Forget the Debt: James K. Galbraith on What Happens After the Bailout

The National Debt Clock in New York made news (including here) last week when its operators had to drop the dollar sign to make room for one more digit. But, James K. Galbraith, Ph.D., professor of economics and government at the University of Texas Lyndon B. Johnson School of Public Affairs, told CPN that the more appropriate attitude is “Turn off the debt clock.” Galbraith is the son of the late John Kenneth Galbraith, the renowned economist and author, and his most recent book, The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, was published in August. He’s been thinking ahead about what comes after the immediate rescue efforts. For example, in a recent Q&A with Harper’s magazine, Galbraith said that the Treasury Department buying subprime loans “won’t change the fact that the value of your home has fallen and now you owe more on it than it’s worth. And nothing has being done to address that yet; it will be the next administration’s problem.” Galbraith said he is “very pessimistic” about the current crisis and its legacy, so it’s no surprise that he isn’t one of those observers looking for a turnaround in one or two years. Galbraith pointed out that the Texas real estate bust of the 1980s took about seven years (1985 to 1993) to straighten out. And while that recovery happened largely as a result of normal business cycles, he said, “We have to make the turnaround happen” this time, through government actions and policies. “There’s nothing that can put this right in six months,” Galbraith told Harper’s. “No bailout can achieve that, but the difference between three years and 10 years is important.” In an exclusive interview, Galbraith gave CPN his top three priorities for the next administration to strengthen the nation’s economy as we move past the current bailout efforts. “The first job is to stabilize the housing sector,” he said, noting that a useful model might be the Home Owners’ Loan Corp., which, under the New Deal, worked out about 1 million residential mortgages in the 1930s. “The idea was to keep houses in use,” he said, and to avoid widespread home abandonment and the resulting blight on otherwise viable neighborhoods. Established in 1933, HOLC applied only to non-farm homes and only to those worth less than $20,000 and typically offered longer-term loans to homeowners in trouble. The agency stopped lending in 1935, once its available capital had been deployed, and by the time it closed up shop in 1951, HOLC had actually turned a small profit, according to a paper by Kristen B. Crossney of Rutgers Unversity and David W. Bartelt of Temple University. At its peak, the HOLC employed 20,000 people (easily the equivalent of 100,000 today, Galbraith noted) at its peak and used local groups, not unlike local draft boards, to help guide its decisions at ground level. Barack Obama’s plan to freeze residential foreclosures for 90 days, Galbraith told CPN, would provide a window of opportunity to start setting up a similar federal agency. The next administration’s second priority, according to Galbraith, is to stabilize the revenues of state and local governments, which are typically highly dependent on real estate taxes, by revenue-sharing with the federal government. The government’s great power, he said, is that “Uncle Sam can write lots of checks.” So has the growth of the national debt over the past half-dozen years, between the wars in Afghanistan and Iraq and the cuts in the estate tax, handcuffed efforts to set the economy back on the tracks? Not really, Galbraith said. The Clinton-era budget gains were heavily driven by capital-gains taxes from the booming IT sector, he explained, and so were not sustainable. In any case, Galbraith just flat out doesn’t think that the national debt, at only 40 percent of GDP, is all that high. In fact, he said, “It’s very problematic that it’s so low” in the current situation. And since the national debt will rise no matter what we do, we ought to increase the debt in ways that will stabilize the economy the most. Pointing to the strong overseas demand for Treasury securities, Galbraith said, “The U.S. is where everybody wants to have their money…. It’s the last safe investment.” Finally, he recommends supplementing Social Security payments as needed to maintain the living standards of retirees (and their ability to contribute to the consumer economy) by compensating for losses in investment income.