Skeptonomics

Minus the amazement about the money multiplier, this proposal published in Yes! Magazine bears a superficial resemblance to mine.  The big difference, of course, is that Brown would have the good citizens assume responsibility for all the liabilities of the banking system she would seize.  This is why I have argued against bank nationalization and for new public institutions to take their place.  A minor note: Germany is a somewhat more substantial instance of public banking than North Dakota.  Not that I have anything against North Dakota.  In fact, we’re having their weather right now in the Pacific Northwest.

Time to shift frames on the auto bailout. The question lurking behind current thinking is “How can these companies make money again producing and selling cars?” This explains the obsession with labor costs, future product lines and the like. The short answer is probably, they can’t. Even if they do everything right from now on, a steadily shrinking car market is the logical implication of serious, grown-up carbon regulation. (I will post on that topic soon, focusing on the news from Europe.)

For an alternative, step back into history and consider the story of Lucas Aerospace, brilliantly chronicled by Hilary Wainwright and David Elliott in The Lucas Plan: A New Trade Unionism in the Making? Lucas made military aircraft and was facing devastating (but socially desirable) cuts in demand for their wares. Seeing the handwriting on the wall, production workers teamed up with engineers and conducted a detailed inventory of their firm’s capacity: what skills and resources they comprised. Then they canvassed a range of nonprofit organizations to find out what kinds of products served important social needs but were not being provided in the market, like improved prosthetic devices and equipment for upgrading railroad crossings. Putting two and two together, they proposed production plans to give the company a new lease on life. The final piece, however, never materialized. The social agencies needed the government to allocate funds for these new products, but the government didn’t come through, and Lucas eventually folded.

You can probably see where I’m going with this. Obama is proposing to spend hundreds of billions of dollars on public projects to restart the economy, and forward-thinking observers, like Jamie Galbraith, are pointing out that we need long-term restructuring, not just a quick burst of stimulus. Who will build the transit systems, smart two-way electrical grids and other components of a clean, green America? If the auto companies are liquidated, we lose a ton of capacity it will be difficult and expensive to replace.

Message to the Obama team: begin formulating the reconstruction plan as a set of receivables and be ready to energize producers from the outset, perhaps with contracts having a loan component.

Message to the UAW and progressive-minded professionals in the auto industry: don’t wait for your top management to shuck the business plans they’ve staked their careers on. Begin a Lucas-like process of discovering what you can produce, and convey this directly to the federal recovery folks.

So five accused planners of Sept. 11 want to confess, avoid a trial, and enter paradise via lethal injection. Their wishes should have no bearing on their cases. First, there is an alarming incidence of false confession, to the extent that, if guilt cannot be established by evidence, confession alone should not be decisive. One of the causes of false confession according to the Innocence Project, by the way, is torture and the threat of torture—not that this would have any relevance to Guantánamo inmates, of course. The second thing to consider is the larger significance of the legal case against these men. The damage done to America’s global reputation and to popular views about justice at home cannot be erased, but the first step toward recovery is a public embrace of the rule of law. If the evidence against them is sufficient, put them on trial. Demonstrate a commitment to truth and fairness of judgment. If they did in fact plot murder against innocent thousands, show the cruel calculation of their planning. And if the evidence isn’t there, the confessions don’t take its place.

Now that stimulus is just around the corner, we are hearing more discussion of what form it should take. There is a general desire to prop up state budgets, so that legislatures are not forced to cut spending on services in the middle of a slump—a good idea. There is also an interest in putting money into roads and bridges, usually referred to as our “crumbling infrastructure”—another good idea. Here I want to broach a third.

The ranks of the unemployed are increasing by as much as half a million a month. Even if we can stop the plunge, we are in for a long, slow season, and the need for structural change in the economy guarantees that large numbers of us are going to have a rough time getting our working lives back on track. The silver lining to this very dark cloud is that it gives us an opportunity to take time out, to go back to school to get new skills, perspectives and perhaps even life goals. Already applications are up at two- and four-year colleges around the country. Meanwhile, however, the credit crunch is making it hard for prospective students to find loans, funding cutbacks are driving rapid tuition increases, and higher education is being starved for the resources it needs to continue at the same level of service, much less the increased level needed to meet the demand.

So the solution is clear: the third big piece of the coming stimulus, overlapping somewhat with revenue sharing, should be a commitment to education—to turn the tragedy of unemployment into the promise of a new beginning. Our universities, community colleges and other institutions have a model that is intrinsically scalable; give them more money and very quickly they will be able to create more seats in more classrooms, with little or no reduction in quality. There is a vast body of economic research that shows that this is one of the most productive investments we can make as a society, one that will bring returns to us as individuals and as a country long after the immediate crisis has passed.

One nice twist to this idea is that it could be accompanied by introducing a new system of tuition financing that works on both the individual and macroeconomic levels. It goes like this: students take out loans from a government agency, but instead of paying back the precise amount they borrowed, they agree to a modest tax surcharge on their earning for several years after they graduate. If they end up with high-paying jobs, they pay back more into the student loan system. If they end up with lower-paying jobs, they pay less. The overall terms, the percent of the surcharge and the number of years, are set so that, over all the graduates combined, the money borrowed is equal to the money returned. This is a progressive approach that scales the financial contribution of those who benefit from college to their ability to pay, and it reduces the pressure on borrowers to take the most lucrative jobs rather than the ones that appeal to their interests and ideals. (More schoolteachers and fewer bond traders would be a small but positive benefit of this approach.) I don’t know who first came up with this idea, but I associate it with the late, great Ben Harrison.

From a macro point of view, instituting this reform at the same time fiscal deficits are being jacked up to pay for the immediate expansion of education sends a strong signal that those deficits are temporary. They will help pull us out of the slump, but over the longer term we are putting in place a mechanism to more fully finance tomorrow’s students. The US Treasury is currently able to borrow as much as it wants at a near-zero interest rate, but this will not last forever. At some point skepticism about the fate of the dollar will start to mount, and it will be necessary to demonstrate that fiscal policy is sustainable. Reforming tuition finance is not everything, but every $50 billion or so helps.