The debt crisis is attributable to “structural” causes, meaning the way the nation’s financing is structured over the next several decades, but also to political and economic causes, meaning both the way we make policy and the way we live and experience the marketplace for trade, credit and consumer purchases. So, we need to implement policies that make serious, sustainable corrections on all three fronts.
Stabilizing debt financing requires the least expensive cost of borrowing possible, i.e. a AAA credit rating and the reputation for 100% likelihood of on-time repayment. It is unhelpful and counterproductive to indicate that the US might not meet 100% of its obligations on time 100% of the time. The long-term solution has to be oriented toward making social services solvent, and reducing the costs of debt repayment.
A more stable financial system over the long term, with better prospects for growth, requires optimizing the contact between human intelligence and the determination of value in the market. This is why it is commonly held that human freedom, generally, has real market value. But if we are to benefit from the virtues of human freedom on the interplay of economic forces, we need to be sure we are not subjecting mot of the population to unfair, unmanageable, dehumanizing pressures.
The more we can allow relevant human creative intelligence to respond to pressures and levers of influence in the marketplace, the more we can motivate positive change and optimize the creation of new wealth. In terms of the day to day management of trading markets, we need to have closer regulatory oversight of computerized stock trading, and find ways to incentivize investment in the virtues of new enterprise. New enterprise tends to come from some sort of innovation, local or global.
Allowing too much automation effectively dumbs down the logic of stock trading, and makes it more difficult for the best human wisdom to interfere with major software-induced trends, i.e. to correct automated misperceptions and to inject intelligent planning into overall market strategy. Automation also favors juggernaut investors and juggernaut enterprises, because they consistently have the wealth to drive trading patterns, buy into hedge funds and correct for the unexpected.
That over-concentration of economic influence is bad for the wider consumer economy and creates bad habits in the banking sector. It motivates false economization, in the form of cutting workers, reducing localized output capacity, and redefining “productivity” as overseas investment. Those entangling relationships can make some costs more reasonable, while making the business less agile, further incentivizing outsourcing and cutbacks.
We need more investment in the United States, more real circulation of real wealth through each layer of the American economy. The best way to achieve that is with a public-private national infrastructure bank, capable of moving major investment, through sustainable projects, with high rates of overall return on investment, into real infrastructure upgrades that motivate new economic growth.
But infrastructure alone will not build the 21st-century economy we need, in order to stave off the pitfalls of the 21st century economic landscape and achieve sustainable generalized prosperity. So, based on the model of a cooperative public-private national infrastructure bank, we need to institute at least two similar forums for major investment:
- A national renewable energy bank—Based on the need to build not just a better infrastructure and a new industrial economy, but on the need to build a future in which energy consumption empowers the wider economy, instead of draining it of vital resources, the renewable energy bank would pool public incentives with private investment to organize the building of major new projects in clean energy infrastructure and enterprise, specifically. Its projects would include the smart grid, solar roadways, wind complexes designed to both preserve rural, seaboard and mountain landscapes, and also build vibrant local economies.
- A national economic opportunity bank—To assist in directing tax incentives and direct investment to businesses that are actually hiring, and to businesses that help their workers further develop their education and advanced training, a national economic opportunity bank would pool public incentives and private investment to establish projects that build sustainable economic value into communities, and that help build a smarter, more highly-educated, more skilled, more versatile workforce, across the entire economy.
Among the solutions needed to make this new fabric of opportunity possible, we would find:
- Job-creation tax credits
- Incentives for employer funding for advanced degrees
- Public-private community development projects
- Small business collaborative competition networks
- Banking transparency reform
Bank of America is now facing a massive lawsuit related to practices that could not have occurred if there had been greater transparency and an opportunity for consumers to police the bank’s generalized treatment of consumers. Transparency can keep improper activities in check, even while it helps to build real competition for consumer-friendly ideas into the marketplace for banking and credit services.
By achieving that level of consumer-friendly competition among financial institutions, and by leveraging real transparency to discourage improper activities, the long-term risks of major financial institutions can be minimized, and the cost-benefit ratio for consumers can improve dramatically, lowering the likelihood of consumer credit defaults, bankruptcies, foreclosures and other major drags on consumer market investment and hiring.
Optimization and transparency are more important than cutting and capping. And for vitally important reasons. Neither cutting spending nor capping spending optimize the investment value of the resulting spending. In fact, there is strong evidence than when cuts are made too bluntly, the resulting shortfall in funding requires not only that more be achieved with less, but that the less that remains take on some of the work of fixing imbalances and pathologies that result from underfunding.
Put more succinctly: cutting spending doesn’t change the landscape of human reality; certain problems still need to be addressed, and doing less with more often exacerbates the underlying conditions that make the problems hard to solve.
Austerity is a double-edged sword, and an overly blunt solution: in Greece, Portugal, Ireland, Spain and the UK, there is clear evidence that aggressive cuts in social spending do reduce the spending side of the budget-deficit equation, but they also result in slower economic growth, and can make already existing economic failings deeper and more endemic.
The way around this hardline opposition to spending—which is rooted in a philosophical position that it is unwise to “trust” the way governments spend money—is to deploy two basic changes in how spending is done:
- Aggressive transparency safeguards—so that the public can track the real value of spending over time
- Funding for a creative prosperity agenda—specifically, funding that induces new investment, results in robust job-creation, and improves the long-term health and opportunity across the wider economy
Optimization, then, is a term designed to cover a wider effort to ensure that spending achieves measurable human-scale results, over the short, medium and long terms. Over the short term, this means making it easier to find investment for new jobs. Over the medium term, this means increasing the potential for increased economic output by incentivizing higher levels of education. Over the long term, this means structural solvency based not on austerity, but on prosperity.
The key for resolving the national debt is to make the entire economy not only solvent, but prosperous, robust and sustainable. To do this, someone has to find reason to invest in the work of others. For that to happen we need to find ways we can trust to pool investment opportunity and direct it to projects with a high sustainable prosperity value.
This is what you might call the “guiding edge” model for public-private investment. Private investment, along with private-sector management, design and workforce, do most of the work, but the public sector facilitates projects of major import and lasting value, so that the private sector has a clear horizon, a guiding edge. Economically, this has virtuous impacts both for private enterprise and for the long-term outlook regarding sovereign debt repayment.
Without establishing those virtuous underpinnings for long-term economic prosperity, it is not possible to speak intelligently about a solution to the long-term costs of major government borrowing. But what is crucial about the guiding edge model is that government does not dictate what must be done; it only draws from the ongoing activity of the private sector, and helps to direct funding, in a reliable and sustained way, to those projects that will be useful in building a prosperous, sustainable economy, over the long term.
So, to recap, we need:
- Sustainable corrections to long-running pathologies
- More human intelligence, less automation
- Incentives for investment in what is virtuous about new enterprise—new jobs, out of new solutions
- Three public-private investment-pooling banks:
- infrastructure
- renewable energy
- economic opportunity
- Job-creation tax credits
- Incentives for employer funding for advanced degrees
- Public-private community development projects
- Small business collaborative competition networks
- Banking transparency reform
And all of these come together to promote two basic ideas: that optimization and transparency are worth more, economically, than cutting and capping, and that the future economy must put creative, democratizing prosperity first.
– – –
Originally published August 13, 2011, at TheHotSpring.net
The Poet Economist 
One thought on “To Solve the Debt Crisis, Rebuild the Middle Class”