The Fallacies of the New Economy

by Chris Campion

As Vermont’s economy continues down its relentless path toward the ash bin of history, at least, um, several Vermonters are advocating for a “new” economy.  What’s the under-pinning of this new economy?  Innovation?  A removal of existing regulatory overheads so high that the state won’t finish building a road it started three decades ago?  A restructuring of its tax burden to entice businesses to move to or invest in the state, to grow an economy that ranks 2nd worst in the country?  A job climate that doesn’t scare college graduates into leaving the state at one of the highest rates in the country?

Nope.  Instead of those things, a group of concerned Vermonters calling themselves “Vermonters for a New Economy” have decided that the primary answer to the problems above is a bank.

Yep.  A bank.  But not just any bank.  A state bank.  Meaning a bank that is funded, and backed, to one degree or another by public funds (the funding issue is just another one of those thorny details that no one really needs to think about, just yet).  Which means, of course, that any risk or liability falls directly upon the shoulders and wallets of those who pay taxes.

And what is their mission statement?  Their raison d’etre?  Here it is:

Vermonters for a New Economy is a coalition of organizations, businesses, and individuals working to create a new economy for Vermont. You can work with us to design and enjoy the new ways we are owning and operating businesses, banking, exchanging goods and services, financing projects, and earning income.  This work enables us to pursue regenerative economic activities that strengthen our food systems, build renewable energy, reuse and recycle byproducts, and foster creativity, culture, and healthy lifestyles.

I must have missed Banking 101, but I’m pretty sure the bank didn’t ask me about my healthy lifestyle choices when I applied for a mortgage.  They wanted some details around income, liabilities, etc., because they’re crazy like that.  But no mention of how their capital would foster my creativity.  Which is mildly disappointing.  It’s also fantastic that they’re allowing Vermonters to work with these New Economists as to how Vermonters earn their own incomes.

That’s generous of them.

But let’s let the New Economy Vermonters provide more of their own detail, in terms of why they think we need a state bank:

Our Planet —  a VT state bank can provide the game-changing, long-term, low-interest financing that will power a transition to a just and sustainable future

Students — to access low interest education loans.

Homeowners — to get mortgages and home loans from the bank.

Entrepreneurs — who need credit lines, loans, and other forms of finance to help their businesses succeed.

Municipalities – the bank can offer competitive interest on public deposits and lower cost financing for public works.

Taxpayers — who will benefit from both the profits the bank makes and the services the bank offers

Well, that’s quite a bit to digest, so let’s take it one at a time:

1.  Our Planet —  a VT state bank can provide the game-changing, long-term, low-interest financing that will power a transition to a just and sustainable future.
The planet.  So the planet needs a Bank?  How did the planet exist, then, before humans evolved?  Did Gaia patiently wait for first humans to evolve, then banking, in order to provide a high enough state of enlightenment before asking for funding?  Gaia’s patience here with us is considerable.
2.  Students — to access low interest education loans.
You mean like those low interest student loans current and former students enjoyed, courtesy of one of the biggest central banks in the world?  Loans that are at higher rates that mortgage rates, but worse, are also subsidized rates? The last large effort to nationalize the student loan program fell afoul of the same issues around health care, and that plan has now been shelved.
So the federal government can’t do it, with virtually limitless resources, but Vermont can, now, because of one bank? In fact, VSAC has said it’s “agnostic” on the idea of a state bank.  So why list student loans as a justification, when the one institution that has historically provided student loans doesn’t see the need?

3.  Homeowners — to get mortgages and home loans from the bank.
You can already get loans from banks, easily – they’ll happily lend you money for a house, or equity loans.  It’s how they make money.  For FHA loans, you only need 3.5% down.  Rates for fixed 30-year FHA loans are well under 4%.  Do Vermonters not know how to apply for a loan, and the state bank will save them from their own ignorance?
And why the incentive to increase – via public funds – the number of mortgage lenders, increasing competition, when, in many cases, the same people who tout this state bank (like Bernie Sanders) want to decrease competition in other markets, like health care?  Why is it a good thing to increase competition in one place, but not the other?
4.  Entrepreneurs — who need credit lines, loans, and other forms of finance to help their businesses succeed.
They can get this already from existing banks and investors.  What would a state bank provide that does not already exist?  Other than offering riskier loans that will be backed by taxpayers?  There’s a federal Small Business Administration that offers many channels for funding.  What would this bank offer that’s not already available?
5.  Municipalities – the bank can offer competitive interest on public deposits and lower cost financing for public works.
Municipalities already have access to funding through banks and bonds.  Like the Vermont Municipal Bond Bank, which has been in place since 1970.  If municipalities already have access to low-interest funding source, why do they need another one?
6.  Taxpayers — who will benefit from both the profits the bank makes and the services the bank offers.
You mean like the benefits current federal taxpayers enjoy, like $20 trillion in debt?  The profit the bank makes is the interest on the loan, which, for the federal government, increases as a percentage of total spending, and if the rates increase, even a little bit, will start to crowd out all other discretionary spending.
Which is really the heart of the matter.  The supporters of the state bank are looking for a way to finance spending now that someone else will have to pay for later.  It’s like giving a college student a credit card with no limit.  Sooner or later that bill will come due, and the people who want to create and support that state bank will then be asking taxpayers to bail it out, just like some other large financial institutions, like Freddie and Fannie.  Which have become, more or less, nationalized.
But the worst of the justifications for the proposed bank’s existence are in its own supporting documents, which make a few claims of fact that aren’t supported by reality.  A few examples (page 6):

Sub-prime mortgages are what Fannie and Freddie specialized in, and still continue to be the largest generators of these types of loans in the industry.  Taxpayers had to bail out their poor business practices and the fact that they were understating their sub-prime exposure; there is nothing in the call for a state bank that would prevent this from recurring.
Secondly, citing Vermont’s low unemployment rate as evidence of economic stability means they either a) willfully ignore the reality of Vermont’s declining workforce participation rate, or b) don’t understand what they’re talking about.  If they’re using this conclusion (below) as one of the underpinnings of the justification for the need for a state bank, they’re making a significant error:
 That Vermont’s housing prices didn’t tumble doesn’t mean anything about “integrity” of anything, and neither does unemployment.  As has been repeatedly shown, Vermont’s unemployment is low primarily because the workforce is shrinking, not because of new jobs created.  As the report’s earlier statements argue, correlation does not equal causation.

If anything, the state’s demographics and the general leveling off of already-high housing prices won’t require a state bank to support increased demand for mortgages.   In fact, the reason housing prices are (relatively) level is because demand isn’t increasing.  There are simply fewer Vermonters looking to buy homes:
Vermont’s economy, and its housing market, are clearly not divorced from national trends. But our housing market seems to be under performing the national housing market, which is worrisome. Over the last two years, Vermont’s housing market, at least measured by prices, has gone nowhere. Nationally, prices are up 7 percent over the same period—not great, but at least it’s a positive number.

One of the reasons for our weak housing market is our underlying demographics. First-time home buyers tend to be in their 30s and early 40s. That’s precisely the demographic that’s shrinking in Vermont. And if there are fewer first-time home buyers, people trying to sell their houses and trade up to more expensive homes can’t find buyers. That clogs up both sides of the home-buying and home-selling market, limiting both sales and price appreciation.

The New Economy site also encourages readers to read the study that justifies the new state bank.  Hilariously, the study recommends that the state not implement a state bank.  That the capital needs are already met.  That the current options available for financing are just fine.  From page 3:

Then what is the purpose of the New Economy site?  To ignore the realities of Vermont’s business climate, Vermonters’ incomes, the demographic changes, and historical policy overhangs that make the state a lousy place to do business?  Another bank won’t fix that.  Another bank can’t fix that.
Only Vermonters can fix Vermont, by dismantling the policies and governmental apparatus that have put them in the place they are today.  If that’s part of the New Vermont Economy, then maybe things will start to change.

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