“Make no little plans. They have no magic to stir men’s blood and probably will not themselves be realized.”
– Daniel Burnham, American architect
Most progressives understand by now that the battle over the stimulus is, at heart, a philosophical debate over whether we’re going to continue with 30 years of failed conservative economic policies, or chart a new direction for the country’s future, built on an economics that’s grounded in investment in the common good.
Given the stakes, it’s frustrating to watch the discussion in Washington and on the news shows wander away from obvious solutions (“Buy American” policies, mortgage renegotiation, and increased oversight of bailout beneficiaries are such no-brainers it’s hard to believe anybody serious would actually waste precious time debating them) and end up mired in ridiculous distractions and nit-picky details. This is a moment for a big vision, painted in bold strokes. We need our own shelf full of challenging new ideas that will shake up people’s assumptions, change the terms of the discussion, and expand the country’s ideas about what’s possible in this unique moment.
Kicking this around with my CAF colleagues, we came up with our own list of outside-the-box Big Ideas that nobody’s talking about—but may be much better approaches than anything that’s currently appearing in the economic recovery bill.
Here are five Big Ideas that deserve to have a much wider hearing if we’re really serious about getting America back up and running.
Buy failed banks and companies outright.
Back in early December, Michael Moore pointed out the basic insanity of giving $18 billion in bailout money to a company whose entire net worth wasn’t even $3 billion:
You could buy all the common shares of stock in General Motors for less than $3 billion. Why should we give GM $18 billion or $25 billion or anything? Take the money and buy the company! (You’re going to demand collateral anyway if you give them the “loan,” and because we know they will default on that loan, you’re going to own the company in the end as it is. So why wait? Just buy them out now.)
None of us want government officials running a car company, but there are some very smart transportation geniuses who could be hired to do this. We need a Marshall Plan to switch us off oil-dependent vehicles and get us into the 21st century…This proposal will save our industrial infrastructure—and millions of jobs. More important, it will create millions more. It literally could pull us out of this recession.
In a TV appearance that same week, Moore further proposed that the government divide GM’s stock among employees and retirees in exchange for retiring their pension plans. This would relieve GM of an overwhelming benefits burden; and, at the same time, create a new set of shareholders with a deeply personal stake in seeing the company succeed.
Dean Baker is proposing doing similar deals with the banks. Rather than going with the proposed “bad bank,” which is basically a mechanism through which taxpayers will continue to absorb bank losses for the foreseeable future, Baker says we should simply “rationalize” the banks by taking full government possession of them:
This is not interference with the market, it is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can’t let them be tied up in bankruptcy proceedings for years. Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors…. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy.
To force banks to own up to insolvency, bank rationalization can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers. In short, bank rationalization is both much fairer and better for the economy than the bad bank plan. If only the people who missed the housing bubble can be forced to recognize this fact.
Both Moore and Baker have noticed that we’re paying far, far more in bailouts than these companies are worth—and they’re very likely to come back for even more cash in the future. We’d save a lot of money, not to mention critical time, by simply taking them over, reorganizing them, and then returning them to new shareholders who are willing to reimburse us for our costs.
(To those who insist —as investment banker and adjunct business professor Max Holmes recently did in The New York Times—that this would “undermine our free-market system:” Don’t look now, but any “free-market” enterprise that’s only kept alive through vast transfusions of taxpayer money is already completely undermined. And besides: don’t taxpayers have the same right to demand value that any other investor does?)
Forget the “bad bank.” How about a “good bank”?
European economist William Buiter argued in a recent Financial Times column that there are such serious problems with the whole “bad bank” model that we shouldn’t even be discussing it. The biggest problem is that it offers the banks no incentive at all to change their policies, their leadership, or their way of doing business. There’s no real guarantee that they’d loosen up their lending policies, or even keep the money in the U.S. We could very easily end up spending more hundreds of billions, and getting no stimulus in return.
Instead, Buiter suggests that we spend our money to set up a “good bank”—a taxpayer-owned bank that buys up the good assets from these banks (which can easily be valued); and concentrates government money to support new lending and investment, which would relieve the credit crunch and get the economy moving. In due time—he suggests three years, at minimum—the government could sell off its shares in the “good bank,” very likely pocketing a profit as it returned the bank to private hands. In the meantime, the existing banks would close their doors, remaining only as holding companies charged with liquidating their bad assets over time.
In recent Senate testimony, Joseph Stiglitz outlined the kind of multiplier effect this kind of investment could have had if the same logic had been applied to TARP:
Assume $500 billion was used to finance a new set of banks, and those banks had a 12 to 1 leverage ratio. Six trillion dollars in new loans could have been financed—more than enough to sustain the core credit flow for working capital and trade credit, even if many institutions had gone under.
Why do we have to get stuck with the toxic waste? Rather than privatize profit and socialize risk, let’s do it the other way around this time. If conservatives are serious about ending government waste, making sure we get our full money’s worth out of these investments would certainly seem to be the right place to start.
Reinstitute the stock transfer tax.
Dean Baker again, this time writing at Talking Points Memo:
The U.K. imposes a modest stock transfer tax of 0.25 percent on every purchase or sale of a share of stock. This sort of tax would make almost no difference to a typical middle class shareholder. However, a tax of this size, with comparable taxes on various other financial instruments, like options and futures, would put a serious crimp in the money shuffling business that has wrecked so much havoc on the U.S. economy.
Furthermore, such a tax could raise a great deal of money, easily in the neighborhood of 1.0 percent of GDP or $150 billion a year. Imagine that we could finance national health care insurance with a financial transactions tax, or provide quality child care and pre-school education, or build up a green 21st century infrastructure, or maybe just have a nice middle-class tax cut of $1,000 per family.
There is no shortage of good uses for the money that could be raised through a financial transactions tax. This is the conversation that the country should be having. Instead of funneling tens or hundreds of billions of taxpayer dollars to the failed wizards of Wall Street, we should be talking about what they can do for us.
One of the best features of stock transfer taxes is that they discourage speculation and short-term trading, and are thus a proven way to prevent market bubbles. And this is hardly a new idea: the U.S. had a similar stock transfer tax in place from 1914 to 1966. It used to be a significant source of government revenue—and could become one again.
Close some prisons.
As I noted in a recent article, state governments are having a rough time right now in no small part because so many of them are bound by balanced budget amendments that prevent them from resorting to deficit spending as an option in bad times. Many of them are running deficits anyway, in direct violation of their own constitutions.
Given that state prison spending grows faster than education every year—and that prison costs are devouring state budgets from coast to coast, even as crime hits record lows—the first, best step toward balancing unstable state budgets may be to take a good hard look at how much we spend on prisons, and whether we’re actually getting our money’s worth.
And it may be an idea whose time has come. A recent poll in California found that voters of both parties ranked the public schools and health care as number one and two, respectively, on their list of public goods that must be protected during the state’s financial crisis. Prisons, on the other hand, were at the very bottom of their list. They’re more than ready to let this go.
Still finding the political will to do this is incredibly hard. Like defense contractors, the prison industry has a tremendous constituency, especially in the growing number of small towns where the prison is now the only major employer. Closing prisons throws thousands of people out of work. But it’s also not the kind of public infrastructure investment that pays off in the long run.
As CAF research director Eric Lotke pointed out in a recent post:
Even as states spend nearly $50 billion on prisons every year and counties spend over $20 billion on jails, we build additional locked capacity. Even with U.S. incarceration rates at seven times historical and international norms, we build. Even as crime continues on its 15-year descent to levels not seen in 40 years, we find money to build even more.
The sacrifices we make to build these prisons are astonishing. Between 1987 and 2007, state spending on prisons increased by 40 percent (as a percent of the general fund). State spending on higher education decreased by 30 percent. We are financing our prisons by cutting our colleges.
We continue to build even though prisons are often disappointing for economic development. The best jobs go to people from out of town, and dollars spent on prisons have little “multiplier” effect. They don’t generate future additional dollars of economic activity, as do dollars spent on transportation, schools and so forth. Every dollar invested in highway construction generates $2.50 of gross domestic product in the short term. Raising teacher wages by 10 percent is associated with a 5 percent decrease in drop-out rates. But still we shortchange our schools and other rural enterprise, and build new prisons….
That’s where federal assistance can come in. Part of the infrastructure/investment/stimulus money can be directed to cover transitional costs out of the prison economy. A few billion dollars of federal money in the short term can help states break the prison hammerlock, and free them to redirect tens of billions of state dollars to other purposes—from schools to roads to hospitals.
Cutting money for schools, colleges, and hospitals pretty much guarantees that we’re going to need more prisons down the road. The current crisis may be the moment we’ve been looking for to tell the private prison companies and corrections unions that enough is enough. We don’t need what they’re selling us anymore. And we can’t afford it, either.
Lift the income cap on Social Security taxes.
One of the right-wing’s favorite bogeymen is the specter that Social Security is headed for some kind of trouble. Most economists agree that this threat is extremely overblown (though Medicare really is in serious trouble, which has only gotten worse since Part D was passed).
Still, whatever trouble looms, there’s one simple solution: Raise the income cap on Social Security contributions. As Lawrence Mishel wrote in an Economic Policy Institute article in 2005:
Many people don’t realize that all earnings are not subject to this federal payroll tax. In fact, current law exempts earnings of more than $90,000 from taxation, meaning someone with a million-dollar salary pays the same tax as someone earning $90,000. Any public policy discussion addressing the potential financial shortfall of this program should rightly focus upon the dramatic growth of wages for top earners over the last two decades, a time when middle-class wages have remained relatively stagnant.
The consequences of this increasing wage gap are no small matter. If left to continue, it will result in extraordinary inequalities and the undermining of Social Security’s financing. Eliminating the $90,000 cap, however, would erase much of the projected Social Security shortfall over the next 75 years.
Americans are already on board with this one: a Washington Post poll found that 81 percent of respondents thought that lifting the cap was a fine idea. If the working and middle classes have to pony up to support our seniors, there’s absolutely no reason the rich shouldn’t pay their full freight, too.
These are just a few examples. The point is that in the middle of these tough times, things are becoming possible that have never been possible before. Small risks, small actions, or small ideas are unworthy of the moment, and of us. It’s time for us to get beyond the old assumptions, and start to think big enough to stir the soul of the country.
Bernie Horn, Eric Lotke, Susan Ozawa, and David Sirota all participated in the development of this article.