Moving beyond conventional remedies

October 24, 2008

diana-furchtgott-roth1Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The opinions expressed here are her own.

WASHINGTON ( – The stock market is falling, retail sales are down, GM and Xerox announce layoffs, and economists predict GDP declines in the 3rd and 4th quarters.  Even Fed Chairman Ben Bernanke has called for a stimulus package.

House Speaker Nancy Pelosi’s prescription for economic stimulus centers on more infrastructure spending, as well as more aid to states, Food Stamps, rebate checks, and unemployment benefits, a package that could cost up to $300 billion.

This is the Keynesian “solution” that didn’t work in the 1930s—more government spending. It’s time for new ideas.

Infrastructure spending—building more roads, bridges, water and sewer systems, and light rail—is too slow.  Spending occurs years after authorization because plans have to be updated, contractors hired, and inevitable environmental impact suits resolved.

Infrastructure projects are not necessarily undertaken in places suffering the most economic damage, but are spread around to win members’ votes.

The rest of Mrs. Pelosi’s plan wouldn’t rescue the economy. Extending unemployment benefits from 26 to 39 weeks increases unemployment, raising unemployment rates.  And rebate checks didn’t save us from a recession when they were mailed out in May and June—why would they help now?

Here are four better ideas:

First, rather than extending the duration of unemployment benefits, Congress could give unemployed workers an additional tax-free sum, perhaps $5,000, after 13 weeks unemployment.  This could be used for training, relocation, or general living expenses.  If workers find another job before the end of the 26-week duration of unemployment benefits, they keep the $5,000.

This would help unemployed workers find new jobs in new industries or different parts of the country, while at the same time giving them an incentive to return to work early.  Extending unemployment benefits, on the other hand, means that workers have to stay out of work longer in order to collect benefits.

Second, Congress could help the weak housing market by expanding permanent immigrant visas, or green cards, for those who promise to buy a house costing at least $300,000.  At $300,000 a house, 100,000 visas could pour $30 billion into real estate markets, 200,000 visas could pour $60 billion. This influx of money would help stem deterioration in house prices, the root of the financial crisis.

Given the enormous desire abroad to get into America, the Immigration and Naturalization Service should have no trouble filling slots.  Two hundred thousand visas is less than two tenths of one percent of our 155 million labor force, and skilled workers would make a valuable contribution to research and innovation.

Third, Congress could raise revenue to recapitalize the impaired banking and credit sector by selling oil and gas exploration and drilling rights.  Oil companies have profits and want to drill; banks need capital.

Places to drill include the Arctic National Wildlife Refuge, the Outer Continental Shelf, and promising areas in the lower 48. As well as potentially raising $50 billion, this would exert downward pressure on energy futures and reduced dependence on foreign oil, translating into lower energy prices.

Finally, America’s markets need capital.  If Congress were to set capital gains rates at zero for the next five years, America would see an influx of investment, both domestic and international, in equity and housing markets.

At the same time, Congress could make current tax rates permanent rather than having them rise on January 1, 2011, as currently scheduled.  With a recession imminent, prospective tax increases would worsen incentives to work and invest.

With the economy contracting, it’s time to move beyond conventional remedies. Unemployment benefits, immigration, energy exploration, and tax policy have been highly controversial.  A new look could mean a shorter recession and improved lives for millions of Americans.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

All fundamentally sound suggestions.

Posted by Brad | Report as abusive

Your ideas are not in touch with our problems, here in the grassroots! I think you must be spending too much time in your ivory tower and reading too many republican playbooks. Here’s my analysis of your ideas:

1. $5,000 in extended unemployment benefits doesn’t help the unemployed get a job, and is hardly a generous handout.
2. Bringing immigrants here to compete with qualified Americans is stupid.
3. Drilling takes 10 years to see results.
4. Letting tax cuts on the rich become permanent helps you not the rest of us.
5. Public works programs, although will take years to complete, will boost consumer confidence that jobs are coming, and that increased confidence stimulates the economy.

Posted by elaine munro | Report as abusive

I like your proposals.

Its time for a dramatic 10 year plan, throwing out what has not worked and creating a balanced plan that deals with:

1). Energy. Tax oil imports (not domestic oil) $1.00 per barrel when the price rises above $75.00 for every dollar above $75.00. Half of the revenue should go to the treasury to reduce the deficit and half to alternative energy subsidy or research.

Sell new drilling rights, and raise the per barrel share to the government on existing contracts when they renew. Create a counter force to opec with the oil consuming and importing countries OCIC. We have shown OPEC that the importing nations can or will shut down oil imports by raising interest rates and cutting demand.

We need to be energy independent within the next 10 years and get our self determination back.

2) Manufacturing.

a). Create a US sovereign fund to invest at low interest rates in expanding existing manufacturing or stimulating lost industries to come back to the US.

b). Examine managed economies around the world for good ideas, and unbalanced conditions and balance the playing field as a condition for free trade imports.

c). We should eliminate litigation against manufacturers or cap awards. Create a federal panel of judges to hear complaints and a set package of awards for legitimate claims. Create a 10 year package of environmental rules that will not change, and create a federal environmental board that makes citing decisions that are not subject to legal appeal or lawsuits. Put excellent knowledgeable people on these non partisan boards like we do with the federal reserve. They should be appointed and remain and not be political like current cabinet related posts. Rotate members in and out over time.

d). In order for companies to qualify for being part of this plan, they would have to agree to conditions such as executive compensation limits, green environmental standards, workers bill or rights and agree to provide stock to employees as part of their pay.

We need to do some radical changes to set America back on its feet and be self dependent.

These things will not be very agreeable to the left or the right.. which might mean they are good for the people.

And… Housing:
Something needs to be done to stabilize housing from dropping much further, or we all risk economic destruction, due to an uncontrolled spiral. Subsidy on the way up and free market hands off on the way down, is not appropriate.

None of the ideas are going to be wonderful.

We have to pick one, hold our noses and go for it.

The authors is as good as any, and does not cost the taxpayer by further increasing the deficit.

Overall I think the author is thinking innovatively and at a much higher level than current politicians, which in my opinion, is what is needed.

Lets start the great debate and push this kind of thing forward.

Email your Senator and Congressman.

Posted by Bryan Smith, Bend, Oregon | Report as abusive

Why invest in infrastructure? It’s not as if we have major bridges falling down or anything… right?

Posted by Brett | Report as abusive

Your prescriptions exaggerate the failures of Keynesian policies, and ignore true solutions. More government spending raises aggregate demand, stimulating the economy, maintaining the profitability of industries, and lessening the potential impact and frequency of crises of overproduction. The boom of “military Keynesianism,” i.e. the increase in government funding which began throughout WWII and has increased ever since, has created a massively profitable sector of the economy with connections to innumerable industries, all without encroaching upon private sector profitability. State spending for infrastructure is necessary for the long term health of our national economy, and although the immediate payoff is less than, say, failed trickle-down policies, the impact to the citizens of the U.S. are far improved. In short, I don’t see either the logic nor the empirical proof of your claim that state expenditure-based policies are failures. In fact, I see the opposite.

A bailout that restricts itself to benefitting the banks, insurance companies, etc., that caused and supported this financial crisis merely creates a massive moral hazard. Additionally, it is unjust if not at least matched with a social and economic safety net to help those who lose jobs, homes, etc., because of the economic fallout. We need infrastructure for long-term efficiency. The irrational fluctuations in the world and domestic market show how irrational the world economic system really is in light of the fact that these stock-market fluctuations (based solely on investors’ prediction of profits) have real world consequences for hard-working American and global citizens.

We need an economic system which is rationally planned and democratic, where the government is not afraid to create infrastructure and social safety nets, and where participants in the economy have democratic say over their society and workplace, while sharing equally in the benefits of such participation. We need a democratic, participatory, decentralized planned socialist economy; this is the only way to avoid such moral hazards, crises, etc., and meet the needs of actual suffering people. We have unimaginible wealth, and there is no excuse for unutilized productive capacity coexisting with an increasingly high unemployment rate. We can provide food, shelter, medical care, education, etc., eliminate poverty and reduce inequality, but only if we move from the capitalist system (which has shown its irrationality blatantly with the current crisis and the rampant fluctuations) to an equitable and just democratic socialism.

Posted by Jeff Ewing, Spokane, WA | Report as abusive

If Mr. Ewing doesn’t believe that state spending is a failure, he should just look at the economic progress of the Soviet Union and other socialized economies versus America. Look at Zimbabwe, which went from a rich capitalist society to socialist, and is now one of the poorest countries in Africa.

True, spending stimulates aggregate demand in the short run, but why have state spending? Why not reduce taxes and let individuals spend that money? They are far better judges of what they prefer.

Infrastructure is necessary for the health of our economy, but it does not have to be purchased by the Federal government. States have a better idea of where priorities lie. I hardly dare suggest this, in case Mr. Ewing has heart failure, but the private sector can also build infrastructure. With new road pricing and toll technologies, such as EZ Pass, the private sector can raise money for such projects. There have been private roads built in Orange County, California, and Fairfax County, Virginia, to cite just two examples.

The reason that the bailout has been concentrated on the banks is that banks lend money to make Main Street function. Without adequate credit markets, there would be no auto loans, no credit cards, no mortgages–and a lot less spending. Less spending means fewer purchases and firms going out of business, which means rising unemployment.

If more state control were desirable, we’d observe Americans going to Venezuela, Cuba, and Russia–all areas where there’s more state control. Mr. Ewing, are you tempted to leave? Instead, we see citizens of these countries trying to come to America. That’s because in America there’s more potential for individual advancement and more wealth created, which can be used both to enrich individuals and as a safety net (Medicaid, Food Stamps, unemployment insurance benefits).

Posted by Diana Furchtgott-Roth | Report as abusive

This is astonoshing. Let’s at least give her credit for seeking new answers.

But the only worse, financial nonsense I’ve seen of late is Republicans arguing that the way to fix Wall St.’s balance sheets is to eliminate “mark to market” rules so the banks can make up phone values for assets no one will buy. Preso, they have assets! Not.

The columnist is right that Pelosi’s plan is also nonsense (You can assume that without even looking since it comes from Nancy “buy votes with pork” Pelosi).

The argument against infrastrucure investment is specious: We need investments that aren’t just short-term fixes that push the problems off a few years. We need to plans that match our country’s longer-term priorities. California’s high-speed train is one such plan that would provide new jobs soon, and improve our economy and quality of life later on.

There must be others of that ilk.

Posted by JimF | Report as abusive

Interesting comments. The ONE thing everyone forgets, is that government has NO MONEY. It can only take from one person and give to another. The problem with government is that is has become a blotted monster controlled by unaccountable politicians who have transformed the wealth we citizens have created, into monolithic bureaucracies and pork barreling on an incomprehensible scale. If the government had no money, it created staggering deficits which not only we, but our children and their children will pay for. Its like an limited spending credit card – but like a credit card, someday it has to be paid. As a student of economics, and proponent of the brilliant Abba Lerner school of thought, perhaps we should hold the politicians as criminally responsible as the corporate executives. Let the economy find its own equilibrium through the actions of its citizens, as opposed to Big Brother. To say any politician can bring about “change” is a myth, only we can.

Posted by laissez | Report as abusive

We always objectify the problem.’ When WE, individually, are the problem.
We always treat the symptoms of a problem, without curing the disease (creating commerce in the process). Until we evolve and develop more consciousness these problems will persist.
This economic problem was created by greed and exacerbated by fear.
We learned nothing from the Great Depression!
‘We have met the enemy and he is us!’

Posted by Magic Dragon | Report as abusive

Ms/Mrs Furchtgott-Roth.

While I applaud your quest to search for new solutions to the current financial crisis, I find some of your suggestions rather disturbing and see no link to how it would rescue the economy.

1) “…Congress could give unemployed workers an additional tax-free sum, perhaps $5,000…”

You’ve suggested that unemployment benefits should not be extended but Congress should send a cheque of around $5000 to aid unemployed workers to pay for their expenses, bills and the like, as an incentive for them to find a job. Giving people a lump sum to tide over does not equal to them finding a job. Even if you take away that $5000, they will still be pressed to find a job to feed their families unless you’re telling me that they are comfortable living in the streets. The real problem is companies, having less job spaces and job opportunities for people due to lack of demand and need, due to the credit squeeze, not because workers complaining that they need a $5000 filler

If Congress mailed $5000 to every unemployed person, not only would the situation not change in any respect, Congress would find themselves having $5000 x 5% of America’s population less to deal with the situation.

2)”…Congress could help the weak housing market by expanding permanent immigrant visas, or green cards, for those who promise to buy a house costing at least $300,000…”

You stated that at 100 000 immigrants having green cards, the real estate market would then have $30 million in cash to bolster the sector, to stem housing price collapse. Apparently, you only looked at the numbers, (100 000 immigrants x $300 000 = solution), and not the problem. People will get the news, its immigrants who are buying property, not Americans, its foreign investors who are rich and buying houses, not Americans. The confidence is still not there, and we’ll see another bubble.

Immigrants buying the houses at $300 000, wait for the rise in prices to say, $500 000, sell. The mass selling would then bring everything down again. Voila, profit! Not to American economy but some foreign economy. There’s still the political issue on immigration at stake which I would not discuss.

3)”…Congress could raise revenue to recapitalize the impaired banking and credit sector by selling oil and gas exploration and drilling rights…”

The oil companies would then transfer the cost incurred from their purchase in the oil drilling rights to the consumers by raising the fuel prices, hurting the citizen’s pocket even further. At a time of credit crunch, additional expenses are really not necessary, especially in the short-term.

4)”…At the same time, Congress could make current tax rates permanent rather than having them rise on January 1, 2011…”

Easy credit was one of the causes of this crisis, there is no reason to try and tempt it once again to ease the crunch. Adding more poison to a poison would not create an antidote. Moreover, consumer confidence is still not there, and foreign companies would be wary. Instead of only considering big corporates and their balance sheets, please consider the common man’s needs too. Government initiatives, job fairs and the like, it would bolster the confidence of the consumers, which are the real driving force of America’s economy.

Posted by Maurice | Report as abusive

I am impressed by the debate, if for no other reason that it shows that those of us who are not academics or politicians have moved beyond apathy and are thinking and speaking out like we haven’t in a long time. I intuitively believe the solutions will come from the grass roots, as it should in a democracy.
Most of the solutions I see proposed seem to start with the proposition that cheap and easy credit are part of the Bill of Rights, when it should be treated as a scarce resource subject to harsh review of the quality of the borrower. We are being swept along by an irresistible wave of de-leveraging, and every solution that depends on more borrowing threatens to add to the “fat tail” of financial failures that has helped get us into this crisis.
Intuitively, I know that there is no solution that does not result in a decrease in standard of living for all of us, as we built our current standard on several generations of debt creation and postponement of reality. Somehow, we have to eat the mountain of debt and come out the other side with a new reality that prohibits deficits and easy lending.
In the meantime, the market is going to speak, whether we want it or not, and the cost of borrowing in real terms is going to rise, with governmental (fed, state and muni)borrowing not being exempt no matter how many lending facilities or discount rate cuts we create. I fear that infrastructure enhancement spending proposals
fall into the category of short term crisis response. We’ve been borrowing for decades for infrastructure without adequate analysis and planning for capital repayment, much less financing the necessary repair and maintenance. Is it any wonder that government depends on inflation?
There is light at the end of this tunnel, but it looks like an awfully long tunnel, full of rocks and holes, to me.

Posted by Gary Leeper | Report as abusive

Investing in infrastructure puts people to work, especially lower skilled people who want to work rather than take a handout. Why would you insult a newly jobless person by giving them 5000 dollars, a pat on the back, and a shove off in to a market with no jobs?

Posted by Josef Hoffman | Report as abusive

I like the idea of giving visas to people who agree to buy houses. But why stop there? How about selling other stuff? The national parks come to mind — or at least the national monuments. Sell trips on the space shuttle. Or how about roles on TV shows — I mean after we bail out the networks. Everybody wants to be a star, right? Let’s use that. President for a Day. (Or at least Vice President.) Auction off the White House. Right, maybe not the White House, but how about the Lincoln Memorial? The Washington Monument? And if you don’t want to get rid of them altogether, we could do a long term lease. Or at least auction off the naming rights. “The People’s Republic of China Lincoln Memorial”. What;s wrong with that? Hey, and if you think that’s creative, wait till I tell you my idea for get out of jail free cards….

Posted by Hank Shaeffer | Report as abusive


That’s very funny, you should be a Reuters columnist. But selling “other stuff” would not address the decline in housing prices and stabilize our housing markets, whose problems are at the root of our current financial crisis. Until the deterioration in housing prices stops, deliquencies and foreclosures will rise, lowering the values of mortgage-backed securities and leaving the holders of these securities in a precarious situation. That’s why having the government print money or run deficits and buy “stuff” such as infrastructure and tax rebates is having little effect–it does not address the fundamental problem with the economy.


Posted by Diana Furchtgott-Roth | Report as abusive

The time has come to stop basing national economies on production of goods
people don’t need and can’t afford.

Posted by David Litchfield | Report as abusive

Part of the reason why some states are going bankrupt or near bankruptcy is the flood of ILLEGAL immigrants (and trust me, as a citizen of Mexican decent, it’s not always insulting) are abusing the system by means of invading ERs for simple health care, lowering the wages, being hired for jobs they are not skilled for because of the desire of cheap labor, and illiteracy. By extending citizenship status, you are doing NOTHING. I’m sure ACORN pressured banks into giving some of these people loans.

I realize that not all of them are bad, but it’s time to change this, because it will not help our economy. Why should my father continue relocating in the construction industry, because he wants to put food on the table for my brothers still? It’s not racist — it’s not always Mexicans, it’s others who come here and abuse it, and that’s a lot of tax revenue and money being lost, if I’m not mistaken.

To offer them status here, when some of them could be criminals? A joke. But a greencard might be a better option, IF they prove to be honest-to-God good people. You’re sincerely out of touch with the reality that hits the midwest.

Posted by NW | Report as abusive