Feb 17 2009
Response to A Thoughtful Critic of The Plan
From an email exchange with TPM founder Neal Katz:
A few people have asked me what I think of the Prosperity Mandate, so I spent a little while looking into it and thought I would give you my impressions directly.
Frankly, I am highly skeptical of the proposal. Though I haven’t read it in exhaustive detail (and don’t expect to be able to spend a lot of time on it), there are very many moving parts that would need to come together, and even if implemented, with no assurance they could be built quickly to scale. The complexity is actually very high. Too high, I believe. As a former entrepreneur and venture capitalist, I learned to be very leery of deals that require many key things to come together to work because there are too many potential points of failure (ie high risk that is hard to mitigate) and it is hard to truly evaluate all the interactions and how they will play out.
NEAL: I can’t imagine a National Monetary Policy that would get us out of our current economic crisis not being fairly ‘complicated with a lot of moving parts’. Seriously, can you? If so, I would like to see how.
Some specific concerns that I saw.
The second-order effects are ignored ($1T raise, given a 10% tax credit means $100B in lost taxes; tax-free interest means (assuming 5% of $1T per year) lost taxes of $15B/y assuming a 30% tax rate), ….). That cuts into existing program funding immediately while transferring it to other programs over time.
NEAL: The proposal is Budget Neutral. The $100 B is made back by limited Capital Gains to job creating investments — ie NOT for buying and selling existing company stocks, ending Oil Depletion Allowances, and Farm subsidies for not growing anything. Combined this is actual Budget Positive to cover some other programs. CDs are at 1.5 to 2% so instead of $15B it would be less than one half that amount — but again, covered by taking away current breaks to the wealthiest that do not create jobs.
If the loans are guaranteed, why would you also need to give tax credits to motivate buyers? By the time you’ve constructed all this, it looks a lot like existing packaged financial instruments. Why is this better than just buying municipal bonds (tax free and insured already) or treasuries (which are already guaranteed), etc. and go directly to government entities to do stuff. You need oversight, administration (a 1% is higher than buying Vanguard mutual funds management), etc. The microloans, etc. require a great deal of on-the-street work to administer, etc. especially if they would be insured, and an entire department to determine how you choose worthy projects and follow-up, etc.
NEAL: If you believe that Federal and State governments is efficient, and works, then you can keep the existing paradigm. I for one do not - and I think there is a lot of evidence to support my belief. NGO’s or non profits like FINCA or Habitat for Humanity or major companies like FLOUR or Bechtel would manage the actual activities under the oversight of an empowered TPM Board.
TPM financial system is really no more complex than any construction project with completion bonds, financed and then PayBack” of the construction loans with permanent long term financing. The guarantee on the principal is due to the fact that no one knows if a bank will be around in 5 years - so the Fed has to guarantee the Deposit - otherwise they won’t come in. This is the only way to get enough deposits into the banks to make them sound again. This is nothing like derivatives or bundled securities.
Yes there will be a difficult and cumbersome approval of a Fund America program — but that allows for individuals to ear mark their own projects. For example Yamhill citizens could buy a CD and pledge on a loan to an Ethanol plant and Energy Service stations — they get to choose. That is a lot of pure democracy in exchange for some small percentage overhead.
Unfortunately the biggest behind the scenes insurers of these kinds of financial instruments are weak, by far the biggest was AIG which is being bailed out by the US government, so not sure what company has the capital to pick up the slack to insure $1T of new loans.
NEAL: Actually the biggest and initially lead insurer would be Berkshire Hathaway Insurance Group and that is the reason I have identified Charles T. Munger as a Board member.
Example that concerns me: “Higher Education Funding College students will INVEST in THEMSELVES by contracting a specified % of wage garnishment on future wages.” How is this substantively different from existing loans that they pay out of future earnings? (Other than calling it an investment instead of a loan? and tying to a % of earnings instead of a fixed payment per period?) How would the provider of the loan make an investment choice when they don’t know the payback period or rate of cash flow generation since someone working a low-paid job might take a very long time to pay off at low/irregular rates?)
NEAL: Once again the point is the amount of funds made available AND the source. This plan would allow College Pension Funds (currently sitting on over $1 Trillion nationwide) to invest in their own students - and pay themselves their operating budgets - and if it is not worth their investment, then what are we funding. This also allows a low income family - take tax savings (from tax due on under $50K) and buy a CD get an additional Tax Credit they can sell to someone else, and fund their kids going to a local community or state college.
Personally, I believe we need to get away from financial schemes that appear to cost nothing by taking from the future and just pay our taxes for the things we can’t do on our own (roads, schools, ..) or on a timeframe (mandated RPS for utilities) or scale (hybrid subsidization) that is greater than waiting for a market to develop on its own. As Wyden said at his townhall — we have the money already, it is a question of choices: $1T in Bush tax cuts, $1T in Iraq war, $0.7T in TARP — the $0.9T stimulus is just 1/3 of of that. We can “recapture” $1T in spending just by rescinding the Bush tax cuts.
NEAL: I think what Ron Wyden was saying is that we have already squandered $Trillions, that money is gone. Goverment cannot print enough money to buy our way out of this current crisis — without completely passing the debt onto future generations. I thought he was looking for different types of solutions.
What do you think? Enter even tough questions below and Neal will try to respond.
2 responses so far
“TPM financial system is really no more complex than any construction project with completion bonds, financed and then PayBack” of the construction loans with permanent long term financing. ”
This statement comes from the blog of the Prosperity Mandate, and I believe it reveals a great deal about both the Mandate and its challenges. Essentially, what the statement says is that the TPM financial system is confusing: It sounds complex, and indeed convoluted, requiring technical, specialized language, which in turn requires technical specialists, which in turn creates special interests. Bear in mind that if people believe economists know what they are doing, they will expect economists to be both rich and disinclined to share their knowledge. Consequently, by the time nonspecialists finish reading the sentence, they may feel bored, intimidated, and perhaps even disempowered. That’s not to say its a bad idea or that it won’t work, but it doesn’t sound like a fun cartoon to watch, does it?
I’m serious - the success of the Prosperity Mandate depends upon its ability (and willingness) to forgo its agenda and - rather than stressing what’s being offered - aligning with the vast pool of the potentially interested. Successful marketing does not emphasize what’s being sold, but who’s buying. Make a connection with what people want to hear, with what people want to read, with what people want to learn, and with how people want to help, emphasize the necessity of their input, and we create the solution ourselves.
As an example, why not promote a debtor’s union? Since - statistically speaking, at least - every man, woman, and child in the U.S. is a debtor, why not get organized, that we have some negotiating power? Rather than an esoteric economic plan that fails to captivate, perhaps this angle would rally a crowd around a cause, ultimately endorsing a plan they learn about slowly.
For that matter, can we really call the creation of meaningless jobs economic stimulus? We need to reward results, not just employed martyrs. Specifically: More jobs that pay wages spent on nonrenewable, fuel subsidized, mass-produced, imported consumables does not solve the economic problem. The American economy is a consequence of the American ecology: there is no wealth without natural resources. We cannot successfully build economic infrastructure without rehabilitating ecological infrastructure. Green jobs does not mean a factory with less emissions, a car with better mileage, or a shirt made from organic cotton. Green jobs means ecological rehabilitation. We must invest in the ecology; all other investment alternatives lead to dead ends.
The Prosperity Mandate offers a financial solution to the economic crisis, but to work, it must offer more. It must offer the people what we want, and it must offer it in a manner that has unbelievable appeal. The art of selling is the practice of serving others - it has nothing to do with what we want to offer the world, and everything to do with what the world wants from us. To succeed, we must prioritize meeting the needs of others, and deprioritize fulfilling our own. This is known as bending in order not to break, or the strategy of adaptation.
Thank you for reading, I would enjoy hearing your response
Thank you for your comment - the post covers a great deal of ground.
The comment makes several leaps to conclusions, that I honestly do not belive to be logical or accurate, none the less, I will try and respond.
TPM is not written as a popular rallying battle cry or branding slogan. TPM is written to provide a road map to Congress and the Administration for a new Monetary Policy based on a proven financial paradgim. The only popularity contest TPM seeks to win is the full support of the White House, and a majority in both Houses. TPM is not trying to become a household name or brand, in fact, if the proposals get enacted, we don’t seek any credit nor acknowledgment. (By the way, I believe some of our best Economists share this humility and/or desire to be of some service without personal gain or profit!). The purpose is to get the economy back into forward gear and provide for a healthier progressive tomorrow.
TPM would fund (entirely - not just partially) a full Code Green Economy as defined by Thomas Friedman in his brilliant book, “Hot, Flat, and Crowded”. The definition of the right job is not on how the wages from that job are spent, but rather what kind of future that job is building.
While we disagree about the purpose and function of marketing and advertising, in any case, TPM is not going to undertake the marketing approach suggested.
That said, we appreciate the time and effort in your comments.