A Twelve-Step Program for Economic Recovery

by Stephanie Kelton

  1. Admit that the real economy is powerless against a de-regulated and de-supervised financial system
  2. Recognize that the fiscal powers of the federal government can restore stability
  3. Ignore the debt-to-GDP ratio; allow it to drift to whatever value is consistent with an economic recovery and a return to high employment
  4. Enact a full payroll tax holiday by setting employer and employee FICA contributions to zero
  5. Provide $1,000 per resident to state governments to help them stabilize projected budget shortfalls
  6. Commit $2.5 trillion to restore our nation’s crumbling infrastructure and build a modern energy superhighway to facilitate expanded use of renewable energy, reduce greenhouse gas emissions and lessen our dependence on fossil fuels
  7. Downsize the financial system; reduce the size of banks to the point that they no longer pose systemic risk
  8. Ban the securitization of non-prime loans
  9. Determine the real worth of bank assets; instruct the U.S. Treasury to conduct a survey of the underlying loan tapes and require banks to aggressively mark-to-market
  10. Stabilize the housing market by creating a Home Owners’ Loan Corporation and bestow upon it a full range of powers, including renegotiation and rental-conversions, as deemed appropriate in each case
  11. Announce a job guarantee program (like the WPA) to provide employment and income to the millions of Americans who will not find jobs in the private sector even after the economy recovers
  12. Carry these messages to elected officials and urge them to practice these principles in all our affairs

8 responses to “A Twelve-Step Program for Economic Recovery

  1. Your plan is begging for a response and since no one else has provided one, I will take the bait. Let it be noted that I am not an economist, but if I was I certainly wouldn't be a Keynesian. Be that as it may, I offer my plan to fix the economy:It should be duly noted that our current problems were 100% caused by excessive reliance on credit which masked the true rate of sustainable economic growth. Any solution that is more than "economic morphine", that is to say merely a pain killer, must acknowledge that the solution to a credit induced asset bubble cannot be more credit. With this in mind:1. Compel, through legal means, all financial institutions to write down assets to fair market value if said assets have been permanently impaired. 2. Liquidate those financial institutions that as a result of step one would be declared insolvent, the losses to be borne by the bond and equity holders of same institutions.3. Eliminate all taxpayer-funded bailouts to private parties, including corporations. Instead of directing what money is available to institutions who have failed in the marketplace (Chrysler, General Motors), make such money available to entrepreneurs who will in turn spawn a renaissance of American industry and create real jobs for future generations.4. Compel all branches of government to live within their means. This means the complete elimination of programs and jobs that are unaffordable, starting with the least necessary and working our way up from there.5. Complete elimination of government shell games such as social security whereby funds are misallocated from their stated purpose to the general fund to be spent however the prevailing winds of the day are blowing.I'm sure I've missed a few, but I'm shooting from the hip. Besides, I know good and well that we don't have the fiscal discipline to do what I propose. That is obvious. What I can't grasp, no matter how hard I try, is how educated economists can believe what you believe, that is that we can borrow indefinitely, reinflate and somehow solve this problem using the same methodology that actually created the problem. We simply cannot afford your solution. The endgame, of course, is that those who are loaning us money now will eventually own all of our productive assets, our real estate and everything else we can sell and will have to sell to pay off the debt. Either that or we will hyperinflate our currency into oblivion.Your proposal, and others like it, scare me to death.

  2. I've been reading a lot of econo-blogs and I'm humbled by how succinct that is.

  3. Hyper-inflation, here we come. The shambles that will be left leave little room for prosperity for my children, but who did we think was going to get the shaft. I know just how Madame DeFarge felt!

  4. I'm scared too. I'm afraid that the U.S., like Japan, is going to experience a "lost decade." The Japanese experience is instructive, for they experienced the bursting of an asset price bubble, and they, too, initially responded with a fairly aggressive mix of easy money and fiscal stimulus. But their government cut expenditures too soon (just as the Obama administration is determined to cut the deficit in half by 2013), which undermined the recovery and left Japan struggling for more than a decade –the Japanese refer to this as their "lost decade". Those opposed to expansionary fiscal policy always talk about the "burden" the debt will supposedly place on future generations — the "grandchildren" tactic. This is rubbish. The U.S. debt-to-GDP ratio reached 125% in the 1940s. That was my grandfather's doing, so where is my "share" of that today? When do I get my bill? Tax revenues, as a percent of GDP, haven't budged in more than 40 yrs. (See my previous post on "Will the Government Debt Doom us All?") The population living at any given time includes bondholders and taxpayers. It is impossible to for an entire generation to be "burdened" by higher taxes. IF taxes did increase, the result would be a transfer of income from taxpayers to bondholders — a distributional issue, not a generational one. As for hyperinflation and giving our children the shaft . . . The concern right now, as Paul Krugman has pointed out, is deflation, not inflation. We are running WELL below capacity (there is abundant slack in the labor market, and factories are operating nowhere near full utilization). Inflation can indeed become a problem, if we push aggregate demand too far. But we are a LONG way from there.Final point: When it comes to future generations, my concern is not that we will shaft them by leaving them with too much debt but that we will shaft them by leaving them with too little of what really matters: a stable financial system, mortgage products that do not swindle them out of their homes, an affordable way to heat/cool their homes, clean air to breath, levees and bridges that don't give way and destroy lives/communities, and so on. Without these things, there will be little prosperity anyhow.

  5. The 12-point plan in this post is good. But it's missing a crucial element:(13) If it acts like insurance, require that the buyer have an insurable interest, and require that they insure for no more than their maximum possible loss.This would eliminate the nightmares caused by credit default swaps.

  6. We have excess capacity because the past "boom" was over inflated by home equity ATM spending and artifically low interest rates. In other words, there never should have been that much production in the first place.People still have too much debt, and they are worried about their jobs. The 70% of GDP consumer spending will not return anytime soon.The dollar will be worth less and less as the Treasury keeps printing cash and buying the Federal debt.We don't need any more spending from future tax revenues. The stimulus package was pork and proof that even in a crisis, Congress and the President cannot do the right thing.There might be a need for another 12-step program…

  7. Well, a bit late to the party here, but I have a few comments to this 12 step program. I read through this many times to find valid steps. While Steps 1, 7, and 9 have some rational basis I think, the rest are idealistic jibberish.Letting the government take full reins on the crises that the government allowed, if not created, in the first place, and believing that the government officials are qualified to fix this is comedic and would be fodder for Will Rogers if he were living.In my humble opinion, until we have Congressional electees that are required to have at least one semester each of microeconomics, macroeconomics and Finance 101, we are doomed to phony pundits in seats of power prone to corporate corruption at every turn. Our legislators do NOT have the educated capacity to judge this crises objectively (mainly because a large percentage of them had their elected seats and passed legislation that caused it).My solution is this – every 2 years as local municipal and federal elections rear their collective heads, vote out the incumbents, whether you like them or not, whether or not they are in your party of choice. Just do it. Both parties put us here and the Washington toilet needs to be flushed and filled with clear liquid so that the future can be more clearly seen and its appropriate legislation passed.Really, it is that simple. Every 2 years, for the next 4 elections at least, vote out the incumbent, even if they just got in the last election. That way, entrenchment is limited and fresh thoughts are the goal. Funny that Congress has only passed term limits on the Excutive Branch. Such hypocrits. This is the first step we can take and keep taking as voters. After 8 years of this at minimum, we can see if it must continue of voting out the incumbents no matter what, or if there is a stability of government through educated minds and better directed hearts.If we succeed in Step 1, the other steps should present themselves in a clearer fashion.

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