Monday, November 24, 2008

Problama for Obama

We've been a little busy, so the Washington Post and the Wall Street Journal have been getting off easy. The gloves are off, now — allowing for slight changes, we just sent the following letter to both of them:

President-elect Barack Obama is, in a sense, correct in that the United States — and the rest of the world — needs "economic stimulus." ("Obama Eyes $500 Billion in Stimulus; Paulson Weighs Ramping Up Aid Again," WSJ, 11/24/08, A1, A15; "Democrats' Stimulus Plan May Reach $700 Billion," Washington Post, 11/24/08, A1, A14.). Unfortunately, the Keynesian tactic of creating money to spend on non-productive consumption and government spending is exactly the wrong thing to do. It tries to solve the underlying problems by making them worse. If he is genuinely seeking a viable solution, Mr. Obama is thinking much too small.

Mr. Obama should not be asking for a mere $500 or $700 billion, but for $2 to $3 trillion. Instead of creating money to spend on consumption, rescuing gamblers, and increasing State ownership of private industry and infrastructure, however, as much money as is necessary can be created in a non-inflationary manner if it 1) results in investment in new equipment, technology, rentable space, or anything else that is "self-liquidating," that is, pays for itself out of future income, and 2) ownership of the investments is put in the hands of people who will use the income a) to repay the original acquisition loan, and b) afterwards spend the income on consumption.

Each year the U.S. economy adds between $2 to $3 trillion in new plant and equipment, rentable space, and infrastructure. Currently it does so in ways that concentrate ownership. If money for new investment were to be created by the commercial banking system and the central bank instead of relying on past savings, all new investment could be financed out of "future" or "forced" savings. Spending for investment that is broadly owned by people who will use the income first to repay their acquisition debt and thereafter for consumption instead of reinvestment would provide a lasting stimulus instead of a one-time infusion of questionable benefit. Investment that creates new owners increases ongoing demand for capital goods as well as consumer goods, and adds to aggregate savings (savings = investment) instead of increasing an already gargantuan public debt.

A program called "Capital Homesteading for Every Citizen," from the book of the same title, details how Mr. Obama can turn this country and the rest of the world around. The "Full Ownership and Employment Act of 2009" would be a good place to start. If Mr. Obama wants to spend money, he should do it wisely, not in ways that make the situation worse.

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