NOTE: This follows my last post (March 14) “Recovery of Fantasy”


Think of being cast into the bottom of a crater. At first, the process of climbing out seems daunting to the point of despair.

Your New Leader is chanting “YES WE CAN!” This seems be addressed to no one in particular and everyone in general from a safe place on the crater rim. Members of the immense mob below the New Leader have joined in the chanting. After a while, you notice that as voices begin to tire and a few have stopped. Many in the crowd have become disillusioned by the exercise.

The members of the Leader’s Team have tossed down a series of strings, none of which is capable of bearing your weight, most of which don’t even reach the bottom. “See!” they shout. “We are helping!”

So you study the situation with a critical, discerning eye. You notice that a few self-reliant souls have located a PATH. This is a distinct trail that leads out of the crater via a series of well staged turns. The PATH, which few in the bottom so far have noticed, is located as far away from the dangling strings as the diameter of the crater allows. No one mesmerized by the cant and the strings has noticed the PATH

Of course the devil is in the details, and those details are best left to the climbers themselves. As a bottom-up economist, I recommend bypassing the pundits, politicians and pollsters in favor of the folks with their feet on the ground and their minds firmly planted in the real world. So as I outline the PATH below, you are invited to retain your critical intelligence; study the details as they emerge from interviews of the folks who live and work on the ground.

As an exercise, I invite you to talk to a successful small business owner. Yes, there are several left. Get the real story. “Just how did you get this business off the ground?” you might ask. “Just how helpful were all those government bureaucrats at the municipal, county, state and federal level? Tell me about earnings, labor costs, taxes and regulations. What is the failure rate in your line?”


The path to recovery consists of several discrete strands, some of which will be initiated by government, but most of them must be taken by private individuals and organizations. And that is our first little secret. Until the private, profit-making economy recovers, there will be NO recovery. Therefore it follows as summer follows spring that the all of the effective and necessary government recovery-engendering actions have to be carefully crafted and here is the second secret: A majority of economists in the US now are of the opinion that the stimulus plan produced by the current congress will do more to retard a full recovery than to stimulate one.


Keep in mind that the current crisis was set off by an over-reliance on credit mechanisms to finance the private economy following the drying up of accumulated well of private investment capital due a long standing, world-wide pattern of government parasitism.

The POP heard around the world was the sound of a giant credit bubble bursting, exposing that about half of the world’s economy was being funded by funny money. We were living on over-borrowed over-lent and under-capitalized debt instruments masquerading as legal tender.

It follows (brace yourself for a blast of common sense here) that a crisis caused by a debt craze should not be addressed by a new debt craze. What most of the misguided governments in the world, ours included, are attempting to do is a dangerous bait and switch scheme: Governments are now attempting the substitution of massively failed system of imprudent private debt using a massively imprudent expansion of public debt. This is like getting out of a crater by shoveling at the bottom for so long that you forget that it is a crater and that YOU’RE STILL IN THE BOTTOM.

  1. Fiscal Triage

(a) Stabilize the finance system by allowing all of the unsound lending institutions to fail and using federal lending to quickly restore liquidity to the ones that survive. Bankruptcy with FDIC protection beats nationalization, the government purchase of overvalued assets (some of which, truth be told, have the negative values of a polluted superfund site), and all the other schemes that have the effect of pouring good money after bad.

(b) Confine any stimulus spending appropriations to measures that meet a three part test: (i) a strong positive private-sector employment-growth impact within 18 months or less, (ii) acceleration of necessary infrastructure projects, especially in the energy, agriculture and transportation sectors, that will facilitate robust private, profit-making enterprises downstream, (iii) a design that fits into a ten year business restoration template (as in the ICE BREAKER agency idea at the end of this piece).

(c) Compartmentalize institutional borrowing risk. It was a dangerous error to allow high risk financial institutions to commingle operations, assets and governance with low risk ones. This process started when savings and loan institutions became banks and it accelerated when the boundaries between high octane investment lenders and the rest of the financial system were allowed to dissolve. Recall that the Titanic was designed not to sink because it floated on several independent separate water-tight compartments. The mutual interpenetration of risk levels in the world economy was like floating an ocean going ship on a single compartment. If Teddy Roosevelt could employ federal anti-trust powers to break up one or two oil companies, we can certainly find the political will to resection the financial world so that future failures will be confined to their own compartments. Doing this now will accomplish more immediate gains in financial stability than bailing out one more major bank. Remember the real lessons of Titanic: No ship is too large to sink. There always will be another iceberg. Check those compartments.

  1. Shifting from Debt to Capital Accumulation

(a) Adjust incentives to favor fiscal restraint in the public sector (see #3 below) and to promote investment capital formation. We first need to stop punishing capital accumulation. The most dramatic and effective measure that could be taken in the short term: Allow cross the board investment tax credits for all US enterprises and industries with a minimum secure ten year continued benefit guarantee and a concomitant commitment not to punish success with higher corporate or personal taxes when the plan works. An investment tax credit is a “non-subsidy, subsidy” in that the government forgoes tax income in order to “permit” enterprises to plow profits back into growth-engendering investments. But businesses are cautious because (surprise!) they don’t trust government to keep its commitments for long.

(b) We’ve relied on high debt levels to sustain the economy or more than a generation. An addiction of decades cannot be undone in a heartbeat…at least not with out a heart attack. In 20th Century Britain, the quasi-socialist welfare economy was established effectively by persistent gradualism; it was called Fabian socialism ( ). I’m proposing a Fabian capitalist recovery.

(c) The subtext of this problem is our one trillion dollar indebtedness to Communist China, held mostly in the form of interest-bearing treasury-issued instruments, by faux-private, Chinese government-run entities. The first step in the long journey to recovery from this creditor-hostage situation is to announce a new US public policy, backed by a presidential declaration, a joint resolution of congress and specific enforcement mechanisms: Not more than 15% of total US indebtedness can be held any country (including its agents, politically controlled enterprises and agencies) that does not have robust free elections, free media and OR lends any support (overt or covert) to countries or non-state actors that are actively hostile to US citizens, allies or themselves support such countries or non-state actors. Can we do this soon? Of course not, but the policy will create new pressures and its own fiscal and political dynamic. It took the Fabians decades to ossify the British economy. It will take us much less to free up ours, if we can get our fiscal together within the next six years. The ancient Chinese understood the power of gradualism. We Americans can learn from them; we need to understand the power of firm direction and long term goals.

  1. Fiscal Restraint

(a) Fiscal restraint means fiscal accountability. The principle applies with equal force in the public and the private sectors. All borrowing, especially borrowing for investment purposes, must be restructured. This is a legal problem and can be resolved by simply rewriting the law. We need to ensure a tight span of authority and accountability. We need to call a decisive end to the days when a broker can treat a loan as a paper asset, floating t to another lender-investor who sells the same loan-set to buyers who then can do the same until only a powerful computer algorithm running for days can untangle the allocations of risk and accountability. Management theory talks about span of authority, as in I supervise six managers who in turn had divisions with six other managers and down the pecking order to the anonymous night security employee who steals office secrets and sell them to a competitor. It is like the seven degrees of separation idea that measures how close you are to a public figure you’ve never met, but whose uncle knows the neighbor of the boss of your high school classmate. The fraudulent success of Mr. Madoff was based on the illusion of trust across a vast cohort where somebody knew somebody and…we suddenly have achieved blind trust with no actual verification. Critical loan and investment transactions must involve much shorter spans of control in which no one escapes accountability and everyone in the chain has an incentive to blow the whistle.

(b) Present federal fiscal spending can be restrained and reconfigured to stimulate private business activity. The two go together. Federal money squandered unproductively is made unavailable for more productive purposes. In the current crisis, Step One is drastic, simple and very effective. [Remember, the goal here is to free up money to spend on private sector stimulus without increasing taxes or building in powerful inflationary forces, the silent tax.] You simultaneously freeze the entire federal budget at the current level, section by section, agency by agency, department by department, but you also unfreeze salaries and staffing levels, allowing operations to continue with the necessary cuts in pay and adjustment in staffing levels and tasks. You want to increase staff in an area? You – the manager – are empowered (recall this is a emergency) to promote, demote, terminate and find money from salary cuts and unfilled positions. But what you cannot do: abandon your department’s mission or spend funds you don’t have. Step Two is more difficult, but it involves making inter-department and interagency adjustments, firing and replacing managers who attempt to game the system. Again, a this level, no one gets to abandon the mission or spend money – in the overall aggregate – than is available.

(c) Temporary macro-functional adjustments can be made within the overall federal system if emergency measures are seriously implemented. The brutal fact of the matter is that much of the federal government’s activities do nothing at all to promote or sustain an economic recovery, however laudable or popular some programs may appear to be at the moment. As a common sense conservative, I would protect the law and justice and national security sector from major structural cuts, relying more on a McCain-style waste-housecleaning exercise. As to the rest of the system, we are restrained only by the weight of political tradition, a lack of imagination and the illusion that laws long in place cannot be changed. At the end of the day, in an emergency, the discretionary spending part of the federal budget is 100%. Permit me just two examples, again bearing in mind that I am treating this as an authentic emergency and presuming bold leadership worthy of the moment:

(1) We need to jump-start the energy revolution. For reasons abundantly set out in other articles (references below) the cleanest, safest, most cost effective move is to go swiftly to a large scale conversion to a nuclear-electric economy. All the groundwork has been done. The reactor designs, the safety standards and measures, the waste handling and recycling strategies, even a primary waste storage facility in Nevada are awaiting implementation. But plug in your Prius and Chevrolet Volt? Not on a hot summer day. The current grid cannot handle an electric powered transportation system. The next steps are not rocket science; they are off-the-shelf engineering. We don’t need to make the grid more “windmill friendly”; we need to double or triple its power handling capacity. We have a growing pool of underemployed labor and skilled engineers. We need to divert funds, now being taxed for less productive purposes, and use them to rebuild our energy infrastructure. Whether this initial push is primarily federal appropriations or a mix of public and private money, it will be the seedbed of powerful long term growth in the private commercial sector the main engine of real economic growth.

(2) To fund the recovery we need to make large, painful reductions in some less economically productive sectors of government and funnel the same money via tax incentives and direct spending to productive, job-creating activities in the private sector. In FY 2006, so-called mandatory federal spending amounted to more than half the entire budget (at 1.4 trillion), social security .544 tr., Medicare .325 tr., Medicaid .186 tr. While the miscellaneous programs like food stamps, disability, unemployment, and the like came to .357 tr. In the same year, discretionary spending was under .40% of the total (about 1.1 tr.), of which about half was for non-security spending (think health, education and human services). Again, my premise here is that we are in a real emergency and that the appropriate leadership emerges. All reductions to need to be reasonably immediate but not retroactive. This sort of decisive step would require an unprecedented level of coordinated and intelligent action at the federal level. But let’s just imagine the ideal for a moment. Two hundred billion dollars, appropriately targeted to income-generating infrastructure represents a lot of jobs and a lot of proactive economic activity, particularly if it represents a mix of direct spending a longer term tax incentives. The reallocation process begins with across the board salary reductions and means-adjusted benefits reductions. These are expressed as temporary, but their re-growth as the economy recovers should be kept at or below the general rate of inflation. Social security is sacrosanct only in the sense that retroactive reductions in status are off the table. But several obvious measures are not: Moving up the minimum non-disabled retirement age from 62 to 72, with a concomitant federal policy that discourages mandatory retirement before then; means tested Medicare, especially for the drug supplement piece. I modestly propose that the government change its operating culture to a more flexible, entrepreneurial one. Only a true emergency and the prospect of even more dire consequences can concentrate the dull bureaucratic mind. We could do really large scale cuts, say as high as 15% in the overall budget in given sectors, but couple them with highly empowered management who are held accountable for results. The necessity of making large salary cuts can be mitigated when good managers are given a freer hand in making do with fewer subordinates. Most of us have served in organizations salted though with marginal, but hard-to-fire employees. Fire the marginal employees first. Do away wit all civil c=service impediments to good management. Fire and replace the bad managers with good ones. Clean house. You get the idea.

  1. Creating and empowering the ICEBREAKER

As I’ve indicated in my last post, the recovery in already underway. Somewhere, not far from where you are reading this, a new business has begun, money has been committed to construction or someone has been newly hired in the private sector. These tendrils and shoots of growth are not unique or miraculous. The overwhelming majority of people who need to work are employed. California is something of a basket case yet employment is still north of 90%. The fact is that most people have some money to spend, that there are unmet needs and untapped demands for new products and services all over the Us, which is a way of saying that there are business opportunities.

Indulge me for a moment. I need to revisit my article, The False Bottomed Boat in order to establish the context for my proposal:

As I wrote in that earlier posting:

The individual, well managed enterprises that make/sell/.move the “real stuff” on which day-to-day commerce depends will link up with the “better mousetrap’ ideas and the surviving sound financial sources. This is where the real recovery will begin.

And this is where a whole set of government impediments, tolerable in a boom, are fully capable, during a fragile recovery, of aborting the new stirrings of economic life in utero.

What impediments, you ask? Think of tariffs, business licenses, building permits, mindless approval loops, excise taxes, sales taxes, capital gains and income taxes, land use barriers, fees, more fees, hearings, slow-moving bureaucrats, all standing in line, blocking the path to economic growth…. You get the idea. This is why successful businesses in the Third World have line-item budgets for bribes.

Collectively I call this the “Political Commerce Load Factor” (or PCL).

The existing PCL has been augmented by an environmental set. NOTE: the even more oppressive “evil carbon” set that is now in the queue could take down a prosperous economy. The PCL factors (extant and contemplated) are dangerous enough by themselves. But when combined with price/cost instabilities induced by haphazard political market manipulation (the unintended consequences of non-productive subsidies, leading to artificial supply scarcities and-spot inflation), the effect is the same as putting a heavy foot on the national carotid. Unchecked, political good intentions will consign us to Japan’s fate.


The interstate commerce clause and the supremacy clause of the US constitution, the source of the federal anti-trust powers, gives the US government the power, should it have the wisdom and courage to use it now, to break through the Political Commerce Load Factor in the service of robust economic recovery. It is both legally and practically feasible for a specific, as yet unnamed federal agency to be created, empowered and charged with the mission to break clear paths through the ice floes of bureaucratic red tape and punitive taxation so that nascent, privately funded commercial enterprises can flourish more quickly and robustly than anyone though possible, especially in the pre-recovery economic environment. In the same way that an Arctic ice breaker can break open a clear path for a fleet of fishing trawlers, a federal regulation and taxation ice breaker can do the same for a strong business recovery. This would be proactive, creative conservative-liberal policy at its very best. It would serve the same, practical function in the tangled web of business-killing regulations, licenses, permits, delays and kleptocratic taxes that bribes to in corrupt Third world economies. Except that its operations, in partnership with cooperating state governments would be above board, transparent, subsidy-free and legal.

Business people are not fools. The protections afforded a start up would need to provide a clear path that could relied upon to remain clear for a reasonable time, say, a full decade or more. And the political leaders who back this plan should not be fools, either. ICEBREAKER[1] protection is reserved for privately funded ventures only, the kind where the cost of failure is born by those who took the risks in the first place, the same investors who can reasonable expect to be allowed to retain the rewards of their success.

I happen to know that this model (or something very much like it) will work. But just stop for a moment to think about the implications. How far we have come…. Pandering politicians were compelled by circumstances, their own ideological inclinations and the electoral reward system to act as the public parasites of success. Now they have nearly brought down the whole beast. The fleas have almost killed the lion. We are now forced to see ourselves as a Third World Country…..

I promised to outline a Path out of the crater. The heavy lifting? That takes place in about two years, or just as soon as the Beltway crowd figures out that our crater is deeper than anyone had been willing to admit…..


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