The above video from Dylan Ratigan’s Friday show was really interesting.  I couldn’t find any direct links to Geithner’s ‘austerity move’ to stop low-interest loans to cities and states, but it sounds enormously counter-productive since most of those governments (if not all) are required to balance their budgets.

I’d run into this piece by Marshall Auerback a few days earlier touting some of James Galbraith’s ideas that would be of help to Obama and the nation; he thinks Republicans could buy into them, given that Nixon used some of the same ideas through community block grants.  He/they are promoting ‘revenue sharing’ with the states, and focus on Medicaid as one helpful vehicle.

“And yet, as we get closer and closer to D-Day on the debt ceiling limit, the negotiations continue to turn on how much income the government should drain from the economy, even as private sector activity continues to stagnate. All moves to date by the Treasury and Federal Reserve have only served to shift financial assets between the public and private sectors. And that includes quantitative easing. Nothing has directly added to aggregate demand (the overall demand for goods and services).  [snip]

It is important to remember that a sovereign government with its own currency can always financially afford such a program. By virtue of its position as issuer of the currency, the US Federal government could promote employment, output, income, and private expenditure through the expedient of revenue sharing. By contrast, US states, as users of currency, are reliant on this counter-cyclical fiscal policy to mitigate the destructive effects of economic downturns — particularly unemployment and the suffering it causes. In the words of Erik Dean, the states “cannot run budget deficits without risking credit downgrades and insolvency. Recessions typically diminish revenues for these users of the currency at the very time that their expenditures are most needed.”

He reminds us that all the ‘automatic stabilizers’ like unemployment benefits aren’t enough to create aggregate demand (and many people’s benefits have timed out); most of the stimulus money’s been spent or traded away in deals with Republican lawmakers.  So without some spending mechanisms put in place to “restore output and employment” which “will restore the flow of credit. Creditworthiness precedes credit.” -- there will only ever be anemic recovery, and that this government is engaging exactly the too-early spending cutbacks that FDR’s economic advisors advised that served to scuttle the recovery back then.

At the end of the piece Auerback says:

“Yes, we have recovered from the worst of the crisis. But it is delusional to believe that economic recovery can really get underway until we have added something close to 10 million jobs. The current level of job growth will not see us get anywhere near that target for at least another 3-4 years. Indeed, in the absence of revenue sharing, we are likely to see more attacks on workers of the kind that has characterized recent budget battles in Wisconsin and Michigan. Wall Street crashed their pensions and created the fiscal crisis now afflicting the states. But this administration is still caught in the grips of that failed economic paradigm. If President Obama were to fight for revenue sharing, he would develop tens of thousands of local government allies. He would also have a very powerful issue with which to fight the next election, as well as a winning economic argument.”

What do you think?