“Fixing the Economy”

By Warren Mosler*

I was asked by a reporter to state how I’d fix the economy in 500 words and replied:

Fixing the Economy

1. A full ‘payroll tax holiday’ where the US Treasury makes all FICA payments for us (15.3%). This will restore ’spending power’ allowing households to make their mortgage payments, which ‘fixes the banks’ from the ‘bottom up.’ It also helps keep prices down as competitive pressures will cause many businesses to lower prices due to the tax savings even as sales increase.

2. A $500 per capita Federal distribution to all the States to sustain employment in essential services, service debt, and reduce the need for State tax hikes. This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP are restored.

3. A Federally funded $8/hr job for anyone willing and able to work that includes healthcare. The economy will improve rapidly with my first two proposals and the private sector far more readily hires people already working vs people idle and unemployed.
In 2001 Argentina, population 34 million, implemented this proposal, putting to work 2 million people who had never held a ‘real’ job. Within 2 years 750,000 were employed by the private sector.

4. Returning banking to public purpose. The following are disruptive and do not serve no public purpose:

a. No secondary market transactions
b. No proprietary trading
c. No lending vs financial assets
d. No business activities beyond approved lending and providing banking accounts and related services.
e. No contracting in LIBOR, only fed funds.
f.  No subsidiaries of any kind.
g. No offshore lending.
h. No contracting in credit default insurance.

5. Federal Reserve- The liability side of banking is not the place for market discipline. The Fed should lend in the fed funds market to all member banks to ensure permanent liquidity. Demanding collateral from banks is disruptive and redundant, as the FDIC already regulates and supervises all bank assets.

6. The Treasury should issue nothing longer than 3 month bills. Longer term securities serve to keep long term rates higher than otherwise.

7. FDIC

a. Remove the $250,000 cap on deposit insurance. Liquidity is no longer an issue when fed funds are available from the Fed.
b. Don’t tax the good banks for losses by bad banks. All that does is raise interest rates.

8. The Treasury should directly fund the housing agencies to eliminate hedging needs and directly target mortgage rates at desired levels.

9. Homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the government at the lower of the mortgage balance or fair market value of the home.

10. Remove the ’self imposed constraints’ that are disruptive to operations and serve no public purpose.

a. Treasury debt ceiling- Congress already voted for the spending and taxes
b. Allow Treasury ‘overdrafts’ at the Fed. This is left over from the gold standard days and is currently inapplicable.

11. Federal taxes function to regulate aggregate demand, not to raise revenue per se, and therefore should be increased only to cool down an overheating economy, and not to ‘pay for’ anything.

*First published on Moslereconomics.com

7 responses to ““Fixing the Economy”

  1. Good post Warren.Glad to see you posting at this site as well.One question about the $8/hr job though. Might it not be necessary to actually make the rate some sort of market determined minimum? I could see where an $8/hr job might get you housing with some to spare in some areas while in others it would barely pay for housing.Isnt the idea to at least have a living wage that allows the person to be a consumer again?It seems like there is something that everyone could love in your proposals.This would be an excellent first diary at DKos, sure to get some discussion going.

  2. Nice to see your posts appearing over on this site Warren.Lots of good stuff in your answer to the reporter. Seems there is a lot for everyone to like. Again, I think the strength of this paradigm is the non ideological nature of it. There is something for conservatives to like, something for libertarians to like and something for liberals to like.I do have a question about the $8/hr govt job though. Might it not be necessary for the rate to be variable, depending on the cost of living in a particular area? Isnt the idea to create a minimum consumer? Someone who has something to spend after buying the necessities?

  3. Warren: Excellent Agenda. At what interest rate would you have the Fed lend reserves?Do you see any use in Fed using countercyclical interest rate targets?LRWray

  4. I fear that the result of #1 will be that folks chase larger houses and/or overpay for homes, re-inflating the RE bubble. Maybe the purchase of a home over 3.5 times income should end the holiday for the purchaser?One problem with mortgages, FICA and pre-tax retirement money coming out of the same check is that home mortgages extend for 30 years due to the lost buying power, and usually start over well before maturity as folks move, along with the ammortized front-end interest.However, if those three items were attacked consecutively – all the money goes first to buy the home in ten years, then into a 401k for about a decade and finally all into FICA premiums – the cost of owning a home would be reduced by one third, at least, through savings in mortgage interest. About 70% of the interest paid on a 30-year note would go to consumer goods or savings instead of to the bank if a home is paid for in only ten years.Of course, you still need to limit the size of a mortgage to a reasonable multiple of income to head off a bubble, but that would lead to RE prices rising with income and thus to more stable housing costs.

  5. I don't buy any of it, but I do believe we will need some make employment. I do believe it would be a good idea to keep the homeowner as a renter and it would make sense to sell the property into the market based on rental value. The current effort of boosting existing home sales back to bubble levels (over 4 million annual is the borderline of a bubble) will result in more of the same. The government already made the biggest mistake, not liquidating the speculators. Unfortunately, the speculators include a lot of middle class who rode the stock market to excessive returns that are far from being given back. If government should get involved on the lending side, I believe it should be to fund inventories and to fund development of energy research and development. The US needs to get away from the consumer economy it has and I believe the ideas you have, though good in the short run only lead to another bubble in the future. Social Security should be pay as you go and it should maybe become a system of voluntary payments that allow for higher receipts in retirement. I guess it would still be a Ponzi scheme, but the idea is to eliminate as much required debt build up as possible to fund retirement. Still, I will chew on what you wrote. In closing, this mess was not a private sector mess, but a mess aided and abetted by the Federal Reserve and the Treasury of 4 or 5 administrations. The current administration is attempting to resurrect Ponzi finance as we read. As Steve Keen relates, they can't figure out this is a debt bubble that can't solve itself.In short, many people think in terms of debt service, while in fact we are talking savings rate when looking at debt. Instead of thinking monthly payment and payment ratios on consumers, think about how much per year must be paid off in order to retire at age 65? Instead people age 50 are looked at in the arena of consumer finance the same as one 30 or so. As time goes on, more and more debt is piled up to the end of ones career and eventually it can't be paid or assumed by those younger. Also, I don't believe the USA has the luxury Argentina had, as they defaulted and started from a different perspective. You can kiss the world economy goodbye if the USA defaulted.

  6. Oops! Didnt mean to post consecutive posts. Thought my first one got lost in cyberspace.

  7. mannfm11The US CANT default. Not in $US. You must start viewing govt and private debt differently.Steve Keen is only looking at the private sector and the horizontal transactions within it. Warren, Mr Wray and Mr Mitchell look further at the vertical transactions between currency issuer and private sector.This in fact was a private sector mess, not exclusively but primarily.Banking is private sector so is the secondary securitization market.When it comes to the banking sector, pointing fingers at private or govt means little I believe.