How to solve many problems

Post stimulated by Steve Benen. Content due to John Quiggin.

This is arithmetic “Arithmetic tells us there are two ways to achieve the goal: the government can bring in more money and put out less.”

This isn’t “a combination of cuts and tax increases were necessary when the deficit got really big”

Revenue doesn’t come from taxes only. Consider the TARP big bank bailout. The Treasury turned a profit. The debt is less than it would have been without that program, but it wasn’t a spending cut or a tax increase. Or how about the Carter Chrystler bailout (not the Obama Chrystler bailout). Ditto.

Sometimes the US Federal government buys risky assets. It doesn’t do this for the high returns, it does this to prevent bankruptcies. This is not a promising time to invest, obvoiusly the Federal Government only invests when no private agent is willing to invest. But it still often makes money (for those keeping score at home Fannie and Freddie and mabye GM are predicted to be the only exceptions and all of my predictions about how the official predictions are pessimistic have been confirmed so far).

I think that the Federal Government can handle it’s financial problem by issuing more bonds and investing the proceeds in riskier assets. Contrast the Social Security Administration with state meployee pension funds. The SSA faces an actuarial shortfall (not huge compared to its revenues and maybe just the result of pessimistic forecasts). So do some state pension funds. But wait no state pension fund has the same sort of huge year by year surpluses the SSA has had (even proportionally). They say they are solvent, because they claim they will get higher yields on their portfolios than they would if they had to invest only in Treasuries. The SSA would be solvent and then many trillions to spare if it were allowed to invest the way all other entities with trust funds invest. Why not ?

Now I have praised TARP and proposed more fancy federal financial transactions. This is not because I have any sympathy for the financial services industry. I think it should shrink. I think this would be an additional benefit from my approach. The high returns on financial assets reward the people who play the market compared to their more small c conservative friends and neighbors. This happens even if they tend to buy high and sell low (betting against more sophisticated investors). So they keep at it. This is what creates the huge profits in finance. Reduce those unreasonable risk premia and you reduce those huge profits.

Yes the Fed Gov would bear aggregate risk. If the economy tanked a lot of the nation’s losses would be in the form of a larger national debt (which people usually barely notice hence the need for this post) not lower personal wealth of individuals or lower book equity of firms. Oh yes, my plan to eliminate the debt without tax increases or spending cuts will also work as an automatic stabilizer causing higher aggregate demand in recessions and lower aggregate demand in booms (when consumption crowds out investment).

So I claim I have a simple proposal to eliminate the national debt and reduce the magnitude of the business cycle and reduce the obscene profits of financiers.

I am not joking.