Tuesday, November 11, 2008

Workable solutions, along with things we must come to accept

The problem, it seems, is weak demand in the economy. Lending money to banks and other firms that are not seeing strong customer demand for their products and services on the other side does very little. Therefore, these loans return little bang for the buck.

There are myriad ways for the government to address the lack of demand. Some suggestions are, as follows:

• Increase the level of government spending on infrastructure, money to states and localities, extension and increase in unemployment benefits, health care payments, etc.

• Raise income and/or disposable incomes by doubling the minimum wage, income tax cuts (including suspension of the payroll tax), or money sent directly to households.

• Provide low interest or zero interest loans directly to consumers and households to be used for auto purchase and/or purchase of durable goods (appliances, large ticket items, etc.)

• End the forex swaps to foreign central banks. This is keeping the dollar lower than it otherwise would be if these swaps were not occurring. A weaker dollar hurts U.S. consumers’ purchasing power at a time when more, not less, purchasing power is needed.

• Back off on threats to foreign countries that they are manipulating their currencies to gain export advantage. Let them keep their currencies weak and export; let us have the strong currency and higher standard of living.

Things we must come to accept

Accept that Fannie Mae and Freddie Mac were designed for a public purpose—to foster home ownership—and consider their lending in that regard to be a public subsidy to achieve the stated goal. End their existence as publicly traded companies and the charade that they must remain profitable enterprises in a competitive environment. Either that, or declare that large-scale home ownership is not a worthy public goal and close them down altogether.

Accept that a large and growing function of the military is to provide social spending and support. For an increasing segment of the population the military provides health care, education, family services and employment. It is terribly inefficient to have it done this way. The government should invest directly in these services through existing administrations and departments or set up a new department and relieve the Department of Defense from acting in this role.

Accept that much government research and development (R&D) funding is channeled through the military and NASA. Many commercial applications of this R&D effort eventually hit the free market, but again, it is a very inefficient way to go about it. Create a new department--the Homeland Department of Technology--that directly funds research and development for civilian applications. This department could also fund R&D alternative energy projects. Its budget should be pretty substantial.

Any and all of these things are feasible, the only constraint is political. The Government deficit will rise no matter what we do and we shouldn’t be concerned with that. What we should be concerned with is whether or not the growing deficit reflects wise choices—choices that will restore economic health and vitality. Lending or investing money in institutions that are experiencing weak and deteriorating demand in their ongoing businesses is not very useful.

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