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Robert Pollin is Professor of Economics and founding Co-Director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. His research centers on macroeconomics, conditions for low-wage workers in the U.S. and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the U.S. Most recently, he co-authored the reports Job Opportunities for the Green Economy (June 2008) and Green Recovery(September 2008), exploring the broader economic benefits of large-scale investments in a clean-energy economy in the U.S. He has worked with the United Nations Development Programme and the United Nations Economic Commission on Africa on policies to promote to promote decent employment expansion and poverty reduction in Latin America and sub-Saharan Africa. He has also worked with the Joint Economic Committee of the U.S. Congress and as a member of the Capital Formation Subcouncil of the U.S. Competiveness Policy Council.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Washington. Last week, commenting about the euro crisis, President Obama said there's lots of wealth in Europe; they can solve this crisis if they want to. Well, certainly that could also apply to the United States. And a new study by the PERI institute looks at one of the places the money is, and that's in big banks and big corporations who have been able to borrow from the Fed at practically zero percent interest. Big banks are sitting on about $1.6 trillion, big corporations something in the range of $2 trillion. And, the PERI institute report analyzed, if you allow reserves for the banks, if you look at short-term liabilities, the corporations, they could still put into the productive economy an investment somewhere in the range of about $1.4 trillion. And what would that look like? Well, now joining us from the PERI institute in Amherst, Massachusetts, is Bob Pollin, one of the authors of the report. Bob is the founder, codirector of the PERI institute. Thanks for joining us again, Bob.ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you very much for having me, Paul.JAY: So, first of all, how do you get to these numbers? And how do the banks and corporations get so much cash? And why are they just sitting on it?POLLIN: Well, the way we get to the numbers is right out of the data from the U.S. flow of funds accounts, which is statistical data coming out of the Federal Reserve. So we're not making anything up. It's all coming right from data from the Federal Reserve. So if you look at the Federal Reserve data, the U.S. commercial banks have cash reserves sitting at the Fed of, as you said, $1.6 trillion, which is extraordinary number. There's never been anything like it. As a counterpoint, right before the recession, the banks were sitting on $20 billion total in cash in 2007. Now, the $20 billion is way too low, but the $1.6 trillion is ridiculously high. And as you--.JAY: Yeah, you make the point in your report, this is something like 23 percent of the U.S. GDP?POLLIN: If you add together the $1.6 trillion sitting on--that the banks are sitting on and the $2 trillion that the nonfinancial corporations have in liquid assets, $3.6 trillion, that's 23 percent of U.S. GDP sitting right there, one quarter of the entire level of activity in the entire economy.JAY: Now, the other point you make in the report is that actual borrowing from small business is a net negative since 2009. So all this cash sitting over here, and it's not getting loaned out into the economy.POLLIN: Yeah. These patterns are absolutely extraordinary. As someone who has looked at these data, the flow of funds accounts, for 30 years now, there's never been anything like it. The small business sector, or more precisely the noncorporate business sector of the economy, which is mostly small businesses, has actually been a net negative in terms of borrowing since 2008. In 2008 they went to negative $346 billion. That is, they were paying back $346 billion more than they were taking in in new loans. Now, how can an economy recover when the businesses are just paying back loans and don't have any money to spend on hiring people or investing in equipment? So that was 2009. As of this past year, 2011, they're still--the small business sector as a whole is still at net negative. So that's where the bottleneck is in the economy. We've got $1.6 trillion that the banks are sitting on that they got for free, and we have businesses, small businesses, net negative in terms of borrowing to expand their operations.JAY: Now, one of the things when we say "sitting on", it's not actually quite accurate, "sitting on", because as we've talked about in some of our previous interviews, the banks are using some of this money in what they're calling the carry trade and loaning it into places like Brazil where they're getting an interest spread. But in your report, you talk about something else is that the corporations sitting on some of this zero percent money are actually using it for share buyback schemes and such instead of investing in new production. Talk a bit about that.POLLIN: Okay. So the nonfinancial corporations are holding $2 trillion in liquid assets. And what we did throughout this study is we tried to work with extremely conservative assumptions as to what's a reasonable number as to how much they should actually be holding and not just jump up and down about $2 trillion without analyzing that number, 2 trillion. So we looked at their liabilities, how much the corporations owe, in short-term liabilities in particular, how much they are going to have to pay back over the next year. And it turns out that if we look at the ratio of this total amount of cash to liabilities, the cash is only about 55 percent of total liabilities. So they actually have more in liabilities than they have in cash. So we take account of all of that, and we look at the ratio of liquid assets of the corporations relative to liabilities as that has held in previous years, and we said that of that total $2 trillion, about $400 billion we can very conservatively argue is excess, is way more than they need to meet their needs in terms of their debt. So $400 billion with the nonfinancial corporations is money just sitting there that they should be using for investment.JAY: Now, the reason the banks are not loaning more or the reason companies are not investing more in more productive capacity, in more employment, you point out, is that the underlying issue here is lack of demand. So, I mean, it's not like these guys wouldn't prefer to expand; it's that they don't see a profitable place to do it.POLLIN: Right. Right. So demand is certainly one issue. I don't think it's the only issue. I think it's also fair to say that there is a credit lockout for small businesses. So I would say it's that combination of two things. But the first is certainly demand, because banks, corporations--look, they're in business to make money. If they thought that they could make money by spending this cash that they're sitting on on hiring people, expanding operations, then we have to assume they would do so. So they have reached the conclusion that it's not worth their while to put the money into job creation and investments. So how do you fix that? You have to raise the level of demand in the economy. That's the first fix.JAY: That means higher wages, more jobs and higher wages.POLLIN: It means more jobs and more higher wages. And by the way, we do--when we calculate the job creation of putting $1.4 trillion into the economy, we assume that wages are going up. So we say in the study that you're going to get 19 million new jobs, you can get 19 million new jobs over three years, by putting the money, $1.4 trillion, into [snip] that we are also taking account of workers getting wage increases, 3 percent wage increases a year. So that is--we are building wage increases into the economy. These are things that should happen. They might not happen. But--.JAY: Bob, let me just ask you the actual number after you allow for cushions in the banks and--or I should say, reserves in the banks, cushions for the corporations, the number you say that's available is $1.4 trillion. Is that right?POLLIN: That's right. That's right.JAY: Okay. So talk about what you would do with $1.4 trillion. How does this actually operate? Like, if they don't want to loan it, then you're suggesting the government needs to play a role here. What is that role? And how does this happen?POLLIN: Well, the government's role, first of all, back to your previous point, is to stimulate demand in the economy. That means we need--we definitely do need another stimulus. We can't sit around and wait--just wait for businesses to figure out that the market is better than it seems. So we--at the very least we need to reverse any notion, any semblance of an austerity agenda as being favorable to creating jobs in the economy. So, number one, yes, we need to defend spending at the state and local level, and we need the government to support that. And that will be the driver of job creation. And then, number two, we need the banks to start lending money to small businesses. Small businesses are getting turned down at a rate of about 60 percent for loans, and that is not going to help us get the small businesses back on their feet. So, okay, how do we do that? So, yes, we need to stimulate demand, and then we need to impose a tax on banks who are sitting on this money, because it's just too cushy for them to hold this money that they get at a zero interest rate. So we need to, first of all, stop paying the banks. The banks are getting paid one quarter of one percent to just sit on money that they got for free. So why shouldn't they just keep sitting on it? So you need to start taxing what we call the excess reserves of the banks, and keep taxing them until we start to see the banks getting movement and starting to find investment opportunities.JAY: So you looked at the effect of this. So if the $1.4 trillion does get into the productive economy, what does that mean in terms of employment? What's the effect of this?POLLIN: Yeah. So let's say $1.4 trillion is spent over three years in the economy. One point four trillion would create 19 million jobs over three years. We just assume it will take three years to get that level--amount of money into the economy. And it will raise total employment from its current level at about 140 million to almost 160 million--159 million. In terms of the unemployment rate, just this moving this money into the economy itself will drive unemployment down below 5 percent. So back to your quote from Obama, the situation in the United States is this: we can solve the jobs crisis with the money that is just sitting there doing nothing either with banks or with the nonfinancial corporations.JAY: *The money that's sitting there, the way you make the big banks start loaning money is, one, through loan guarantees, two, you tax their excess. Is that enough? And I guess part of my question is: does there need to be--do we need to find some other mechanism to get that money into the economy, seeing as it came from the Fed in the first place?POLLIN: I don't know if it's enough. Nobody knows. I mean, the situation is historically unique. My feeling is that this is something that we can implement tomorrow; practically speaking, we can implement it tomorrow. The loan guarantees to small businesses, we already have a Small Business Administration. They have the apparatus available to start expanding what they're doing tomorrow. To some extent they don't even have to need an act of Congress. The excess reserve tax could be implemented tomorrow. So these are extremely simple mechanisms that potentially could have a lot of effect.JAY: So the counterargument will be, you're shifting the risk to the government, because these small businesses might default, and then the government would have to pay. You've analyzed that. What does it look like?POLLIN: Yeah. So the federal government is already--they know how to do loan guarantees. They're loaning--their guaranteeing $300 billion. And the default rate on those loans that they already do is between 3 and 4 percent. Now, let's assume that the default rate doubles or even triples relative to its existing default rate. And we've done the math on this. And so let's say you get a triple rate of--so we're up to 10, 12 percent default rate. Even with that default rate, we're looking at government expenditure increase less than 1 percent of the federal budget right now. So the loan guarantees are--I'm not saying it's the best way to get money into people's hands, but it is a cost-effective way, and it's something that could be done right now. So let's try it. Let's get the money into the small businesses that say they're--.JAY: So the other objection [that] is likely to come is this will be inflationary, all these new jobs and higher wages that result from this. So you--what does the inflation picture look like?POLLIN: Well, we could use a little inflation. A little inflation that is generated by the economy growing, by there being more demand in the economy, by workers getting higher wages, that's good. That's good. That is not a malignant form of inflation by any means. And in the study itself we allow for that. We assume inflation is going to go up on average by 3 percent a year. So, you know, inflation driven by a growing economy is a byproduct of something good--growing economy with more job creation. So I don't see that as bad. Now, yes--.JAY: Well, as long as wages don't fall behind inflation.POLLIN: No, no, no. In--yes. We are assuming--and, of course, I don't know if this is going to happen--we're assuming, as often happens when workers start to get hired back into jobs--and we're creating, you know, almost 20 million new jobs--we're assuming that workers' bargaining power is going to go up, and we did factor that in. So we said even allowing for higher wages and allowing for inflation, real wages going up faster than inflation, we still get 19 million jobs. And then, also, we are increasing the well-being of workers, we're increasing the demand capacity of the economy, 'cause we're putting money in workers pockets. That's all--that is the engine of recovery that we need right now.JAY: And how much of this can be done without Congress passing new legislation, if any? 'Cause it doesn't seem like you can pass anything in Congress.POLLIN: Well, the first steps can be taken immediately, the first steps being, certainly, on the credit side, that is, to expand the loan guarantee program, at least improve the terms, make it really, really easy for banks to start thinking about lending to small businesses. The Fed itself can eliminate the 0.25 percent interest that they're paying to the banks right now to just sit on money. Those things can be done tomorrow. The excess reserve tax, it's possible--if you call it a negative interest regime by the Fed, it's possible that the Fed could do that without an act of Congress, maybe. I'm not sure. Certainly, to have a demand stimulus to accompany this, that has to come from Congress. But if you frame it in a way that's saying, look, what we're trying to do is get money into the hands of small businesses so they can hire workers, why would traditional Republicans be against that? They say they're always for small businesses. And the way that we've designed this program, it is really focused on enhancing the conditions for small businesses who are getting locked out of credit markets.JAY: Okay. Well, we're going to have a link to Bob's report. It will be underneath the video player here. Just one final quick question. If the Fed can loan money to big banks and corporations at practically zero percent, could it not do the same thing to states and municipalities?POLLIN: Yeah. Well, that's a good point. And they could also make loans directly to small businesses. It would be extraordinary. It would not be what they've done before, but they've been tossing out all the rules as it is to get out of the crisis by giving money to--giving money to the banks, giving money to the mutual funds. And, therefore, if the banks are going to keep sitting on the money that they're getting for free, it's time for the Fed to think about starting to do direct lending into the economy. And actually this has come up. I wouldn't say that it's a prevailing view. It has come up because the situation is so untenable. I mean, how in the world can you get a recovery when the Fed is running a zero interest rate policy and the banks won't make loans to small businesses? We don't get a recovery under that scenario.JAY: Thanks for joining us, Bob.POLLIN: Thank you very much.JAY: And thank you for joining us on The Real News Network. And don't forget the Donate button here. We're in the midst of our $200,000 matching campaign for 2011. If you want to keep us in business, you need to click Donate. Thanks for joining us on The Real News Network.
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