Canceling Debt as an Economic Stimulus package

Tuesday, December 23, 2008

I've been thinking about ways to address the debt issue in the midst of a global financial tar pit. And though it sounds a bit esoteric, it occurs to me that a Keynesian formula may be helpful. I'll try not to be too fuzzy.

Let's say that Obama is planning on a trillion dollar stimulus package, something that a growing number of people are expecting. How much should that boost the economy, given the normal measures of growth?

The way economists typically measure such things is by a "multiplier" in this case, it's often called the "Keynesian Multiplier" because it is based on his theory of pushing money into the economy to stimulate it. It's takes three things, consumption, tax rates, and the ability to import. It's a bit more complicated than that, but this is close enough. For purposes of making this look like math, let's call consumption "C" Taxes "T" and imports "M" (I know imports starts with an "I", but it sounds right when you say it out loud, so go with me on this). And let's say he's going to flush 1 trillion dollars into the economy.

The formula would be $1(1-c(1-t)+m), and the result would be $1.8 trillion. That is, making a $1 trillion stimulus would raise GDP by $1.8 trillion. Not bad, but not stunning.

There are a couple of ways to increase it even more. The most obvious is to export, though that's tough during tough times. The easiest way to increase exports would be to raise import tariffs sufficiently to discourage people from importing, which would make exports (relative to imports) go up. If imports were down to zero (which is impossible) then we could raise the GDP to 2.8.

Now in practice, slowing down imports with tariffs would be an awful thing. The upside of it is that it would increase our own growth and employment because we'd have more sales and salaries going on here within the US, and it would do it without creating an even larger stimulus package. The downside is that it would piss off the world that we are trying to make nice nice with right now and with whom we need to work closely to fix the ailing giant world economy. The downside is pretty down, but it might be a tactic that some people in Obama's inner economic circle will suggest.

One other solution is to get the entire world to get into bed together and pull the same weight (to mix my metaphors). China has become surprisingly eager to do that in recent weeks (their fake currency was one of the reasons for our trade deficit, which made some of our self-inflicted misery a lot worse, but they're hurting now also, and looking like they are willing to change their ways). One big holdout is Germany which, under Angela Merkel (who fashions herself as a throwback to Maggie Thatcher of the eighties), still believes in fiscal conservatism and not spending money, in an age when governments are the only institutions left that have any.

A major problem with getting all of us to pony up more money for the flushing is that most poor countries can't play along. That's for three reasons. First, they typically don't have a whole lot of money in reserve to flush with. Second, they don't have much of a capacity to borrow money and even during good times, they are constricted by "original sin." "Original sin" has nothing to do with Adam, the Apostle Paul, or John Calvin. It means they have to borrow money in an international currency, such as dollars, but pay it back in a local currency, such as pesos—a very tricky operation, and one which invariably means their international finances cost more than ours do. And third, they are often saddled with the horrendous debts that Jubilee USA and other faith and justice organizations have been harping about for the last decade or so. They can't pull their heads out to do a stimulus package if thirty to fifty percent of their export income is tied up in paying off old loans. So the idea of their borrowing money to spend money to flush money throughout their economies is difficult because it typically increases their interest rates more than ours (because of their "original sin"), because of their difficulty in getting a hold of the money it would take to pay back the loans. That's not just "original sin," it's also eternal hell.

There are things we can do to help that problem and they would ultimately help ourselves out of our won mess in the long run (you always have to put in an element of selfishly helping yourself these days or an argument won't fly). The first is to increase the amount of money we give to poor countries. One way to do that would be to increase the amount that the IMFG and the World Bank offer them for "special drawing rights," making their borrowing cheaper. Another is for us to do a blanket cancellation of all of their external debts with none of the self-serving, draconian, punishing "adjustment" policies usually required of them. (There is a bill languishing in congress right now that would propose that very thing--watch for it in a congressperson near you.) Another is to institute a "Tobin Tax." That's when you place a tax on all foreign currency transactions and pass the proceeds on to developing nations.

Each of these would send free or cheap money to poor and developing countries of the global south, so that they would have the capital to do local stimulus packages in their own countries. It would not only help their own economy, in the long run it would increase their capacity to buy our stuff and would lift our own economy.Who would have thought that caving in to the cause of helping poor countries would actually be a way of getting through our global economic meltdown? But, then, as we've said, you gotta convince people that something can help us before you ever move them to help others. Now, THAT, is original sin.


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