America`s Economic Crisis Is Beyond The Reach of Traditional Solutions

By most accounts the US economy is in serious trouble. 
Robert Reich, an adviser to President-elect Obama,
calls it a

and that designation
might be optimistic.  The Russian economist,
Mikhail Khazin says that the

will soon face a second `Great Depression.`" 

It is possible that even Khazin is optimistic.

I cannot predict the future. 
However, I can explain what the problems are, how
they differ from past times of troubles, and why
traditional remedies, such as the public works
programs that Reich proposes, are unlikely to
succeed in reviving the U.S. economy.

Khazin points out, as have
such as
University of Maryland economist

Herman Daly
and myself, that consumer debt
expansion is the fuel that kept the U.S. economy
alive.  The growth of debt has outstripped the
growth of income to such an extent that an increase
in consumer credit and bank lending is not possible. 
Consumers are overburdened with debt.  This
fact takes monetary policy out of the picture. 
Americans can no longer afford to borrow more in
order to consume more.

This leaves economists with
fiscal policy, which, as Reich realizes, also has
problems.  Reich is correct that neither a
reduction in marginal tax rates nor a tax rebate is
likely to be very effective.  Reich, a
Keynesian, has an uncertain grasp of supply-side
economics, but as one who has a firm grasp, I can
attest that marginal tax rates today are not the
stifling influence they were prior to John F.
Kennedy and Ronald Reagan.  As Art Laffer said,
there are two tax rates, high and low, that will
produce the same tax revenues by expanding or
contracting economic activity. Marginal tax rates
are no longer in the higher ranges.  As for a
tax rebate, Reich is correct that in the present
situation a tax rebate would be dissipated in paying
off creditors.

Reich sees the problem as a
lack of aggregate demand sufficient to maintain full
employment. His solution is for the government to

"a lot"
more on

projects on top of a trillion
dollar budget deficit —"repairing roads and bridges, levees and ports; investing in light rail,
electrical grids, new sources of energy."
spending would boost employment, wages, and
aggregate demand.

I have no opposition to
infrastructure projects, but who will finance the
baseline trillion dollar US budget deficit plus the
additional red ink spending on infrastructure? Not
Americans.  The US savings rate
is zero or negative.  Home

mortgage foreclosures
are in the millions. 
Officially, US unemployment is 10 million, but
if measured by pre-Clinton era standards
unemployment is much higher.  Statistician John
Williams, who

measures the unemployment rate by the pre-Clinton
concludes that the rate of US unemployment
is about 15 percent.  President Clinton
"reformed" the unemployment statistics by ceasing to count
discouraged workers as unemployed.  

For years, the US government`s budget has been
dependent on foreigners financing the red ink. 
Countries such as Japan and China and OPEC
suppliers of oil to the

have huge export surpluses with the US.  They recycle the dollars
by buying US Treasury bonds, thus financing the US government`s red ink budgets.

The open question is: how much
longer will they do so?

Foreign portfolios are
overweighed in dollar assets.  Currently the
dollar`s value is benefitting from the financial
crisis, as investors flee to the reserve currency. 
However, sooner or later the huge outpourings of
dollar debts will cause foreign creditors to draw
back.  Already
largest creditor, has sent a signal that that time
might be drawing near.  Recently the Chinese
government asked, as they do indirectly 
through third parties,

"Why should China help the US to issue debt without
end in the belief that the national credit of the US
can expand without limit?"

Is the rest of the world, which
has demanded a financial summit to work toward a new
financial order, going to  permanently allocate
the world`s supply of capital to covering American

If not, the bailout and the
stimulus package will have to be financed by
printing money. 

And the bailout needs are
growing.  Car loans and credit card debt were
also securitized and sold.  As the economy
worsens, credit card and car loan defaults are
rising.  Moreover, AIG needs more money from
the government. Fannie Mae`s loss has widened to $29
billion despite the $200 billion bailout. General
Motors and Ford need taxpayer money to survive.
General Motors says that its GMAÇ mortgage unit "may
not survive."
Deutsche Bank sees General
Motors shares
likely worthless.

Shades of the

Weimar Republic.

What Reich and the American
economic establishment do not understand is that the
recession paradigm does not apply.  There are
no jobs waiting at US manufacturers for a demand
stimulus to pull Americans back into work.  The
problem is not a liquidity problem.  To the
contrary, there have been many years of too much
liquidity.  Credit has grown far more than
production.  Indeed, US production has been moved
offshore.  Jobs that used to support the growth
of American incomes and the tax bases of cities and
states have moved, along with US GDP, to China and

The work is gone.  All
that are left are credit card and mortgage debts.

Anyone who thinks that America still has a vibrant economy
needs to log onto
and face the facts. 

Economists associate economic
depression with price deflation.  However,
traditionally, debts that are beyond an economy`s
ability to service are inflated away.  This
suggests that the coming depression will be an
inflationary depression.  Instead of falling
prices mitigating the effects of falling employment,
higher prices will go hand in hand with rising
unemployment–a situation worse than the Great

The incompetent Clinton and
Dubya administrations, unregulated banksters and
Wall St criminals, greedy CEOs, and a no-think
economics profession have destroyed America`s economy.  

What is the remedy for
simultaneous inflation and unemployment?  

Three decades ago the solution
was supply-side economics.  Easy monetary
policy had pushed up consumer demand, but high tax
rates had curtailed output.  It was more
profitable for firms to allow prices to rise than
for them to invest and increase output.

Supply-side economics changed
the policy mix.  Monetary policy was tightened
and marginal tax rates were reduced, thus
stimulating output instead of inflation.  

Today the problem is different. 
The US has abused
the reserve currency role, thus endangering its
credit worthiness and the exchange value of the
dollar.  Jobs have moved offshore.  The
budget deficit is huge and growing.  If
foreigners will not finance the widening gap, the
printing presses will be employed or the government
will not be able to pay its bills. 

The bailout funds have been
wasted. The expensive bailout does not address the
problem of falling employment and rising mortgage
defaults.  Treasury Secretary Hank Paulson
could not see beyond saving

Goldman Sachs and his bankster friends. 
Paulson bailout does nothing except take troubled
assets off banks` books and put them on the
overburdened taxpayers` books, thus endangering the
US Treasury`s credit rating.  

What the Bush Regime has done
is to stick the taxpayers with the banks` mistakes. 
An intelligent government would have used the money
to refinance the troubled mortgages and stop the
defaults.  By saving the mortgages from
default, the banks` balance sheets would have been
made secure.  By failing to deal with the
subprime crisis, Bush and  Congress have added
a financial crisis to the exhaustion of consumer
demand and the problems of financing huge trade and
budget deficits.

Belatedly, Paulson has realized
his mistake.  On November 12,
Paulson announced
"We have
continued to examine the relative benefits of
purchasing illiquid mortgage-related assets. 
Our assessment at this time is that this is not the
most effective way to use

The financial crisis has cost
taxpayers far more than the amount of the bailout. 
Americans` savings and pension funds have been
devastated.  Americans in investment
partnerships, who have been required by IRS rules to
pay income taxes on gains in the partnerships`
portfolios, have had the accumulated multi-year
gains wiped out.  They have paid taxes on years
of "capital
that have disappeared, thus doubling
their losses.

`s economic
troubles will rapidly accumulate if the dollar loses
its reserve currency role.  To protect the
dollar and the Treasury`s credit standing, the

needs to curtail
its foreign borrowing by reducing its budget
deficit.  It can do this by halting its
gratuitous wars and slashing its unnecessary
military spending which exceeds that of the rest of
the world combined.  The empire has run out of
resources, and the 700 overseas bases must be

Can Americans afford massive
infrastructure spending when they cannot afford
health care?  In

a Blue Cross Blue Shield group policy for a
60-year old woman costs $14,100 annually, and this
is a policy with deductibles and co-payments. 
Supplementary policies from AARP to fill some of the
gaps in Medicare can cost retirees $3,300 annually.
When one looks at the economic situation of the vast
majority of Americans, it is astonishing that the
Bush regime regards wars in the
Middle East
and taxpayer bailouts of
Wall Street criminals as a good use of scarce

US corporations, which have
moved their production for US markets offshore in
order to drive up their share prices and provide
their CEOs with multi-million dollar bonuses, can be
provided with a different set of incentives that
encourage the corporations to bring employment back
to the US.  For example, the corporate income
tax can be restructured to tax corporations
according to the value-added in the US.  The higher the value-added
in the
, the lower the
tax rate; the lower the value-added, the higher the
tax rate.  

Cutting the budget deficit by
halting pointless wars and unnecessary military
spending  and reducing the trade deficit by
bringing jobs back to
are simple
tasks compared to confronting inflationary

The world has had enough of
American irresponsibility and is taking away the
reins. At the November 15 economic summit, the world
will begin the process of imposing a new financial
order on the US in exchange for continued lending
to the bankrupt

With bailouts eating up the
world`s supply of capital, continued foreign
financing for
`s wars of
aggression is out of the picture.

Paul Craig Roberts [email
] was Assistant
Secretary of the Treasury during President Reagan`s
first term.  He was Associate Editor of the
Street Journal.  He has held numerous academic
appointments, including the William E. Simon Chair,
Center for Strategic and International Studies,
Georgetown University, and Senior Research Fellow,
Hoover Institution, Stanford University. He was awarded
the Legion of Honor by French President Francois
Mitterrand. He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy

Meltdown: Inside the Soviet Economy
and is the co-author
with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

for Peter
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.