I’ve been reading a lot lately that the Obama Administration plans to put forward another stimulus package. OMG. Let’s look at the inherent flaws in this year’s package, since one definition of rational is to avoid doing things that we know, from past experience, results in failure.
A decision was made to filter the money down to the people through state governments. I assume a reason for this was that virtually all states have a balanced-budget amendment and this would allow governors, most of whom are Democratic, from making the unpleasant choice between raising taxes to get more revenue, cutting services, or some combination of the two. The rationale provided to us, though, was much more pragmatic, that if the funds were provided to states, much needed services such as teachers, police, and fire fighters could continue as before. As well, states could provide work such as construction projects, which tend to provide a high multiplier effect.
Well, as a nation, we tried that way. We don’t even have to ask the governors of Virginia or New Jersey how the strategy worked out. At the end of the year, we now have unemployment rates calculated at greater than 10%, and real unemployment is figured at one out of every six potential workers being out of work or under-employed. Why not try a different system now. Let’s instead try to figure out what is causing the recession to deepen rather than recede.
For decades, economists have complained that individuals were consuming too much and not saving enough. This induced macro-level growth, but did not keep the nation fiscally strong. Then, house prices collapsed in much of the country. People who had assumed that all they had to do to survive retirement was to sell their home at a large profit, then buy a cozy condo, and live on Social Security or their pension, were left in the lurch. So now, a lot of people are saving at a really high rate, trying to recapitalize themselves. People are very afraid that what they’ve worked for all their adult lives is gone, and don’t feel comfortable spending anything other than on bare necessities. But, after a year of frugality, I would think that there is a lot of latent demand among the people.
So instead of giving $600 billion to governors again, and throw it into another statehouse rathole, give each person in the country $2000. Make this money subject to state and local taxes, though. That will provide an impetus to state revenues. Maybe some of us would choose not to spend most or any of the extra money. But most people will spend much of the extra money. This will raise consumption again, much as cash for clunkers did, except for a longer term. It will also raise employment, as retailers will get rid of much of their excess inventory. It would then work its way down to the manufacturing sector, which will make investments more worthwhile.