Category Archives: Economy

Friday, January 18, 2008

Once again our government, and candidates for President, have decided to give millions of Americans money in the hopes of heading off a recession which may be, no one’s sure, coming soon to a community near yours.  The idea is that lowering interest rates – which is up to the Federal Reserve – and increasing consumer spending are the cure for any problem with our economy.  The Fed, which is an independent entity, is doing its job.  All the President and Congress can do is give the people money.  Not incidentally, this is a politically popular idea.  You and I will spend it, retailers will order replacement inventory and hire more employees, and distributors and manufacturers will follow suit as the effects of increased consumer spending ripple throughout the economy.  At least that’s the way it’s supposed to work.

Personally, I think there may be other reasons why we have recessions, factors other than the cost of money and available cash in our personal and corporate pockets which affect families and businesses.  But let’s just assume, for the sake of discussion, that President Bush, Congress and the candidates are right, and that it’s all about consumer spending.

The problem is that different people tend to do different things with extra money depending upon their specific circumstances.  Generally speaking, the more money and “stuff” people already have, the less likely they are to spend a few more dollars the government gives them.  Sure, we normal people could always use some new clothes, a couple of days off with our wife or husband, a new washer and dryer, you name it.  Practical or frivolous, we can always find something to buy with found money, but with different immediate and longer term effects on our local and national economies depending upon precisely how we spend it.  And then there are the credit card balances we ought to pay down, and the savings accounts that we’ve been ignoring lately.

The thing is, even if we did run out and buy things, it’s not at all clear how significant the impact on the economy might be, how quickly and to what extent our nation’s companies would order more, increase production, and hire back the unemployed.  These things take time, and what we want is a quick fix.  At best, what the President is considering will be a brief, miniscule poke at a huge economic beast, barely noticeable and quite probably without any discernable effect.  The economy will recover on its own, with the President taking full credit.

I have an idea.  Who among us is most likely to spend every extra dollar at their disposal, and do it immediately?  The unemployed, of course.  Give them jobs, and watch what happens.  The simple, and less expensive solution, is to give companies, large and small, a financial incentive to increase their total work force, preferably by hiring people who have been unemployed for some minimum time, and who have exhausted their savings and perhaps their unemployment benefits also.  Give new jobs to families who are most likely to spend every dollar they make.

The form of the incentive could be anything financial, but I like giving them credit, for a limited number of months, for the employer and employee withholding taxes their new hires will generate.  Think about the efficiency of what I’m suggesting.  We’re putting income into the hands of people who need it most, and are most likely to spend it.  The taxes we’re crediting back to the employer were income the government wasn’t getting anyway when those new hires were unemployed.  (By comparison, giving everyone money which is the current plan is just going to increase our budget deficit by billions of dollars – plus interest.  Don’t forget the interest.)  In many cases we’ll be saving the unemployment benefits we’re currently paying these new hires.  And these newly employed will be producing ongoing income to spend in the economy month in and month out, not just some one time, lump sum.

Easier said than done?  Of course.  Are you kidding?  I’m naturally lazy, and always underestimate the difficulty of everything.  Otherwise, I’m not sure I’d ever attempt to do anything if I really knew how hard it would be.  And I’m not alone.  Put a man on the moon by the end of the decade, for example?  Underestimation is one of our nation’s most endearing personality traits.  Will a program to encourage the hiring of the unemployed work?  It depends upon how easily our companies can rationalize putting on additional staff.  Could be we’ll need to give them a greater incentive than just a tax credit, but isn’t at least worth thinking about?

Is it really a good idea concentrating so many billions of dollars by giving some of the unemployed jobs, rather than spreading it around?  The fact is, for the same total dollars we give away, we get a greater, more immediate impact on the economy by giving it to families with the greatest need and highest propensity to spend.  Think about it.  Suppose the entire work force consists of 1,000 people, 50 of which (5%) are unemployed, and that we have $1 million dollars to spend – an average of $1,000 per worker.  Which approach is more likely to have the greatest and most immediate impact on consumer spending?  Giving everyone $1,000, or giving the 50 families who are unemployed $20,000 each (by reimbursing their employers) – not all at once, of course, but over several months as on-the-job income?  Too much?  Save some money.  Give them only $10,000 over time by subsidizing the wages and salaries they earn.  The program will cost us less, and accomplish more.

Does it make our President’s and government officials’ brains hurt to think about it?  I think we can figure it out.  If not our current government, not known for its creativity and initiative, maybe the next one we elect in the fall.