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$400 Billion Pay Go Stimulus? It’s Possible.
The whiff of deflation that the bloggers have been crying about has
turned into a very noticeable global stench. The numbers from the US
today on housing starts (record 30% drop) and the ISM manufacturing
index are just the latest in a long and growing list of indicators that
are headed in one direction. South.
The stock market knows this with a 10%+ drop of late, but the real signs
are in the bond market. Sub 3% ten-year should be considered an omen.
Nothing good will come from these lower interest rates.
Our political leaders must be crapping in their pants. Obama, Geithner,
Summers etc. are not blind. They may be publicly ignoring the signs, but
privately they are sweating big time. Their hands are tied. The
Administration tried to get Congress to pass an emergency-spending bill
to support the states and extend unemployment benefits. As of last night
that effort failed. It would appear that we are about to fall off of a
cliff.
I am pleased that Congress failed. More federal debt and spending is not
a solution. I am also happy to see that the reason this effort failed
is that our Congressional representatives have come to the conclusion
that if they vote to spend our money they simply will not get
re-elected.
I am not sure that any stimulus would really turn the tide of what
appears to becoming at us. I am certain that more deficit spending will
not solve the problem. There is today a “confidence factor” that is part
of the equation that has not existed in the past. If Washington voted
another deficit spending package of $300-400 billion the markets would
not rejoice, they would tank. A step like that would lead S&P to
downgrade our paper and we would be looking at a very long slide into a
very deep hole.
I will stick my neck out and say that if we do not have some form of
renewed stimulus ASAP we are going to be headed into negative growth
territory by the end of the year. I don’t see a depression in our future
(12 months – 10% GDP drop), but it is getting easier to forecast near
zero growth for the next 24 months. We don’t need a depression for there
to be a crisis. Negligible growth for an extended period of time will
do it just as well. Should something like that happen we would end up in
a hole we simply cannot dig ourselves out of. Unemployment would be
north of 15%. Social problems/crime would be exploding. States would be
either desperate or bankrupt. If we have no growth the federal deficit
will balloon even if spending is not increased from current anticipated
levels.
With this in mind I want to reintroduce an idea that I believe should be
considered. We need a $400b stimulus. We need it fast. And it has to be
“pay-go”. The pieces for this stimulus are right in front of us. For
the life of me I can’t imagine why the “deciders” have not considered
it.
I want to put $240b in the hands of workers and another $160b in the
hands of corporations and small businesses over a twelve month period. I
want the private sector to do the heavy lifting of fighting the
slowdown. I do not want the federal government to spend more money. The
Feds have done a terrible job. It is time for the private sector to
have a chance.
Currently workers pay 6.2% of their wages on social security
contributions, employers pay an additional 6.2%. Small businesses pay
the same total percentage. If these percentages are lowered workers will
have bigger paychecks and employers will have extra cash to either hire
more workers or invest in productive capacity.
A reasonable estimate of SS revenues for fiscal 2011 is $700 billion. I
want to drop that to $300 billion. This would imply that the combined SS
tax rate would fall to approximately 5.5% from the 12.4% or a ~58% drop
in total payroll taxes. I would skew this reduction in favor of the
workers on a 60/40 basis. The end result would put the $240b in the
hands of workers, the $160b in the hands of employers.
If something like this were accomplished, it would certainly revive
economic growth. It would be (in my non PhD mind) the smartest way to
stimulate consumption. The private sector would be spending this money.
Far better than the federal government building bridges to nowhere.
Something along these lines would spin SS out of control. I doubt that
they would recover. Therefore reducing SS revenues for a year is just
another way of deficit spending and it will not work unless SS achieves
spending cuts that are equal to the $400b in lost income. I believe
there is a way to accomplish this.
The CBO produced a report on tax rates that I thought was interesting.
The full report is here.
The data provided is from 2007 and therefore stale but I believe the
numbers today are not too far from those of 2007. The following
information is contained in the report:
The number of households
that have no children but are 65 and older and that have income(s)
greater that $384,000 was equal to 4.4 mm in 2007.
that have no children but are 65 and older and that have income(s)
greater that $384,000 was equal to 4.4 mm in 2007.
Some of these households are two individuals others one. I estimate that
this represents approximately 6mm people. They are all receiving an
average of $18,000 from Social Security on an annual basis. That comes
to $80-100b per year.
If the SS benefits of the >$350k set were eliminated for 4-5 years
the SS Trust Fund would be net revenue/expenses neutral. Therefore the pay-go
status is achieved.
Some thoughts:
-We need to raise taxes. But if we do, that will hurt the economy. This
plan is a form of tax increase, but consumption from the >$350k, +65
set is not going to be influenced.
-There are those that scream, “Do not touch SS!!” I say the hell with
them. This does not change benefits for the vast majority of
beneficiaries. Nor does it alter the long-term financial status of SS.
-This is a tax on the rich. Yes it is. Who else are we going to tax?
-This is confiscation. Yes it is. In return I would give those that lose
benefits a dollar for dollar tax credit on any federal estate taxes
that may come due on their death. This, in theory, benefits future
generations. Keep in mind we have no estate taxes at the moment,
therefore this is a tax credit of questionable value and no impact on
the current budget.
-Let the private economy work. This is not government spending. If we
put $400b back into the proper hands it will work to stimulate the
economy. I will let the PhD’s quantify the results. I will tell you that
this will have a far greater and lasting impact then a similar sized
government-spending package.
-Unlike any of the other plans that have been put forward this is
politically “saleable”. It negatively impacts about 2% of the
population. The other 98% may benefit, but there is no social cost or
increased debt.
-This is, “Screw old rich people”. Yes it is. But ask Bill Gates or
Warren Buffett. This is in their best interests. They have big stakes in
our economy. Much larger than a few years of SS checks. My guess is
they would be big supporters. There are 300,000 SS beneficiaries that
had incomes >$1.7mm. These same folks are getting $5b of benefits
that they don’t need.
A plan like this only buys time. It does not address the long-term
issues. I hate the “kick the can down the road” approach. This is no
different. It may not work. At the end of 12-18 months we may find
ourselves exactly where we are today. Staring at a void. But on a
federal level this will not add to our debt. I can’t think of any other
approach that gives us a chance and does not include more debt.
Disclosure: This plan would take money out of my pocket. I believe it
is the right thing to do.
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I am for extending unemployment benefits but at a reduced rate.
I think too many people are living too well on unemployment. Especially in a 2 income household where many times a wife/husband stays home to watch the kids, work on a house project, take care of other tasks for the family all while collecting a check from the taxpayer. They have no intention of getting a job until that gravy train is completely tapped out.
I don't think that's what unemployment was meant for.
Good has loose definition. So what do you mean exactly?
Your proposal is written in an honest and up-front way, and there are a lot of worthwhile thinking points in it.
However, I think you misunderstand the heart of the problem, and therefore your proposed solution is directed at what is largely a phantom.
IMHO, the heart of the problem is decades upon decades of debt bingeing, across business, personal and public accounts - all of them.
The only solution is to pay down (or default in whole or part thereof) those debts. Excepting the reduced debt service obligations of the debtors, paying down DOES NOT stimulate economic activity. However, reduction of debts is what must be done to return to a sustainable, realistic financial footing on business, personal and public levels.
I may have misinterpreted your proposal, but it seems to center on the notion that your proposed 'tax on the rich' will lift the economy by way of providing consumers with the means to resume consumption. Increased consumption will appear to lift the economy, but only temporarily. In fact, it may not lift the economy at all, because it is highly likely that the funds will be employed in whole or in part to pay down debt - anyone with their eyes and ears open right now can observe the tectonic shifts in awareness of the root of the problem and the increasing desires to pay down debt.
If I understand the economic trends developing right now, then your proposal really amounts to a tax/theft from the rich to pay down debts of the poor. There will be some broader economic benefit to this by way of decreasing the debt service obligations oof the recipients of those funds, but only a fraction of what I think you envisage because you are thinking it will mostly go to consumption. Even if it does (mostly go to consumption), the debt burden elephant will still be in the room, big as ever, once the money is spent.
I too have robin-hood genes in my make-up and so the proposal does have natural appeal on an emotional level - even more so when I know that a significant proportion of those rich have 'wealth cornered' inasmuch as they have privileged ways and means (legal and otherwise) of growing their riches. However, theft of their wealth runs many risks, including them taking their bat and ball and going to another country.
I'm leaning more in favour of creating an environment for investing in the future. Downturns are the times to get heavy into R&D for new technologies and ideas that will flower once we eventually bottom-out. They are times to trim beaurocrating and business fat, reduce taxes (as counter-intuitive as this will sound to some) and generally 'get lean and mean'. I don't have all the answers, but if circumstances could be created to entice those riches from the wealthy set into R&D investments (think heavy tax breaks and other incentives) coupled with a wealth-sharing structure once/if these ventures pay off... I think that's a more sustainable and productive direction.
All the best.
Why the hell do we need to raise taxes? You're not sticking it to "the rich", unless your definition of "rich" involves anyone who's ever worked at a career. No matter how much the politicians steal from us, they manage to spend far more, so how is stealing half our earnings going to fix it? More importantly, by what right?
It is absolutely criminal that anyone's taxes should make up a larger burden than his housing, retirement, family, etc. And for just about anyone who can keep a real job for more than 5 years, that's the case. It's inexcusable.
Bill Gates and all the lefty bluebloods don't care how high you raise taxes, because all that does it block out anyone else from joining them. That's what the poverty pimps are doing with these insane tax rates--not taxing the rich, but anyone with any hope of becoming rich (or just comfortably middle class). They're pushing for a caste system of political royalty and peons dependent on government handouts.
The only fix is to get rid of the class warfare garbage. Flat tax, fair tax, whatever--one rate across the board with no deductions that no one escapes, so that there is no constituency of free riders who can scream for freebies at zero cost to themselves. Any new program has an instant and obvious cost to everyone.
Then cut spending back so that government is not dominating the economy, every productive activity, and our lives. There is no excuse for government being involved in 10+% of the economy, much less 1/3.
here here ragnar......couldn't have said it better!
a side note also: the u.s. supreme court has already ruled that if a person pays into soc. sec. than they are entitled to recieve benefits. in the early fifties the goverment started taking soc. sec. taxes out of the military personel pay checks, while not letting them collect the benefits. a retired air force sgt. sued and won. you pay in, you get out.
I agree with the flat tax idea. That might be something that could come out of this, but it would take more than a year to accomplish and any benefits another year or two. We don't have that much time in front of us. I said in this piece that this would work for a year at best.
To gear down spending will take time. We have little time left.
+1
Let the market reset itself. Deleveraging MUST occur. Delaying it with fiatscos printed out of thin air WILL NOT fix the problem. We tried this in the '30s and could only solve the issue with a world war. A world war will not work this time as we have already shot our wad over the last 10 years with our ridiculous middle east forays. In the '30s the problem was private and corporate debt. This time the sovereign is included and there is no where to hide.
since we are apparently talking political fantasy here (reducing social security benefits for the rich), why not the nut of the actual problem (as noted above) -- too much debt?
put the dang tbtf in receivership when (not if) they are shown to be insolvent (i.e. need another dollar of bailout). they already deserve it for past fraud/very poor investments. wipe out the shareholders and haircut the bondholders, marking the toxic assets to market. sell the purged and potentially profitable (in reality not "model") company with the proceeds reimbursing the taxpayers for the liabilities with which they were criminally saddled. it would do wonders toward restoring "confidence".