I agree and disagree with Joseph Stiglitz in this article by Phil Izzo. Central banks are certainly raising havoc with banking practice, Government expenditures, and Consumer Demand. Central banks are extending Cash to individual banks practically for nothing, destroying Interest rates for Depositors along with their Consumer Demand. Governments are borrowing Cash at extraordinary rates on every level because of low or nonexistent Taxes and huge expenditures. No one should even imagine that this Government debt will disappear before the Interest rates return to normal. Banks Depositors are following the banks themselves in investing only in Treasuries–the only place where there is any rate of Interest; Consumers going further and curtailing normal Spending because the 10-year Treasuries exact a great deal of Time before you get repayment or even market sale. Banks can derive a secure rate of Return by investment in Treasuries, or much higher Risk Return by investment overseas. None of this helps the American economy, where Unemployed Labor cuts its Consumer Expense drastically.
I agree with Stiglitz that there should be great Government expenditure on Labor programs, especially cheap level Employment which brings high Return in Consumer Demand. Paying Business to provide this Employment is stupid, though, and is much too expensive to be withstood. We do not need Business to borrow all Operating Capital funding from Banks at Prime rates, then give Business a 20% Return on their investment, simply to employ large numbers of people. Government can borrow at much cheaper rates, hire more people at cheaper rates than Business, pay managerial personnel much less, and additionally coordinate the national effort. Government programs have an added advantage over Business–greater ease of downsizing past the period of Recovery; Business demands continued program maintenance after their initial capitalization. It should not be the economic policy of the Government to maintain Businesses in the Black, when they should themselves downsize.
I have always advocated the elimination of the Bush Tax Cuts of 2001-03 at all levels; they should have never been instituted in the first place. Current economic thought suggests a policy of maintaining Business activity, even in those areas where Capitalization is bloated, and Profits are truly marginal. Their Solution is a ever-increasing award of Tax Cuts. I would take the exact opposite course. Everyone–Consumers, Business, Corporate, Capital Gains, and Inheritance should be taxed at rates which will pay for Government Expenditures at least in Boom periods; this means adjusting Tax rates to fully pay for Government Expenses at the time of the height of the last Boom. Government expenditures which are higher than they were at such a time will be repaid by a return to Boom conditions, or at least seriously retard our Debt acquisition. Such a policy would force Business to reinvent itself in order to maintain Profitability, spark a considerable amount of domestic investment to reduce taxation, and narrow the gap between High and Low Incomes in this Country. It is interesting that the effort would actually improve Business performance, as it forces the business remodeling which always occurs in a return to a economic boom. lgl