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Bob Pollin Pt.4: Unemployment has evaporated in Washington policy discussions

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome back to The Real News Network. I’m Paul Jay in Washington. And we continue our discussion with Bob Pollin, codirector of the PERI institute in Amherst, Massachusetts. And we’re talking about the current economic crisis and what to do about it. Thanks for joining us again, Bob.


JAY: Alright. So sort of two major issues that we need to address: number one, the levels of unemployment; and number two, long-term debt, which I think we all agree is an issue and needs to be addressed in some way or another, ’cause sooner or later interest rates will go up and people are going to have to pay off this debt. So given where we are, what steps do you think should be the next steps?

POLLIN: Okay. So we have a short-term problem: we’ve got to solve unemployment. And we’ve got a long-term problem, which is debt levels do need to come down in the long term. I agree with that. Maybe–I don’t think they have to come down as much as some people argue, and I think they can come down very gradually, but we do have to deal with it. In the short run we need to solve unemployment. That has to be the absolute focus. It has been completely evaporated as part of the policy discussion here in Washington. Now, there are two ways that the government can really work to stimulate the economy. One is just by spending money itself. And in order to do that, they have to borrow. That’s–that has to be continued at least at the level it’s at now, rather than cutting back. And then number two is all these operations of the federal reserve to get credit out into the economy. Now, the Fed has put interest rates that banks can borrow at near zero. And that–but the point there is not to just give banks money to sit on, but to get it out into the economy. And the second part of the Fed’s approach has been a complete failure, so that the banks now are sitting on an unprecedented $1.4 trillion in cash reserves. That’s 10 percent of US GDP is sitting in the banks’ coffers–well, literally they’re sitting at the Federal Reserve. So we need to move that money into the spending stream; we need to move that into creating jobs. And, by the way, when you do that, you do that without any additional borrowing, ’cause it’s money created by the Fed, moved into the banks, and then the next step is the banks have to start giving out loans for people to invest and create jobs.

JAY: Okay. So the argument from the banks is: the reason there isn’t more lending going on is that it’s simply too risky. There’s not enough demand for the loans at a–with a security that justifies the loan.

POLLIN: Right. Okay. You know what? Let’s say that’s true, or even partially true. That does not justify the US government essentially giving out a free insurance policy. Free unlimited insurance–here you go, guys. That’s not the way the private market economy’s supposed to work. So if we’re giving them essentially the free money, there has to be a quid pro quo, they have to give something back, or else they’re not serving the broader social purpose that the government policy is intended to encourage. So, number one, $1.4 trillion is a huge amount of money. They don’t need that amount in order to be safe. They could get by with, oh, something like $200 billion, a mere $200 billion. So we need to enact policies to get that money out, even a third of it, even $700 billion. Number one, I think you tax the excess reserves of the banks. And I don’t know what the interest rate should be to tax them. So you can start low and keep moving up until the banks actually get focused and get serious about connecting with their communities and creating jobs. And it doesn’t just have to be the federal government policy. At the state governments, I’ve actually had discussions with people at the level of state governments. States have procurement power, so states can just say, we won’t do business with you banks if you keep sitting on your cash. We’re going to take our business only to banks that are going to invest in the communities. And once you start having that happen, it creates a positive cycle where you get more investment that gets more job creation and you start strengthening the recovery. And a key point is you do it without–you don’t add to the debt or deficit at all; it’s money sitting there at the bank.

JAY: So, just to be clear, what you’re proposing is if banks are sitting on this money they got from the Fed for next to nothing, in terms of interest rates, and they’re not lending it out, that would get taxed at a significant rate that would put pressure on them to lend it out because they’re paying too much interest. Is this money also part of what the banks are doing in what’s called the carry trade, getting practically free money from the Fed? And then they are lending some of it out, except they’re lending it to places like Brazil, where they’re getting, you know, three, four, or more points on their money?

POLLIN: Once, they get the money, because the US government has put no stipulations on this, they can do whatever they want with it. It’s their property. So, yeah, they can lend it in Brazil. They can–you know, they can arbitrage, as you’re describing. They can find places where they can get a little bit higher rate. That’s what they’re doing instead of putting the money into job creation. And so we have to set up a structure whereby, okay, we can keep lending money cheap until we get into a recovery. But the deal is the financial institutions that have this enormous opportunity have to put money into their communities. And, yes, there has to be the evidence of demand for businesses to want to invest. Part of that is we have to stop the cuts at state and local governments. That’s weakening the demand; that’s weakening the recovery. We have to start creating jobs and see wages go up and see the public sector stabilize. On top of that, then you push the money out from the banking system. You’ll get a recovery.

JAY: Now, what about if the banks don’t want to play along with this, why not find some way to tax, claw the money back, and then, you know, use direct methods to stimulate?

POLLIN: Well, that’s what I’m saying. Tax the reserves. And, you know, by the way, if you tax the reserves, those tax revenues will pay for programs, which is another thing I support is giving loan guarantees out for small businesses. And that would also–if the argument is small businesses are too risky, we can’t lend to them, okay, well, then, let’s do a government policy which we already have in place, which is Small Business Administration loan guarantees, let’s extend that and make it more viable and make it easier for the banks and the small businesses to move forward at a lower risk level. And that also is a very low cost, and no cost if you’re also taxing the bank reserves.

JAY: Okay. So what’s number two?

POLLIN: Well, the tax on reserves is important. The–I think, encouraging through the loan guarantees, because–to address your argument that we’re always facing this thing that the risks are too high. Okay, lower the risks. Let’s get that going. Well, there’s other thing. Long-term, yes, long-term, to correct the long-term imbalances, which is–they’re not severe, but they’re there. So let’s say long-term we’re at 4 to 5 percent of GDP without any correction. We need to be at 2 to 3 percent to be a stable growth path for the economy. Well, that is, you know, a problem that is not an overwhelming problem. So what do you do for that? Well, okay, raise taxes on wealthy people. They’ve been making out just fine. Sixty-five percent of all the net income from 2002 to 2007 was captured by the top 1 percent. Their taxes are too low. Tax Wall Street transactions. We’ve talked about it before.

JAY: Let’s just go back to taxing the wealthy, ’cause one of the talking points you hear a lot on places like Fox News–in other words, when they bring on their economists and such–is that there just isn’t enough wealth to deal–make a serious dent in the debt situation. Just taxing the wealthy won’t do it. I saw a number the other day. Something like 5 percent of the population actually owns 65 percent of America’s assets. If that number’s correct, in terms of dealing with the debt, it has to deal with just–more than income, doesn’t it? Somehow there has to be some way to get at all that accumulated wealth.

POLLIN: Well, yeah. I mean, as you and I have discussed before, I’m a big proponent of taxing Wall Street transactions. We could call it just a sales tax; we can call it a gambling tax. You can get a lot of money.

JAY: Because people with wealth, what they do with it is they funnel it through Wall Street, one way or the other.

POLLIN: Yeah. So they’re trading. And, in any case, we probably want to discourage all the speculative trading. So you put a low tax rate. There’s so much trading going on, I mean, just on stocks alone–forget about bonds and derivatives–the trading now is, like, 37 times what it was on average per day just 20 years ago, a massive increase in turnover trading. So put a small tax on that and, you know, you can raise easily on the order of $200 billion, which almost by itself–almost by itself would bring down–if we say the–you know, the debt–deficit to GDP is at 4 percent, we need to get it at 2 percent or 2.5 percent, do that one thing, and that almost by itself solves the problem.

JAY: And then the other issues you’ve raised in the paper is real health care reform to bring down the costs of health care, serious reductions in the military budget, which are both things we’ve talked about in other interviews. I mean, if you put all that together, what does that do to the debt?

POLLIN: There’s no crisis whatsoever. I mean, actually, if people read–people in Congress read the congressional budget office’s own work–and I don’t necessarily agree with everything in their model–in their base case model, they themselves are saying the long-term deficit at 3.5 percent of GDP, okay, maybe we need to get it down to 2.5 percent, but, I mean, there is no crisis there. Even according to the Congressional Budget Office, they do have an alternative scenario where the number’s bigger. So yes. But we’re talking about reducing the military even to a point, you know, $150 billion higher than it was at the end of the Clinton administration. We’re not talking about anything drastic. We’re talking about getting health care–we don’t even have to say, get it to where it is in Western Europe and Canada. Let’s say get us halfway between where we are now, at, like, 16 percent of GDP–they’re at 8 percent–let’s at least get it down to 12 percent of GDP. Any combination of those things is going to solve this long-term problem, which is not a severe problem to begin with.

JAY: Thanks for joining us, Bob.

POLLIN: Thank you very much.

JAY: And thank you for joining us on The Real News Network.

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Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.