As the $1.9 trillion Biden stimulus plan – let’s call it ‘Building Back Better’ Phase One – now nears completion, the time’s come to talk about ‘Building Back Better’ Phase Two. What should we do?
Let’s start with some recent developments.
Exhibit 1: Early last month, Larry Summers sparked some furor by reintroducing the ‘I’ word – ‘inflation.’
That was absurd. But we can make it yet more absurd – that is, preempt it yet further – by redirecting capital from speculative uses, which fuel inflation, to productive uses, which counter inflation.
Exhibit 2: Later last month, bond markets began to draw public attention as putative inflation fears in the face of good growth prospects brought on a taperless ‘taper tantrum.’ Bond vigilantes and James Carville’s reincarnation fantasy (‘In my next life, I want to come back as the bond market’), it was said, were ‘ba-a-ack.’
This too was absurd. What Carville should want to come back as is the ever more consolidated Fed/Treasury balance sheet, for the dynamic Yellen/Powell duo shows no signs of interest in spinning-off assets. But we can make this yet clearer by adding more assets to Fed and Treasury balance sheets – productive, not speculative assets, as I’ll explain.
Exhibit 3: China’s central bank this week has warned that there’s bubble inflation again underway in the markets it oversees. Responsive rate hikes now look to be imminent. This is remarkable, given both (a) how recently China was under the Covid water and (b) how direct a hand the Chinese state takes in allocating capital, which enables counter-inflationary productive investment to supersede bubble-inflating speculative gambling.
This announcement is not absurd. But it spells opportunity. For rate hikes will in time tend to hike-up the renminbi if China’s as serious as it purports to be about internationalizing its currency. And this would help counteract China’s all but inevitably forthcoming attempt to relaunch its mercantilist export blitz. Meanwhile the US, by contrast, for its part has seemingly ‘infinite space’ to keep rates and the dollar low without sparking inflation – if only it does what it used to do and what China has done now for decades: productively allocate capital!
Exhibit 4: Last week President Biden signed an Executive Order aimed at rebuilding domestic productive capacity and associated supply chains. This week one particularly salient field of interest covered by that Order – rare earth metals – is the subject of yet further discussion, with the US, Europe, India, Japan, Australia and other nations at last growing serious about breaking China’s near global monopoly over these all-important components of new green technologies. (China controls somewhere between 80 and 90 percent of global supply – a position the US bizarrely gave China ten years ago.)
This development also is anything but absurd. And it too spells opportunity – the opportunity to reclaim national productive autonomy in the industries and infrastructures of the future. That autonomy’s not only an economic and environmental, but now also a national security, imperative.
You see now where this is all going. What it all spells is the need for Phase Two of the Biden Team’s Building Back Better plans to do something we used to do, but had until recently given up doing for fifty plus years to our detriment – namely, to allocate investment capital productively and strategically, and hence to do so publicly.
Public capital allocation has of course been taboo in the ‘neoliberal’ era. The operative understanding has been that ‘government mustn’t pick winners and losers,’ because ‘the capital markets,’ including James Carville’s bond market, are best at channeling capital to its … term of art alert … ‘most valued uses.’
But there are two vitiating errors in these two slogans, one having to do with ‘picking,’ the other having to do with ‘most valued.’
Let’s start with the latter. Is ‘most valued’ to be understood in immediate market price terms, or in longer-term ‘production possibility frontier’ terms?
Pre-crisis neoliberal types of course deny any distinction between these two sets of terms. But fifty years of bipolar swinging and destructive bubbles and busts ought to show that denial not only wrong-headed, but an intolerable insult to citizens’ intelligence. What ever the allocative efficiency of our capital markets in the longer-term (hint: it isn’t that good), the grotesque inefficiency of these markets in the short-term is by now beyond cavil.
The reason is not hard to find – it is accessible even to orthodox economic intuition, and bears the added advantage of showing us what we must do. In effect, our financial markets are subject to classic collective action predicaments – a garden variety instance of orthodox ‘market failure’ which seems amazingly to have escaped wonks’ attentions for decades.
A collective action predicament is a choice situation in which the individually rational thing to do is, when rationally done by all individuals, collectively irrational in its outcome.
Consider a credit-fueled asset price inflation – a.k.a. ‘bubble’ – for example. While prices are rising it’s individually rational to pile in. But everyone’s doing so boosts prices yet higher in ultimately unsustainable Ponzi fashion. The same’s true of CPI inflation – when it happens – of course.
A debt-deflation or asset price fire-sale is of course the same problem in reverse. So too were bank-runs, back when they happened – that is, before we developed means of addressing them through modes of collective agency: central (‘collective’) bank liquidity risk pooling, borrowing cost (‘monetary’) policy, and associated deposit insurance, for example.
So what manner of collective action predicament enables short-term financial market prices to diverge from longer-term productive value? What separates bona fide productive investment from mere speculation, and ensures that markets not guided by exercises of collective agency will fall prey to the latter and not do the former?
There seem to be two especially salient causes. I call them macro controllability and benefit capturability.
Controllability problems induce collectively irrational underinvestment in productive industry. Why individually invest in a firm, for example, if underemployment, deflation or inflation, or other features of the macro-environment make future sales uncertain? Similarly, why do so if the success of a new product line – e.g., electric vehicles – depends upon actions that producers can’t take, like installing charging stations everywhere?
Capturability problems induce collectively irrational underinvestment in infrastructures necessary to production. Why individually invest in the latter if the ‘positives’ yielded by the investment are mainly ‘external,’ in the form of aggregate growth that individuals can’t tax?
The result of these kinds of problem is individually rational, but collectively irrational, underinvestment in productive progress. Our industries decline and our infrastructures decay as individual investors find higher short-term profit potential in betting on price movements in secondary financial and tertiary derivatives markets – that is, speculating.
Our forebears in America understood these vulnerabilities. Read any pamphlets or op-eds amid policy controversy in the late 18th, the 19th, or the early 20th century and you’ll see it at once. And if you read our first Treasury Secretary – Alexander Hamilton’s – state papers in particular, you’ll see at once that understanding of these ‘deep structure’ predicaments is what lay behind his program of proactively guided, never-ending national development.
Hamilton and those who followed him here and abroad understood both that ‘development’ is a perpetual project of national productive renewal through strategically seeding and accommodating the industries of tomorrow, and that only exercises of collective agency – of government – could orchestrate this in the presence of the aforementioned collective action predicaments.
Today’s most renowned followers of the Hamiltonian program are Germany, Japan, South Korea and China, not to mention the other ‘tiger economies.’ But tomorrow’s most zealous follower of Hamilton’s vision must be Hamilton’s country itself – that’s us. And ‘tomorrow’ here must start today.
What does this spell for Phase Two? I think it spells some rendition of the InvestAmerica Plan that I and my colleagues at New Consensus have been pushing since last spring. The plan rests on four pillars, each of which could be adopted solo in its own right but all of which make for synergy gains thanks to mutual complementarities. Distinct ‘Plan A’ and ‘Plan B’ versions of it also can be adopted with or without 60 votes to approve in the Senate.
Pillar One is to bring into one Council all Cabinet-level agency heads with jurisdiction over key industries and infrastructures. This National Reconstruction and Development Council (NRDC), which in effect replicates the National Security Council in putting multiple authorities ‘on the same page,’ will be charged with developing a regularly updating a National Development Strategy (NDS) reminiscent of the National Defense Strategy regularly updated by the nation’s security establishment.
Note what this Pillar accomplishes. It makes national development a perpetual and proactively orchestrated process again, affording a mode of collective agency to address ongoing developments collective action challenges. It also does so in democratically accountable fashion, since Presidential cabinets are in effect reelected every four years. In so doing, moreover, if affords means of democratically determining, by reference to national needs, what counts as ‘productive’ instead of just speculative (implications for Treasury and Fed lending below). And these determinations can take full account, as they must, of ethnic and regional differentials where current levels of development and associated wealth accumulation are concerned.
And it affords means of addressing the ‘picking winners and losers’ challenge noted above with ‘most valued uses.’ For the Council identifies project fields, not firms, and will be required to mandate that NDS-related investments be diversified across firms and Congressional Districts nationwide, as the New Deal itself operated. (It’s also worth noting here that those who decry ‘Solyndra!’ never seem to mention another beneficiary of the program that aided Solyndra – a little firm named Tesla, now the most heavily capitalized firm in the world.)
Pillar Two complements Pillar One. It is to upgrade the functionality of the Treasury’s Federal Financing Bank (FFB) so that it can both finance, and channel supplemental private capital toward, key areas in need of fostering as identified by the Council. At the outflow end, the FFB will be authorized to invest directly, including by taking equity, debt, or hybrid stakes in, fledgling firms in new industries and sensitive infrastructural domains.
At the inflow end, the FFB will be able to deploy capital not only appropriated for it by Congress, but also invested by private sector parties looking for long-term investments that are neither as volatile as short-term Wall Street ‘products’ or as low-yield as Treasury securities. This it will do by opening special purpose trusts that sell debt, equity, or hybrid instruments to finance investments in specific project fields – e.g., electric vehicles, batteries, wind turbines, renewable diesel, solar, etc. A collateral benefit here will be to siphon capital away from volatile Wall Street markets and supply officials with price signal information in connection with specific projects.
Pillars One and Two will in effect replicate a ‘winning combination’ of democratically accountable strategy-formulation and financing that has recurred through our nation’s most successful eras: Hamilton’s combined Society for the Promotion of Useful Manufactures and Bank of the United States in the late 18th and early 19th centuries; Wilson’s combined War Industries Board (WIB) and War Finance Corporation (WFC) of the early 20th century; and Roosevelt’s War Production Board (WPB) and Reconstruction Finance Corporation (RFC), both patterned after Wilson’s initiatives, in the early-mid 20th century.
Pillar Three of the Plan pivots from heavy industry and infrastructure to smaller-scale startup companies and family businesses that show productive promise. It is to ‘Spread the Fed’ to restore our ‘decentralized central bank’ to its original mission as a network of regional development finance institutions.
The founders of the Fed worried that a central bank might centralize financial power and influence in the northeast, and in so doing move capital toward unproductive speculative uses rather than real development uses. Hence they gave it a federated structure, vesting lending authority – for productive purposes only – in twelve regional District Banks spread across the country and oversight authority in a Federal Reserve Board in Washington. For misguided reasons that I address elsewhere, we abandoned that model later in the 20th century, and did so to our detriment.
Now the Fed has largely become what its founders had feared and thus sought to preempt, concentrating financial power in New York and channeling capital to unproductive uses by large banks and trading floors in lower Manhattan. Pillar Three of the Plan accordingly restores discount lending authority to the Federal Reserve District Banks and requires that only productive commercial paper be monetized – as in the Fed’s early decades. ‘Productive’ can in turn be defined in relation to the National Development Strategy described in connection with Pillar One.
Pillar Three would not end one salutary innovation made twenty years after the Fed’s establishment – establishment of the Federal Open Market Committee charged with overseeing and tweaking national credit aggregates. That, after all, is a form of necessary collective agency necessitated by our financial markets’ subjection to recursive renditions of the collective action predicaments noted above. What Pillar Three does do, however, is give expression to a tragically overlooked fact – which is that FOMC-style credit modulation can be managed well only if there’s complementary credit allocation as well, to productive not speculative uses. And that’s what the regional Fed banks are for.
Pillar Four of the Plan can be considered a liability-side counterpart of the asset-side innovations – or rather, restorations – that are Pillars One through Three. At least that is so once we remind ourselves that the full plan in effect tweaks a de facto consolidated Fed/Treasury balance sheet. Here what we do is to convert Treasury’s already existing TreasuryDirect system of universally available Treasury accounts in a nationwide digital savings and payments platform on which people use what we call Democratic Digital Dollars. Doing this will eliminate the problem of the unbanked, will accelerate transaction velocity and thus economic growth, will afford leak-proof monetary policy transmission, will enable encrypted financial privacy, and will offer quite easy means of immediately disbursing loan moneys, relief payments, helicopter or UBI money, and the like.
US Digital Service (USDS) could convert TreasuryDirect accounts into phone-usable digital wallets by summer. Adding interest on wallet accounts would enable the Fed in turn to effect monetary policy by raising or lowering rates paid on business and citizen wallets. This would be a national savings and payments platform up-to-date with the 21st century – as well as with Sweden and China, which are already doing something much like this, in forms congenial to their specific governance and financial systems. It will also preempt the forms of abuse and volatility already occurring in the ‘wildcat’ private crypto-currency space.
And there is the Plan. Something very much like this, I think, is the form Building Back Better Phase Two ought to take. Each pillar is on the one hand incrementalist, in that it builds upon federal instrumentalities that we already have. Yet each pillar is also is potentially transformative, in the ways just describe. And finally, perhaps best of all, each pillar is also restorative, not ‘radical.’ For the Plan simply returns us to what we once were – a dynamic, proactive, productive powerhouse of a polity.
We used to approximate and can now actually be, in other words, a socially just, environmentally sustainable, productive commercial republic.