How to Thaw Credit, Now and Forever

In The Great Crash of 2008, Mason Gaffney explained our current crisis as a manifestation of the roughly eighteen year real estate cycle–disastrously amplified by bad policy. Now he has published a sequel: How to Thaw Credit, Now and Forever. His solution may shock some readers, especially if they haven’t seen his earlier essay: Stimulus: The False and the True. For Gaffney argues that to thaw credit we must PAY DOWN THE NATIONAL DEBT, cutting capital-intensive spending like the military, and raising taxes on economic rent. He begins:

“Working capital is the bloodstream of economic life. It is physical capital, the fast turning inventories of goods in process and finished goods that supply materials to the worker, and feed and clothe her family. Short term commercial loans and trade credit buy it, but the capital is “real”-a fact often forgotten in the paper and virtual worlds of high finance whence come the highest inner circles of government.

“The bloodstream metaphor harks back to François Quesnay, an 18th century French physician turned economist. Quesnay drew on William Harvey’s (1578-1657) earlier discovery of how blood circulates. Adam Smith and other classical economists followed Quesnay, distinguishing “circulating capital” from “fixed capital,” the kind that is stuck in the ground or otherwise lasts for many years. Today we call the bloodstream metaphor “macroeconomics”, elaborated but not always improved from Quesnay’s insights.

“Now the economic blood is drained down, and what’s left is slushy. We need to restore and thaw it, and get it circulating, right away as well as over time. To understand how, let’s see what drained it away in the first place.

“My thesis here is neither purely Keynesian, nor monetarist, nor Austrian, nor Georgist, but combines elements of all those models in ways that are off “mainstream” thinking today. The first three models suffer two major faults: they ignore the role of land as “fictitious capital” with a “wealth effect” that discourages real saving and investing; and they treat all taxes and government spending alike. The fourth (Georgist) model lacks a good concept of how capital circulates. Some readers may find it puzzling and alienating to proceed without one of the old familiar models in pure form. Considering where mainstream thinking has led us, and how dismal are its forecasts now, and how it lacks any positive guidance for recovery, it is timely to modify the mainstream.


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