You know what the problem is with America?
The poor don’t get just how great they have it.
I’ve hear this a lot lately; the basic thrust of the discussion is that all those cars, TVs, DVD players, refrigerators, and stoves that have found their way into the homes of the economic underclass are proof there’s really no such thing as “poor” in America.
If they were truly poor, the argument goes, well…think recycled corn.
And if the poor want things to get better, let ‘em pull themselves up by their own bootstraps – and if they can’t, then let ‘em rot, because that’s the best thing for the economy.
But I don’t buy all that, and by the time we’re done today, I hope to have given you a whole new perspective on how jobs get created in this country.
There isn’t a rich man in your vast city who doesn’t perjure himself every year before the tax board. They are all caked with perjury, many layers thick. Iron-clad, so to speak. If there is one that isn’t, I desire to acquire him for my museum, and will pay Dinosaur rates.
–From the letter “A Humane Word From Satan“, by Sam Clemens
We must have completely misjudged how many Americans live here about 15 years ago, because everywhere I go I see vacant buildings.
Empty retail space, empty office buildings, empty factories, and all of it apparently just thrown up for no reason whatsoever.
But then I recently saw some historical pictures from the 1990s, and it turns out a lot of those buildings used to have businesses operating within their now-abandoned walls – businesses which have since gone away.
And that’s when I began to get confused.
You see I’ve always known, just as you have, that it’s all about capital; that’s why it’s only the very wealthiest people who can create jobs in this country.
And I’ve always known that they can only do that when they are 100% certain that nothing was going to hurt their current economic condition, and that any sacrifice on our part, no matter how large, was crucially important to keep this very special source of economic vitality full and happy and creating jobs for America’s future.
And when I look at the statistics, I know we’ve been doing our part: the wealthy have been getting wealthier, faster, over the past 30 years than at any time in memory…and yet, for some reason, all those businesses were closing down.
So many, in fact, that I began to question whether America actually understands how jobs get created. It even began to cross my mind that maybe we’ve been coddling the wrong people.
I mean, what if the actual job creators…are the people who no longer work in those empty buildings?
It makes sense, if you think about it.
The common argument is that those with capital make investments, which creates jobs.
But why would anyone invest capital unless there was perceived demand for a product, or a need to do research to meet perceived future demands?
That seems to suggest demand drives investment; a good way to “prove” the point would be to consider what happens to capital without demand: building factories and ships and warehouses does no good if there are no buyers at the store.
Of course, I’m not the first to think workers drive demand: Henry Ford famously paid his workers double the prevailing wage; part of the idea was to create demand for all those Model Ts he was cranking out in his new factories.
So now that we know who the job creators really are, and we established years ago that we have to do every single possible thing on the face of the Earth to keep the job creators happy, happy, happy…how do we get started?
Well, here’s an idea: the Fed willingly gave more than $1.5 trillion to banks for bailouts, mostly by simply “creating” money; now I’m proposing we do the same for homeowners.
If you have a loan backed by Fannie Mae or Freddy Mac, let’s allow you to apply for a one-time $200,000 markdown on your mortgage – and let’s allow the first “tranche” of any markdown to apply to any back-due loan payments.
The amount of “haircut” (fancy technical term) you might impose on each loan could vary, but $1.5 trillion would allow 7.5 million writedowns at $200,000 each; if you limited the haircut to 50% of the loan value many would be less than $200,000. (It’s estimated that 11 million homes in the USA from are underwater; $2.5 trillion or less would cover all underwater loans.)
Since Fannie and Freddy back $10 trillion or so in mortgages, and you probably won’t be able to write down every loan, how would you decide who gets writedowns?
One way would be to create a “triage score” that incorporates things like the odds an applicant/borrower can pay off a restructured loan and the amount of foreclosed or underwater homes in any given community; the 7.5 million highest (or lowest) scores get the writedowns.
(One caveat: many who are having trouble today with home loans are also laid off; unless we can find ways to keep those folks in homes until they can find work, we’ll still have a substantial foreclosure problem.)
Writing down mortgages does several things: it quickly applies a “moral hazard cost” to those who deliberately lent to unqualified borrowers, it turns millions of “underwater” loans into homes with equity, it turns millions of “nonperforming” loans into “performing” loans, keeping millions out of foreclosure, it gives communities a chance to either stabilize or recover from “mass foreclosure-itis”, and it finally breaks the deadlock between banks and regulators over who will blink first on loan “haircuts” versus bank recapitalizations.
Wait? What was that last one?
Banks are scared to death that if they write down all these loans they will have to find new capital to make up the losses – and they probably won’t be able to raise that new capital by charging a $5 fee to have a debit card.
That could mean a few things: it could mean big banks are going to have to more sneakily raise lots of other fees and sell things to raise capital, or, perhaps, the Feds ease back a bit on capital requirements.
Or…it may mean that the banks end up having to get smaller. Consider this scenario: a forced haircut of significant size, followed by regulators who stand firm on capital requirements, followed by a less-than-stellar round of stock offerings or asset sales; next thing you know, “too big to fail” becomes “we have to spin off some part of the retail business for reasons related to the rules governing capital requirements”.
This could happen without the passage of new regulations or legislation beyond the initial bailout authorization – and even that might be within the power of Federal regulators already, since Fannie and Freddy, as the owners of many of these loans, have the power to forgive some or all of that debt, and capital requirements are not set by legislation.
And where does all that leave you?
Well, you’d have 7.5 million families that could more easily afford to make house payments than before, and those folks will probably take that money and spend it on things they haven’t been buying for several years: home improvements, cars, appliances, and the travel and entertainment markets could all see substantial bumps in sales.
Many, if not most of those families, would immediately go from being “underwater” to having equity, which always helps turn reluctant consumers into willing consumers.
Cities could begin to recover as well, as the number of foreclosures bottoms out; once banks are forced to write those properties down from “2006 value” to today’s market value they’ll be looking to sell ‘em at bargain prices; that’ll help soak up today’s housing supply “overhang”. All of this is good for beleaguered new home builders, who are today in a holding pattern.
And here’s the best part: if you get a handle on foreclosures, and put some cash back in some pockets, and start selling stuff…well, that looks like a bit of a jobs program, even if Congress might not be willing to sign up for one just at the moment.
So how about that?
If we make an effort to give to the actual job creators the same level of incentives that we gave to the “demand responders” since November of ‘08, we could actually find ourselves creating actual jobs with our money – and doing it by the millions, just when we need ‘em.
Considering how fast we were able to find ways to create TARP, QE1, QE2, an alternative auto industry bailout, and anything else a banker could ask for, including, I’m sure, partridges in pear trees…well, we should be able to knock this out over a weekend, assuming we can either make a really convincing argument – or do like the banks do, and lay out a million a day for lobbyists until it gets convincing enough to get things done.
Of course, if we have to we could also start Occupying the Offices of reluctant Members of Congress to help make the point; as long as the end result is some serious pampering of the real job creators, I’m all good.
well now, thanks to audacity of greed, there’s a new deck, featuring all your favorite players from the new depression; check it out just for fun or print them if you want, in small or poster size.
This sounds like you are just going to try to bring back houses as assets and then hope for some kind of “wealth-effect” spending, when people take loans out against their houses.
Demand can’t drive investment. If you go to the marketplace with your money, looking for the product, there is no way to signal to the producers that their current products aren’t what you want by not buying. You walk away and keep your money, the producer keeps his product.
New products come from ten different guys making ten different versions of some widget. But they need investment funding to actually produce the widget and get it to market, where the price signals who the winner is.
The true proportion is probably 2000 inventions though that are attempted where one finally gets through. There is a lot of failure involved.
In socialism, the government tries to take over this process by directing investment. It can sort of work, but probably not as well as the private market does it, because government can’t take failure.
You are right that all those little shops could be job creators, but you should understand that all the little requirements and regulations on healthcare, diversity, women hiring, workplace this and that, environment, climate change, all that stuff which you would like to have wind up sitting heavier on little shops than big ones. Even when I was a web designer a long time ago, I remember the government accessibility standards coming out and sinking lots of little web shops.
is talking about investment only in terms of entrepreneurship.
Demand can certainly drive investment, though not exclusively. If I invest Apple now, it’s because there’s a demand for their products. Demand for Apple stock determines its price.
i’m gonna have to disagree with you here, and i’ll explain why:
start with something as basic as agriculture. we didn’t invent cultivation and then start selling the market on food; instead, agriculture is a process driven by biological imperative, and over the last 30,000 years it has been a process of demand driving farmers.
clothing is the same way: when you’re cold, you start thinking putting something on might be nice. same with fire.
the invention of lighting did not create the demand to see in the dark.
the computer did not create the demand for “filing cabinets” or drafting tools or comparative analysis or engineering modeling or entertainment or a handy way to communicate; instead, every computer widget that i’ve seen so far simply fulfills some previously existing demand in a new way.
beyond that, consider the retail world: who “creates” a restaurant, then waits for the guests to come? a broke restaurateur, that’s who. instead, you examine the market, then open in a location that meets your market concept…and that is demand driving capital.
home depot doesn’t open on an empty piece of ground in the hopes of a town to follow; no other retail business does, either. every surviving retail business, almost without exception, is based on finding a location that is demanding the product or service provided.
i really can’t think of a single example of capital being deployed to industry or important inventions that created demand all by itself; instead, i see capital financing a series of inventions that were intended to fulfill exiting demands better, as well as a series of choices related to how those products get sold that are totally driven by demand, and not the other way around.
as i said at the top of this comment, it’s my belief that capital spends it time chasing demand, not the other way around; i’ll stand by that.
I remember reading that 6 out of 7 restaurants fail in their first year. Most small businesses fail. It’s very easy to say in general that people eat, people buy hardware. What’s difficult is figuring out how to get them to come to YOUR restaurant or YOUR hardware store.
Look at the history of video games. Large companies rise and fall, small companies come up with new ideas and might get squashed or bought, or invested in to the point of explosion, employees move around all the time. Failure abounds.
Can you imagine any way the government could pull its aggregate demand levers and grow the video game industry? It could throw billions at taxpayers and hope that some makes it into games.
If you go for targeted demand, a Third Way public-private partnership, it could create a contract program where it contracts to create a game for military use or something, but and does it retard the growth of games which are not shooters, which people might want? Does it then pass laws to forbid playing Tetris, because that competes for dollars with the shooter-maker?
two issues here; i’ll take a quick whack at them both:
–the way government targets aggregate demand is by creating “aggregate income”; that’s the entire point of “roads and bridges”: you put a million folks to work, and they make their own choices about the restaurants and other businesses where that money gets spent.
–can government effectively target certain investments to grow an economy? of course: everything from ports and roads and the transcontinental railroad and hoover dam and velcro are all the result of targeted government investment that favored certain industries or geographic locations at the expense of others, and all of those investments have turned out quite well.
of course, investments, by their very nature, involve risk and reward tradeoffs, and public-private science investments are risky, whether it’s solyndra or nasa or the internet or the human genome initiative or lewis and clark.
you gotta run this stuff transparently, wisely, and well, and that doesn’t always happen, but it’s clear that we can do very well by leveraging government and private resources, and i would not want to end the practice.
btw, i use the opera browser, and it doesn’t seem to be playing well with the “reply” feature; that’s why this isn’t appearing as it should in the thread.
Are you really saying that velcro would not have been developed without the space program?
Every benefit you cited has been accompanied by plenty of waste and abuse, besides the fact that it drained money and attention away from the market operating as people wanted, and towards a few people in the government thinking about what was best for a few other people…
If Occupy means anything, it should mean the end of this kind of targeted investment. It is always corrupted, and always leads to failures that the political system is not made to cope with, such as Solyndra.
Your Soyndra example betrays your provincial worldview. The government has no monopoly on “waste and abuse” — it doesn’t sound as though you’ve been inside very many private companies.
I encourage you to learn more about the role of Chinese companies in the solar energy industry before you so cavalierly throw around words like “always”.
In a very real sense, the 2008 crash on Wall Street, and it’s horrible aftermath, is directly attributable to ‘waste and abuse’ on the part of the banks: we already know about the abuse of insurance, CDO’s and other derivatives, but the waste could be found in the general, and generally heedless, rush to consolidate banks through mergers, takeovers and acquisitions which created a great deal of gaps and overlaps as diverse banks with diverse computers and networks, processes deriving from differing state laws and differing core businesses… This waste, in turn fueled the abuse as larger and larger profits were sought to cover the larger and larger overheads that resulted from these mergers. For example, numerous accounts of BofA attempting foreclosure on homes where the homeowner didn’t have even a mortgage, indicates extraordinarily poor tracking and archiving of records. If you dig into banking practices with any depth you’ll find examples of this sort of thing legion.
If the GOP held Bank of America up to the same standard as they do with Solyndra, then John Boehner would be leading the charge to nationalize Bank of America.
If a private company fails, then its investors lose their money, but they understood the risks. With a company like Solyndra, when it fails the taxpayers didn’t decide to invest in it, so it’s much more embarrassing.
The fallout will be that the government will only invest in bets like some wind project of General Electric, companies that didn’t need the money, which are already big, which get the money by hiring lobbyists, compliance officers and grant writers, partnering with other huge companies, and which will not generate the kinds of explosive job growth that we need.
Don’t forget that the program Solyndra got money under was started under Bush. In professional sports, there is only one team: the players. In professional politics, the elected reps are the team.
Essentially, this is more of the Republican “ownership society” bs that helped get us into this mess. The most effective way to stimulate the economy is to put money into the hands of the poor, not the middle class. Middle class stimulus is better than upper class stimulus, but it’s still crappy.
Create more blue collar jobs. Extend unemployment benefits. Those sorts of things. But anyone who owns a house is well-off enough that they’re not going to spend as much of their money as the average renter would.
There’s also the moral hazard issue. People who took on irresponsible home loans shouldn’t be rewarded while renters who were more financially responsible continue to get screwed as always. Homeownership leads to more unemployment. http://cura.osu.edu/research/roundtables/data/hendershott1.pdf
That’s exactly what we don’t need. We should be encouraging people to take jobs, wherever they may be. If that means abandoning their homes, they should do it. The Government shouldn’t encourage bad decisions in the name of the “ownership society”.
can’t drive aggregate demand is conservative fantasy. You can argue about how efficient the government’s actions would be stimulating demand–as legitimate, but conservative, economists do–but there’s no question that the government can drive and increase aggregate demand.
The famous, humorous Keynes example of stimulus is the government having money buried so people can dig it up. Obviously, it makes more sense to spend money on something we need–such as infrastructure, which we have neglected in the last 30 years of tax cuts and conservatism. Requiring less educated and unskilled workers, such projects would employ more blue collar workers. At this point, many of the unemployed also qualify as poor, even if they started out.
Although the poor will spend more of their extra money, there is a theoretical point where they would no longer be poor or at least start to save money. More practically, putting money in the hands of the poor is probably not enough to stimulate the economy to the degree it needs.
The middle-class is too leveraged and too busy paying down its debt, some of that debt is in mortgages. The sooner middle-class debt is down, the sooner the middle-class comes online and starts spending. And while the moral hazard argument has some merit, we’re not going to be risking it in the housing market in the near future. The economy is where it is in large part because there was no moral hazard when it came to investment.
Targeting aggregate demand misses the point, which is making products and services people want to buy.
… the fried chicken or the omelet?
I want to buy an Audi R8 5.2L V10. Yum.
Can’t afford one, but there it is. It’s already made. I already want to buy it.
I’ll even settle for a Audi A4 Sedan, but I can’t afford that either, in my present state of underemployment. Of course if the government were to target aggregate demand my prospects for full employment would (drastically) rise. It doesn’t even have to be the government… if the banks would target aggregate demand (and they could, you know, rather than merely hoarding profits…) my prospects for full employment would also rise.
So… I can haz Audi now?