Friday, September 26, 2008

Perhaps Brad DeLong is Mostly Wrong

Yesterday Salon offered this Brad De Long(also here) essay:

Our economic system is indeed on the verge of a serious meltdown, but lawmakers should not grant Bernanke and Paulson the far-reaching powers they call for in their plan.

I responded:

Perhaps Brad is wrong, mostly

I'm sorry, but Dr. DeLong's apologia for buccaneer capitalism is highly suspect.

Brad, if I may also be so forward, you write:

1."The high level of market risk and its rapid run-up from normal levels only a year ago last August means death to all banks, and near-banks, and shadow-banks, and banklike institutions -- unless the economic fever is broken and is broken soon."

All banks? Really? All banks? Come on. Several key, high profile firms, sure. Morgan Stanley, among the ones presently in trouble, survived the depression without this kind of intervention, as did others. Maybe Morgan Stanley won't make it this time, but others will. They are still needed, and some smaller, hitherto unheralded, more soundly capitalized banks will inevitably fill the void created by a few marquee names going bust.

Possibly this would occur more slowly than Bernanke and Paulson might care for, because of the understandable reluctance to be incautious that the survivor institutions would have. But that reluctance is good for the economy in the long term, and the recovery would happen, the market correcting the recklessness of corrupt lawmakers who helped create the conditions that allowed the present state of affairs to come to pass.

2."The game that Ben Bernanke and Hank Paulson are playing right now is an extremely tricky one: try to keep the banking system from freezing up; try to restore risk perceptions to normal levels; try to keep finance flowing so that we have a peak level of only 8 million unemployed in America next year, rather than 15 million or more..."

If the goal is to prop up the economy and reduce the suffering and anxiety of ordinary people, aren't there numerous better ways to spend 700 billion dollars we don't actually have?

If you just gave 7 million people 700 billion dollars, say, over the course of three years, specifically targeting the populations most likely to lose their jobs using your math of going from an apparently acceptable(?!) 8 million to 15 million out of work, that could work out to paying 7 million people a stipend of about 33 thousand a year for three years.

Award this stipend only to people who've lost their jobs, or have averaged less than 18 thousand a year income for the past three years. I'll bet they'd spend it, helping out retailers, and some would even start catching up on their debts. And some would go to school and get educated, so they could help with the transition to a more modern workforce that you discuss. Wouldn't that help the economy a hell of a lot more?

Or how about tax credits for homebuilders who construct new homes with solar panels, especially in sunnier climes like the southwestern states. And maybe even an aggressive public works program, fixing bad roads, and unsafe bridges, and inadequate levees.

And yes, Brad, I know what you're thinking: how would we pay for such programs?

How indeed?

Why do you blithely assert that we can pay for the bank bailout by shouldering more debt, to fix an unsound situation created through excessively leveraged loans, without pausing to consider the danger of excessively leveraging the debt of the government and the taxpayers?

I'm not nearly so versed in the ways of markets as you are Brad, but I remember that Bill Clinton increased taxes on people who made over 200 grand in 1993, and the economy boomed for several years. Was that so long ago?

3.So I propose we pay for any economic stimulus or partial bailout by freezing the tax rates on lower and median incomes, making capital gains taxable as regular income, and increasing taxes on those earning over 500 grand.

What do you think, Brad?

My sense tells me that when all the smart people on the television on "both sides" of the spectrum, and the celebrity press, all get together to tell us this is an urgent problem that needs to be addressed now, now , NOW... that we are being sold something that's probably far more toxic than the thing it's ostensibly meant to cure. I also think that Paulson may have deliberately overplayed his initial gambit as part of a "good cop-bad cop" shtick that's designed to make a subsequent "compromise" appear reasonable. But maybe that's just me.

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