The latest figures show both GDP growth and unemployment stuck in the mud. The federal government must continue to aggressively fight mass unemployment created by Wall Street hyper-speculation and promote recovery through both spending measures and credit market interventions. Austerity is not a solution.
The federal government is not in a fiscal crisis. Interest payments on the federal debt are at a near-historic low of 7.7 percent of total spending. Under Ronald Reagan and George H.W. Bush, interest payments averaged more than 16 percent of total spending. Government can and should expand spending on education, health care, public safety, family support, traditional infrastructure and the green economy, as well as unemployment insurance.
Credit must also be channeled to small business. Credit markets remain locked up, while banks are holding an unprecedented $1.4 trillion in cash reserves. These are cash hoards which the banks built up mainly through the Federal Reserve’s zero interest rate policy for banks. Two initiatives — one carrot and one stick — can deliver lower rates and risks to businesses. The carrot is an expansion of existing federal loan guarantees, focused on benefiting small businesses. The stick is a 1 to 2 percent tax on the excess cash reserves now held by banks, to push them to become more bullish on loans for job-creating investments. If Congress won’t pass such a tax on banks’ cash hoards, then the Fed can establish a maximum requirement on banks’ cash holdings to achieve the same end. If banks want to hoard free money, they will have to pay a fee.
Robert Pollin, professor of economics and co-director of the Political Economy Research Institute PERI, is the author of Back to Full Employment.