This is EXACTLY what I've been trying to tell people out here at UC Irvine. (I'm a PhD graduate student in Economics, decided to pursue my PhD after completing my MBA).

When I heard on NPR one of the local Republicans saying that "you should stimulate the economy by cutting spending and cutting taxes" I yelled at the radio "you just failed Econ 101!!!"

What seems like common sense is no doubt going to be portrayed as risky theorizing by the current administration and those who support them. Fortunately for us, most people are no longer supporting the current administration. Let us hope that common sense works....

I agree with the answer to the first argument, but the answer to the second argument is far simpler: "W".

Enough said.

Technology infrastructure should rank right up there with classic roads and such.

Broadband to rural areas and getting low cost computers out to low income areas will keep the focus on future productivity and creation of wealth.

Thank you for this.

Would you consider adding one item to your list of ways Government should spend? I advocate a direct, simple bailout of underwater homeowners. It would be an effective use of bailout funds, because consumers aren't going to increase their spending until they feel more confident about the value and stability of their homes and neighborhoods.

The method would be to look first at neighborhoods hit hardest by the foreclosure crisis. Find the people who are still in their houses. Offer to share the cost of their mortgage payment by however much housing values have dropped in the neighborhood, if owners will commit to making the remaining part of the payment plus a principal payment each month.

The program would have the effect of a massive principal reduction without all the fuss.

For example, if housing values have dropped 40% in a given neighborhood, offer to pay 40% of the homeowner's payment if they will pay the remainder, plus, say, a $100 principal payment each month. It's simple for the homeowner, involves no fees, and will provide immediate incentive for people to stay in their houses instead of walking away. This will cut the number of houses on the market and immediately help stabilize housing prices.

More importantly, this move would bolster homeowners' confidence in their ability to stay in and hang onto their homes, which most ordinary Americans view as their sole source of stability and wealth. (You just can't overstate the value of that.)

The housing industry doesn't need a bailout as much as housing consumers do--they are the ones most affected by the products they bought. In all of the discussion of bailing out the industry, I haven't heard anyone pay much attention to the consumers themselves, what they need and what would work for them. I think a direct, simple bailout would work well.

Mr. Reich,

I could not agree with you more but I would also add that we should stimulate investment in startups and early stage companies as this is the sector where lots of job growth and innovation takes place. Most of the discussions have revolved around some form of tax incentives to these corporations but since startups and many early stage companies are not profitable, these incentives do not work. We should consider offering seed (angel) investors and venture capital funds special investor tax incentives to stimulate this arena. One example might be to allow investors in startups and pre-profit early stage companies to write off their investments (subject to a certain portion of the investment is applied to W-2 wages) in the year they make these investments with the IRS retaining the ability to recapture the deduction down the line if the exit is profitable. Another thought might be to create time-sensitive credits to these investors if they invest in specific areas of the economy (e.g., alternative energy startups). For example, one might offer a deduction of the venture investment along with a credit that is at its highest in the first six months of President Obama's term.

Finally, I would urge a plan that could be called "The Surge for America" that would combine private investment, infrastructure investment, tax incentives for investors, volunteers, worker retraining, etc. -- and target a specific area of the country (e.g., Western Pennsylvania, Ohio, Michigan) with a specific agenda -- to create a Silicon Valley for renewable energy, for example. A focused "surge" will help us understand how we can move an entire region from one industry to another -- and, an integrated, targeted approach can then be scaled to larger regions, more industries, etc. In addition, an integrated approach around the renewable energy sector will attack many problems at once -- infrastructure, jobs, dependency on oil, the deficit, creating a new industry that the US can lead in, and global warming -- many bangs for the buck!

Your analysis couldn't be more true.

After more than two decades of real income losses for working class Americans it has to have registered with economists on both sides of the argument that the top several percent of the income scale can't possibly buy enough stuff to stimulate the economy. Whatever the plan, it has to put disposable dollars in the pockets of a majority of Americans. Overall it'll require people working and some form of government stimulus focused at the largest number of people possible.

Frankly, I am tired of hearing cut taxes, cut taxes. Cutting taxes is an absolutely counterintuitive argument and has nothing at all to do with economic stimulation or job creation. I am quite sure that cutting taxes actually takes dollars out of circulation.

And besides, one of the reasons (certainly not the only one) we have such a huge deficit is from having cut taxes. Cutting taxes is not only a boneheaded argument but we have never cut taxes when we faced a big dollar outlay to support a war effort. Every bit of Bush monetary policy is in conflict with what has ever been done in the past under similar circumstances. There can be little doubt that administration monetary policy is central to the current economic mess. The Bush administration has been consistently wrong in most of its endeavors and this is no exception.

For those who are not already aware of a (hopefully rare) situation of real instability in the current marketplace, here is a link to a New York Times article reporting on the current state of Iceland's economy:

Iceland In Trouble

We *do not* want this in the U.S. Unfortunately, Iceland's recent behavior resembles our own entirely too closely.

Whatever government spending will do this time around, Reich's claim that "Government spending lifted America out of the Great Depression" falls under the Keynesian Big Myth technique. Anyone familiar with the economic history of the 1930's knows that in spite of all of FDR's programs, including a large amount workfare aimed at infrastructure, the depression deepened in the late 1930s, with no exit in sight. It took WWII, i.e., government expenditures and massive transfers of labor of a wholly different kind, to pull the U.S. out of the Depression.

Since the federal program to build the U.S. interstate highway system in the 1950s and early '60s, U.S. capitalism has been loathe to spend on infrastructure. For example, most if not virtually all major bridge collapses in recent decades, including the recent I-35W one in Minneapolis, can be traced to having cut corners to save money. Does Reich propose to take that on, or is he really tallking about makeshift work to buy time against a potential working class shift to the left politically - or in its absence the rise of a populist-fascist movement on the Right - by putting a few dollars in peoples' pockets, a la FDR?

romath @ 3:52 PM "...'Government spending lifted America out of the Great Depression' falls under the Keynesian Big Myth technique...."
It all depends on what one means by "lifting America out of the Great Depression". It is just as easy to argue that true Keynesian policies were never used as the amount of money spent by the Federal government was too little and therefore the restoration of economic stability had to wait until WWII, where the scarcity of consumer items to buy and the rationing of those available was added to an intensive savings program to pile up something on the order of $450 billion in savings by 1945; thus averting a renewal of the Depresssion.
Had the Federal Government spent as lavishly on various projects during the 1930's as it did on winning WWII, there is every reason to believe that the Great Depression would have been overcome by steadily increasing civilian demand. At any rate, there is certainly nothing to disprove it.
If nothing else, we now have the chance to see whether Keynes was actually correct or not. Undoubtedly any attempt to truly implement Keynesian methods will be fought tooth and nail as "irresponsible" and "leading the country to bankruptcy"; something depressingly familiar to anyone who has read any history of the Great Depression.

Now is also a perfect opportunity to enact card check legislation that makes it easier for employees and unionists to organize employers into union agreements and rescind Bush's anti-middle class "no project labor agreement" executive order for federal projects.

The rise and fall of the middle class's purchasing power as compared to the very highly compensated class almost directly correlates with the increase and decrease of union membership over the last 70 years.

If the union movement seized this opportunity and immediately went into full financial transparency, maximum public relations, slash dues/working assesments to the bare bones, and maximum employer flexibility mode, I believe they could be again a powerful engine for rehabbing the country's slack ecomomy and getting the distribution of wealth back to reasonable levels.

The whole "Joe the Plumber" thing really scared me. Regular Joe after Regular Jane out here somehow is incensed by the idea of policy's that have the effect of deviding the economic opportunity pie up in a way that gives them more than the super rich - when the unknown truth is the policy's since Reagan took office are unabashedly policies to distribute more opportunity to the super wealthy! Why aren't they pissed about that? The data shows the policy's have been very sucessful in giving less spendable income to the working class and more to the very wealthy while the functions of the two classes have remained the same. Why does the middle manager now make 3 or more times the factory floor worker when he/she only used to make twice or less within the same size organization? All of the labor litigating/legislation and corporate cultural influence has been on retarding wage growth and making it harder and less attractive to unionize.

Well, there you have it, save Mr. Reich's post and then lets see what Obama and the Democrats do.

So, Professor Reich, just how many stimulus angels can dance on the head of a fiscal pin?

Couple days ago, Paul Krugman wrote on his blog, ""It’s time to raise Keynes: we need big fiscal stimulus, now now now."

The ol' Sandwichman commented: "What part of the word three(3) don't these stimulus addicts understand?"

You see, John Maynard Keynes wrote about THREE ingredients for a cure to unemployment but latter-day Keynesians can only count to two. Number 3? Working less. ("The Long-Term Problem of Full Employment" 1943)

A little over a week ago, Professor Reich wrote, "For now, focus on the unemployed."

In reply, S'man quoted Samuel Gompers said:

"The answer to all opponents to the reduction of the hours of labor could well be given in these words: 'That so long as there is one man who seeks employment and cannot obtain it, the hours of labor are too long.'"

Who would have thunk that J. Maynard and Sam, the cigar maker were on the same wavelength?

Look, I think fiscal stimulus is great idea for smoothing over the cyclical slumps & bumps but we're talking here about the fallout from a 30-year binge of "just one more bubble... just one, pleeease." The magnitude of fiscal stimulus required in proportion to the number of jobs that will be created is just not sufficient.

Just because JMK said "in the long term we're all dead" doesn't mean the long term never comes. The problem we face now is the one for which Keynes prescribed working less. But the erstatz Keynesians want to keep going back to his intermediate solutions. Been there. Done that. Ate it all up.

Next... the work less jubilee.

Nice to read these rational thoughts after a.m. conversations with my very wealthy employer. He is infuriated with the changes Obama will bring. He claims his taxes will go up because he's being forced to "spread his wealth" to poor people and "others" who can't manage life or work hard. He claims the government is forcing his hard earned dollars into a charity program.
Clearly, my attempt to suggest that the health of an entire organism is required for any of it's parts to maintain viability, were ill spent on angry, deaf ears. He says it doesn't matter to him personally because he'll be dead before any "good" can be realized in his own coffers.
Lovely perspective.
It would make me laugh if I didn't realize he's not the lone ranger. However, how does one influence such illogical perspectives? I'm clueless.

Sorry Reich, but the only way to get out of a depression is a WAR. Building infrastructure didn't help much in the 30's. It was WWII that pulled the US out of the depression. The war on terror (common enemy to join the citizens around to increase worker productivity) and the housing bubble helped after the orgies in the 80's and 90's. Now there are no bubbles left. Building bridges takes long and they last too long. Another WAR is needed. Pulling back troops will only hurt the military industrial complex and bring home unemployed soldiers. How about a war in Iraq? Another cold war maybe against China... or India, some big country at least. Need common enemy to unit the workers and increase output. Communist, Nazi... whatever, the terror label isn't working well anymore. Hope isn't an enemy.

Handing over money without limit to everyone who has purchased more house than they can afford is not on my list of things I would support. Some mortgage relief, yes. But not just massive do-overs for people who, in many cases, attempted to make a lot of money by investing in real estate. There's a difference between people who are legitimately in need and people who overspent rather wildly or bought houses expecting to flip them within a year or two for a big profit. Whatever relief there is needs to be carefully targeted so that it doesn't just become a giant transfer of wealth to people who made unwise choices that were pretty predictably unwise. Don't get me wrong -- plenty of folks legitimately need help, and I'm all for helping them. But I like Reich's ideas, which offer relief by raising incomes, to direct mortgage relief, which only adds to the already egregiously imbalanced favoritism shown to homeowners over others.

I don't think that we should increase spending on health care. At about 16% of GDP, we spend more on health care than on food or housing. Much spending on health care is consumption, with no future return on the expenditures. A large part of the spending is on elderly in the last months of life, and another large part is on chronic illnesses, which are maintained but not cured.

Instead of an increase in overall health care spending, it should be shifted away from insurance companies, corporate benefits consultancies, healthcare payment processors and the other numerous intermediaries and admistrators, and towards the actual care givers - doctors, nurses, and other practitioners. Investments should be made in a new organization with standardized and efficient information technology systems to replace today's intermediaries. Investments should also be made in research to achieve more cost effective treatments and to evaluate drugs, medical supplies, and technologies for effectiveness as well as safety.

Professor Reich argues that absent consumer spending, investments will not be made. I do not think that demand size economics is the way to make the case for a government stimulus. Even with sufficient demand, businesses were already beginning to suffer declining profitability. Government deficit spending can stimulate new investments not simply by providing final demand but also by improving profitability and thereby whetting the appetite for businesses to make new investments.

How can government do this against the threat of Ricardian equivalence, i.e. the depressive effects huge deficts can have on businesses today as they anticipate the taxing away of future profits to pay for the debt incurred today to pay for expansive government programs.

Three ways.
1. Government can increase the pool of new scientific and technological knowledge on which businesses can draw to capture and make new markets and rationalize their energy costs. That is, government spending will stimulate new investments by raising the profit outlook or what Keynes called the marginal efficiency of capital

2. Government intervention can help to rationalize the health care system and bring down the costs of health care for workers and businesses as a whole.

3. A better educated and healthier workforce will also be more productive and thus profitable to hire. So education spending will crowd in new private investments.

I would thus challenge Professor Reich's defense of deficit spending in terms of shoring up final demand, rather than shoring up profitability.

That is, I think there is a case that profitability problems are more the cause of weakening demand than their cause. That is, because new investments have not proven profitable, businesses are not expanding, and that in turn creates deficient consumer demand which then of course compounds profitability difficulties.

Government spending can crowd in new investments.

I would advise Professor Reich to make the case this way to business because it is more likely to create bipartisan support for the government deficit spending that we now need.

Supercapitalism is a brilliant book.

Your colleague
Rakesh Bhandari

A revival of FDR's WPA to rebuild our infrastructure would probably be the best path to economic recovery, although I still think it will be a tall order for President Elect Obama and his Administration when we're facing wars on two fronts and an economy in crisis. I think Professor Reich that you've laid out some pretty solid solutions in this article and I have great faith that an Obama Administration will be able to take great strides in undoing the errors of the past 8 years.

You have Obama's ear, hopefully you are aiding in stteering him into the right direction.

Am I the only one that thinks Dr. Reich posts a fanastic article but doesn't respond to any posts as sort of a tease? I would love for him to answer some questions.

3! (See above)

Great piece. Lays out the basic arguments so concisely for a big economic stimulus package. Reich is once of the sharpest, most genuinely civic and compassionate economists out there. I sure hope he will be part of Obama's team.

A review of History reveals that most of History's epic collapses are the result of Supply-Side Economics. Why isn't this taught in high school civics classes to everyone?

I took a class called "History of Property Rights" taught by Nobel Laureate Douglas C. North. He had us read his book "Structure and Change in Economic History." In that book he says (pages 100-115) that the Roman empire fell because wealth and power concentrated. The wealthy and powerful used their influence to avoid paying taxes. The Roman Empire failed to fund large enough armies to protect its borders (despite controlling all the resources of western civilization). A 500 year dark age ensued.

The startling thing about this, is the people who had the most to lose, the wealthy and powerful, were the ones least willing to pay the taxes to perpetuate a state that recognized property rights.

Then I took a class on Japanese Law, and discovered a similar thing occurred in medieval Japan. Japan, an island nation, did not fall, it just disolved into a two hundred year dark age.

I then did a directed reading on Islamic law. Part of that involved reading about pre-Islamic Meccan society. In essence, Islam is, in part, a reaction to concentrated wealth.

Then I saw on the History chanel that the collapse of Ancient Egypt's New Kingdom resulted from the exact same thing. The moderator read it off hieroglyphics.

Then I stumbled into a used book store that had an interesting book on the Byzantine Empire. In 1025 Byzantium had made a startling comeback and was the most powerful entity in the Balkans and the Middle East. The Islamic state was disolving. But in 1025 Bazil II died without an heir. The aristocratic families took over and basically implemented supply side economics. Less than 50 years later the Turks had taken all of Anatolia in a small battle with ancilliary Army at Manzikurt. The Byzantines then asked for help from the West. The crusades ensued by Byzantium never recoved Anatolia and so eventually collapsed.

I seem to recall vaguely from high school history classes that concentrated wealth led to corruption and decline of Hapsburg Spain, Bourbon France, Romanov Russia.

Finally the Great Depression itself was caused by supply-side policies in the 1920s. In turn that gave us Hitler, Militarized Japan, World War II, and the Holocaust. (Yes Republican party is partly to blame for all of that. No wonder so many Jewish people vote Democratic).

Certainly any and every one of these can be disputed in their details. But the overall trend is massive.

I will not go so far as to say that supply side is always wrong. If you have too much inflation it might be an appropriate remedy. But the bulk of economic history says 'that way, madness lies'.

This should be common knowledge. Supply side policies are basically insane.

Dr. Reich: A few weeks after I added the following quote from FDR's Federal Reserve Chairman, Marriner S. Eccles, to Wikipedia, you wrote that you did not think we had gotten into the same situation. Your article today seems to me to suggest that you may have changed your mind. Any comment?

Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, Beckoning Frontiers (New York, Alfred A. Knopf, 1951)[24]:

As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.]

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality underconsumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression.

The next shoe to drop is coming and I don't see any easy answer for it. Right now credit cards are acting as an artificial prop on consumer spending. People are using their cards to continue lifestyle maintenance in the absence of real income. When the bill comes due, the lending industry is going to see a massive wave of defaults and be forced into an orgy of charge-offs. This is not the least of the reasons that the bailout monies are not being used by the banks for interbank lending. They are building up their capital in anticipation of defaults (and an uncertainty as to the exact state of their own assets/debt ratios)

At that point consumer spending really will fall off the table.

The government is going to be able to keep the banking system solvent, but its going to have a much harder time re-igniting consumer spending.

Krugman is right. Speed is of the essence at this point.

I just want to say that it is absolutely great to see a long, old school TPM Cafe thread and debate on a serious public policy issue, and to get away from the brain-rotting game of electoral politics.

I didn`t read all the comments,so if I repeat someone else`s,forgive me.
My only comment is that Supply-siders are the ones who engineered this whole mess in the first place because no matter what happens they are making a shitload of money.They tank and there`s W.and Paulson et.,al.to give them an other shitload of money to bail.So why shouldn`t they want tax cuts?They have been lining their pockets since Reagan.As far as I`m concerned,they have no relevance at all.They`re lucky they aren`t in jail.To them I say STFU.
There need to be indictments,lots of them;AND THERE NEEDS TO BE MANY RICH FUCKERS DOING SERIOUS TIME.That`s my humble proposal to fix the economy and to keep it fixed.

Robert says: is exactly what the economy needs right now."

Yes, there's a lot to be said for "Government spending that puts people back to work and invests in the future productivity of the nation..." unless you're like me, recently retired on a pension from my union. That government spending may, over time, rev up the economy again and, if done properly, reward us with some durable improvements to our infrastructure, the education of our work force, etc. HOWEVER, now that Bush has had his little wars and run us way the hell into the red already, there's more likelihood than ever that more government spending will have to be paid for -- at least in part and maybe in toto -- with inflation down the road. That is a huge dose of rodent-intercourse for people on a fixed income. My hard-won pension could end up looking like 1972 dollars being spent in 1985. Remember those?

This is a growing perspective that has logic (not to mention renowned economic adviser) written all over it. I've referred to it as The Renewable Deal. We may very well only be able to crawl out of this quagmire through massive infrastructure investment and our national and global infrastructure's greening transformation:

http://www.fogcityjournal.com/wordpress/2008/11/01/the-renewable-deal/

That's interesting. Why would people put their currencies in DOLLARS? That makes no sense at all to me. If I could I would flee the dollar as fast as possible, we have been running our economy for years on credit and it is all coming due NOW.

But I suppose if the value of the dollar is going to go up, massive deficit spending by the government will inflate the currency causing it to go down and keeping it a bit more stable.

That's pretty interesting.

Also the question is, at what point do infrastructure projects mask the problem (I'm thinking 1937-38 recession). The only thing that got us out of the depression was the spending on the war and that the industrial base of all the other nations that mattered was mostly bombed out wreckage so we were the only game in town.

First of all, Prof. Reich, you are my choice for Treasury Secretary.

A few comments: 1. Monetary policy works fine in an inflationary environment, but it is ineffective in fighting deflation, since the Central Bank cannot create negative interest rates. So Milton Friedman may have been right for the inflationary 60's and 70's; but Keynes was right for the deflation of the 1930's.

2. It does no use to pass out stimulus checks, because the wealthy either save the money or invest it abroad, and the poor use it to pay off bills.

3. It can be argued that the primary reason for our present financial pickle is 30 years of Reagonomics, specifically, trickle-down economics. Wealth does not trickle down; it trickles up. The wealthy have more opportunities to invest, and more political power; and they naturally tend to support public policy which is favorable to them. To maintain a stable equilibrium, we need to inject money at the bottom and let it trickle up; this is accomplished by progressive tax policies, and investment in the public sector (schools, hospitals, public transportation, etc.)

4. Starting with an inflationary environment in the 60's and 70's (generated by the Vietnam War and Johnson's "guns and butter" tax policies), we began fighting inflation in a number of ways, beginning with Paul Volker's aggressive tightening of interest rates. Reagan followed through by pushing back the unions, starting with the firing of the air traffic controllers. Walmart has been a deflationary force for years: cutting prices, knocking out competitors, keeping down wages, etc.

5. Forcing down wages and benefits for those at the bottom of the economic ladder was good for those on the higher rungs. They kept their salaries and got cheaper goods. The free trade agreements under Clinton provided a further deflationary force, by exploiting cheap labor in the "third world" a.k.a. the emerging market economies. But this put further pressure on the people at the lower economic levels of the U.S. This, plus cutting of health benefits, forced more and more people into debt. The housing boom of the early part of this decade forced more people into debt, and use of homes as ATM machines covered over the fact that people were not doing so well. The subprime ponzi scheme was the straw that broke the camel's back.

6. Greenspan's incompetence is without parallel. He apparently was guided solely by the ideology of Milton Friedman and the supply-siders. WE are indeed in a deep hole, but the Republican mantra of cutting taxes will not solve the problem The biggest obstacle to economic recovery is getting the nation to face up to the primary cause: by undercutting the people at the bottom of the economic ladder, we have destroyed the foundations of economic prosperity for the entire country. The pain is now rapidly trickling up.

7. There is far more to the problem than re-regulating the banks. We need to restructure our economy, so that it is not so dependent on consumer spending, not so dependent on credit, and involves a larger component of PUBLIC investment. WE need to create good-paying jobs up and down the economic ladder. We need to spread the wealth around, as Obama said in his off-handed remark to Joe the Plumber.

8. Spreading the wealth around is vital to restoring economic stability and vitality. Rather than inject money at the top, which is what the $700B bank bailout bill is supposed to do, we need to inject money at the bottom, not by giving money away, but by providing meaningful jobs, good health care, and good education.

9. Keynes was focused on employment, Friedman on capital; but the truth of the matter is that both are equally important, and sound economic policy requires people up and down the economic ladder to have good jobs, good health care, and good education. The main obstacle to solving our economic problem is the ideology of the past 30 years. Democrats must make the case to the general public that the way forward is to increase taxes on the wealthier classes and invest in the public sector -- not only bridges and public transportation, but education, and health care. Trickle down economics was class warfare; taxation and investment in the public sector is sound economics that in the end will benefit everyone. Large disparities in wealth and income destabilize the economy, and eventually the political system.

Wow, it's like ready those old Fortune magazines from the early 1930s again! All things old are new again, including the good old New Deal.

I'll add that infrastructure should include fiber optic cable or other high speed technology for the final mile. That's labor intensive work, and incredibly important. We should also unjam our copyright system.

As for the banking bailout, we need something like the Gameen Bank, not the existing finance oriented structure. (I've done small business loans myself. It's easy to run credit checks and calculate amortization. Who the hell needs bankers? The whole model is obsolete.)

People who marry or inherit money believe in trickle down. They are like the old fashioned Boston women who don't buy hats, they have hats. The way you make money is to sell lots of stuff to other people. You pay your suppliers and staff and take a cut for yourself. That's called profit. Keep making a profit and soon you're richer than your customers. The money trickled up.

Keynesian demand management is all right as far as it goes, but it's really just a more or less effective palliative measure for a terminal disease. The disease is overaccumulation and overproduction, and its root cause is state capitalism.

Keynesian demand management only really worked with spending on the scale of WWII, and even then only when it was coupled with a supply side solution to overaccumulation (i.e., blowing up most of the capital in the world outside the U.S., and giving the state capitalist economy another 25 years before the chickens came home to roost).

The problem is overaccumulation, and the Sloanist push-distribution model it depends on to dispose of its excess product. The only solution is to remedy the causes of that problem, instead of attempting to inflate aggregate demand enough to buy up the product of overbuilt industry. Instead of putting the old Alfred Chandler economy on life support, we need a new economy that bears a closer resemblance to the ideas of Lewis Mumford and Ralph Borsodi.

This is my own "maximum strength remedy," which I left at change.gov:

If we want to replace the present centralized economy of waste production and planned obsolescence, it's an inescapable fact that a great deal of excess manufacturing capacity cannot be saved. In my opinion it's a mistake to try to prop it up through expedients like the Detroit bailout.

The goal should be a shift from the present system of overaccumulated, centralized, oligopoly industry, and its business model of planned obsolescence and "push" distribution, to a decentralized economy of small-scale manufacturing for local markets. This means, among other things, a switch from capital-intensive production methods based on product-specific machinery, to production with small-scale, general purpose machinery. It means, in place of the old Sloanist production model, something like the present-day economy of Italy's Emilia-Romagna region: networked small manufacturers producing in large part for the local market, with a high degree of cooperative ownership. Such an economy, based on a "pull" distribution model with production geared to demand on a just-in-time basis, will be insulated from the boom-bust cycles of the old national "push" economies. And we need a new model of user-friendly, modular product design aimed at cheap and easy repairability and recycling.

Your main focus, in my opinion, should be to ease the transition by eliminating present policies (market-distorting subsidies, privileges, and cartelizing regulations) that impede it and protect the old economy from the new one.

This means, for one thing, eliminating differential tax exemptions that favor firms engaged in centralized, large-scale, capital-intensive production: e.g., the depreciation allowance, the R&D credit, the deductability of interest on corporate debt, and the exemption of stock transactions involved in mergers and acquisitions from capital gains tax). Then lower the corporate income tax enough to be revenue-neutral.

It means, especially, eliminating the biggest subsidy to economic centralization, and to artificially large market area and firm size: i.e., subsidies to long-distance transportation. The Interstate should be funded entirely by weight-based user fees on trucking, which causes virtually all of the roadbed damage. All subsidies to new airports or to expanding old ones should be eliminated, including all federal guarantees of local bond issues.

Perhaps most important of all, it requires radically scaling back the present strong "intellectual property" regime. IP (through patent pooling and exchange, monopolies on current production technologies, etc.) is probably the single most powerful cartelizing force, which enables each industry to be concentrated in the hands of a few players. It impedes the transfer of skills and new technology from the old manufacturing dinosaurs to the kinds of small, local producers we need. It also serves as a powerful bulwark to planned obsolescence, imposing legal restrictions on the manufacture of cheap generic replacement parts.

Scaling back IP law (a good start would be repealing the DMCA, the WIPO Copyright Treaty, and the Uruguay Round's TRIPS accord) would
eliminate the barriers to the diffusion of skill and technology that currently prop up the old corporate dinosaurs of the software and
entertainment industries, and facilitate their replacement by networked production on an open source model. Please cut loose the MPAA, RIAA, and Bill Gates, and do so yesterday!

Finally, we need to eliminate all subsidies to large-scale agribusiness. The result will be a flourishing sector of community-supported agriculture, replacing the old agribusiness dinosaurs as fast as new ground can be cultivated.

I think the credit/mortgage/economy crisis is merely presenting symptoms as they're currently discussed. Put simplistically, countries create wealth two ways: they either dig it out of the ground or they add value to goods and services that other countries buy from them.

Here's a graph and some analysis:
http://tinyurl.com/5js8da
When one looks at the graph, imagine how the money flows. More money is gushing out of the US than is coming in.

Countries can "play games" to try to help in the short term: cut interest rates (done almost as much as they can), fiddle with their currency (and they have to some extent), insulate with trade barriers (lost to a great extent with current trade deals), big government spending domestically, etc. But until the government and country stops the gushing of money to other countries through trade, the real problem isn't going to materially go away anytime soon. Eventually, the alternatives to mask the problem get exhausted and the country falls into severe decline.

In the late 90s, a manufacturer I consulted was looking at outsourcing. The Chinese at the time had labor rates of $1/day + a bowl of rice (that's gone up considerably since but is still way below US labor rates). The Chinese don't have the labor, safety and environmental standards the US does nor do they have the health care, high standard of living/high cost of living expenses. The Chinese don't take action against the stealing of intellectual property from other parts of the world. Etc. That's just one example. It's tough to compete unless changes take place.

I think the US is facing a correction no matter what they do. People extending their credit and it catching up to them is just a symptom. It's inevitable and the government Obama is about to inherit is running out of short term "tricks" and money to buy time. Eventually, the creditors of the US will also say "enough" - particularly those who are effectively enemies ... like the Chinese. Fortunately, we don't appear to have reached that point yet as there is still appears to be enough of cash to drain from the drying money swamp in the US. But that day is coming sooner than later unless the problem is addressed.

Part of what impressed me about Obama is he's recognized this and it's reflected in his policies. He hasn't been as blunt as he could have been so he wouldn't pummel the markets. Some examples he's given since the beginning of 2008:
In trade agreements:
- protection of intellectual property
- fair trade through making up differences in labor, safety and environmental standards
- policing currency games (played in particular by the Chinese)
To help the trade deficit:
- producing new products for energy independence while reducing the trade deficit caused by oil imports
- helping the automakers produce a 21st century product
- tax incentives for companies to keep jobs in America (and sell that value add to other countries)
To help cost of living: working towards more cost effective government

Obama was far more on the ball than McCain remotely imagined in this area. So there truly is some foundation for real hope that after decades of dodging the trade deficit issue which gave Clinton a brief, artificial economic spike but saddled Bush with a trend towards a bigger mess. Our president-elect is trying to address it head on. Obama can't possibly solve it in two terms but he can do a lot to get the US going in the right direction.

In interim, we have to recognize the circumstances, roll up our sleeves to help and hope Obama is successful at making substantial progress in this area. The future of the US as a strong economic and military power hangs in the balance.

So we need to turn Chinese before we turn Japanese?

Beijing already getting ahead of us - over half a trillion dollars in G spending announced over the weekend. Given the size difference in our economy shouldn't we need another trillion or so in spending to offset the trillion or so in bailouts? And while we're at it - how about trimming down the trillion or so spend on the defense-industrial complex? It's time to challenge the Pentagon.

It's just the opposite of what major corporations and the wealthy want us to believe being greedy entities and totally out for their own benefit.

Increased corporate taxes and the very wealthy MAKES them have to increase production to make increased profits which makes them NEED more employees to accomplish this, which increases jobs and salaries. Mix this with tax breaks for the poor and middle class and they have more money to spend for goods and services which also increases production. Hell, this isn't rocket science. When taxes are high we have higher production, increased jobs, a stronger middle class spending more money in the market place and more money for needed government programs like the EPA's protections and global warming.

Bush has done just the opposite and it has ruined our economy.

btw...I think Wall street should have their holdings confiscated and the billions in bonuses returned in order to gain their bail out money. They blew it and should not prosper personally while making us bail out their companies. Hell, they are even attempting to do it again, using bail out money for bonuses and CEO compensation. Time to turn it around on the wealthy who've been robbing us for years.

. . . [1][M]ostly "infrastructure" -- repairing roads and bridges, levees and ports; investing in light rail, electrical grids, new sources of energy, more energy conservation (...) [2] Government should also spend on health care and child care.

---

A.) Sec. Reich says nothing to support his 'mostly.' No doubt he does have grounds for thinking transportation more stimulating than medicine. Some of us who missed the MBA phase of postnatal ontogeny, however, do not instantly see what is obvious to most people.

B.) Also it would be nice to learn HOW 'mostly' he means: 60% for passengers to 40% for patients? 80% to 20%? 95 to 5?

Medicine being the most expensive worldly good there is, apart from possibly tertiary education, I assume a five percent stimulus solution would not actually buy a whole lot of it. And the less purchased, the more problematical who gets what IS purchased. ¿No es verdád?

C. Dean Baker pointed out plausibly the other day that a spending spree on passengers can be terminated any time, as soon as the ass of Lord Mammon has been prodded into motion again, whereas spending on patients, once started, can never, ever be stopped without all sorts of howls and moans and aborted careers in public service.

Dr. Baker did not mention, though he should have, that getting a medical spree under weigh will be difficult politically also -- "Death to Harry and Louise!" -- and certainly cannot happen fast. Inertia applies to acceleration as well as to deceleration.

D. Speaking of Harry and Louise, why not redefine ‘infrastructure’ so as to comprise insurance and "financial services" as well as the traditional crude materialistic things? Persons dismissed from their positions in other sectors could be trained to do I&FS in a couple of evenings, whereas one actually needs to know some technicalities to be of much use with "roads and bridges, levees and ports, light rail, electrical grids, new sources of energy, more energy conservation, health care and child care."

Instead of taking in one another's laundry, let us sell one another collateralized debt obligations until the economy gets back on that permanent high plateau where it belongs. At that point we can revalue all the toxic paper as plain paper and live wealthily ever after. (You heard it here first.)

Happy days.

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A revival of FDR's WPA to rebuild our infrastructure would probably be the best path to economic recovery, although I still think it will be a tall order for President Elect Obama and his Administration when we're facing wars on two fronts and an economy in crisis. I think Professor Reich that you've laid out some pretty solid solutions in this article and I have great faith that an Obama Administration will be able to take great strides in undoing the car transport errors of the past 8 years.

One way to stimulate small/startup companies would be to provide universal health care/insurance. Lack of health care for their family prevents many people from going out to try new entrepreneurial ideas. It's a small point next to the Search Engine Marketing magnitude of what you are talking about, but important.

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