On October 14, 2013, Rana Foroohar writes in Time Magazine:
As behavioral economist Peter Atwater recently pointed out to me, these two numbers have historically almost always moved in step with each other. But while markets are higher today than they were in their precrisis peak in 2007, confidence, which reflects perceptions about the strength of the real economy, is lower.
No wonder both consumer and business spending are down. Government could be doing so many things to help the economy, from properly reregulating the banking sector to revamping education to funding the R&D that fuels job creation. But instead of leading the way to growth, some politicians remain obsessed with defunding Obamacare. While they complain that the law has created punishing uncertainty for businesses, their brinkmanship creates far worse uncertainty about bigger things–like whether we’ll have jobs. With or without shutdowns that shave 0.2 percentage points off GDP growth per week, we’ll be lucky to maintain 2% growth, let alone achieve the 3% we need for true economic health.
The divide between stocks and the real economy tells us some important things. For starters, the foundations of our recovery are weak. Equities have remained relatively strong because the Federal Reserve is artificially propping them up with $85 billion a month of asset buying. The tactic is understandable–the Fed has kept the money spigots open, risking market bubbles, in part because of “fiscal headwinds”–that is, growth-destroying partisan politics. Ben Bernanke can’t make Congress agree to fund the government or raise the debt ceiling, but he figures he can at least shore up stock and home prices.
The problem is that this monetary cycle is breaking down. People simply aren’t buying into the sugar high of this kind of policy anymore. For proof, look at how the Fed’s decision a couple of weeks ago not to taper off its massive spending spree boosted stocks for only a day. Each new round of quantitative easing does less to goose the market than the round before. “It all shows what a weak and narrow recovery we are in,” says Atwater.
It also shows the dangerously schizophrenic nature of our economy. As long as Congress remains too dysfunctional to keep parks open, let alone craft a real growth strategy for the country, the Fed has to play the role of economic stimulator of last resort, and banks, hedge funds and money managers have to play along. As Atwater points out, they are now using record levels of debt and leverage to buy up stocks, since the Fed’s money dump keeps interest rates so low. (I’m reminded of former Citigroup CEO Chuck Prince’s infamous line that “as long as the music is playing, you’ve got to get up and dance.”) A recovery seen mainly in the financial markets and built on the shaky foundations of debt rather than income growth is not what the U.S. needs.
We may not be able to keep even that kind of recovery going much longer. Whether any federal workers are around or not to produce the next jobs report doesn’t matter, because it’s not the unemployment number we need to look at. It’s the workforce-participation number, which is as low as it’s been since women started entering the labor force en masse in the 1980s. Only 63% of the population are working–about the same as in the beleaguered euro zone. It’s impossible to stage a robust recovery in an economy that depends heavily on consumer spending when so few people are getting paychecks.
And therein lies the real debt conundrum. The battles over spending limits and debt ceilings have nothing to do with the state of our public finances. They’ve actually improved in the past year, thanks to the sequester cuts that resulted from the last round of partisan budget battles. But ironically, those cuts, along with the continued political squabbling, have created a situation in which we have a weaker dollar, slower growth and a recovery that isn’t creating enough jobs to hold the percentage of working Americans steady. Too bad Congress isn’t eligible for furloughs.
As my colleague Michael Greaney of the Center for Economic and Social Justice (www.cesj.org) plainly states:
For us, citizens, it is important to be informed. And to know the right solution – there is one!
The other day we were asked a “complex question. The question was, “The House [of Representatives] has rejected the budget for not including enough cuts in spending. Is this the start of sane reductions and a return to much smaller budgets?”
Capital Homestead Act: Every Man, Woman and Child an Owner of Productive Capital
The “complex” part of the question is the assumption that current levels of spending are insane. We happen to agree, but the question could have been phrased better.
Anyway, the problem is that no one in power is proposing a viable alternative to government spending. As long as people assume as a given that either the government provides basic needs or we do without, there is no way out of the situation. One side is chastised for being heartless fiends, who want everyone to die for want of a crust of bread or a bandage, while the other side is lambasted as brainless spendthrifts, who want to take care of everyone without it costing anyone.
The fact is that government was never intended to try and take care of people’s individual wants and needs, but to provide and protect the environment within which people can take care of themselves. In an emergency, of course, it’s perfectly legitimate for the government to step in and redistribute enough wealth to keep people going until they can get back on their feet, but we seem now to live in a permanent state of emergency.
The fact is that government was never intended to try and take care of people’s individual wants and needs
At the heart of the problem is the belief that only the rich or the State can own capital, and everybody else must work only for wages or receive welfare. This is because most people think that the only way to finance new capital formation is to cut consumption and save, not monetize the present value of future marketable goods and services and let the new capital finance itself. This means that only the rich who can afford to cut consumption, or the State that can simply confiscate wealth, have the ability to finance new capital.
Once we realize, however, that we can turn the present value of future marketable goods and services into money — which is what commercial and central banks were invented to do, not finance non-productive government spending — we see the way out. People who currently own no capital can become owners of the capital that is displacing them from their jobs by buying capital on credit, and paying for it with the profits received from the capital in the future.
As more people become capital owners, entitlements can be phased out, and the savings applied to paying down the national debt.
Most new capital is financed this way, anyway, but only by people who have collateral. Replacing traditional collateral with capital credit insurance and reinsurance solves that problem. Corporations don’t need to finance growth by accumulating cash. They can pay out all earnings as tax-deductible dividends (fully taxable as ordinary income to the recipient), and issue new equity to finance growth.
Once most people become capital owners by purchasing the new equity (paid for using the full stream of dividends they receive, then when the shares are paid for, using the dividends for consumption), the government need no longer provide for individual needs, including Social Security and other entitlements — that make up two-thirds of the federal budget. As more people become capital owners, entitlements can be phased out, and the savings applied to paying down the national debt.
Without a replacement for entitlements, however, all the cost-cutting and tax increases (imposed on a deteriorating tax base as jobs disappear) in the world will not help. Leaving the present system intact and fiddling with the numbers can’t work. Run the numbers — without a way to finance new capital without using cuts in consumption, the economy will continue to spiral downwards, ironically just as the inflationary policies result in “gains” in the stock market.
CESJ’s proposal to replace entitlements, “Capital Homesteading,” has the potential to turn this situation around, but none of the candidates or incumbents is considering it.
Nor is academia or the media addressing this solution.
http://content.time.com/time/magazine/article/0,9171,2153769,00.html
