My Stimulus Plan

I have been asked on a number of occasions “what I would do” regarding the recession. I have replied here and there with ideas, but putting all of them in one place will be helpful, at least to me as it will give me someplace to point people.

So here are some things I think could be done to help reduce the impact of the current recession.

An immediate and permanent reduction in the payroll tax. This would put money into people’s hands rather quickly, hence this would satisfy the timely aspect of good stimulus. Also, such a proposal would result in people spending more money. According the the permanent income hypothesis temporary increases in a consumer’s wealth/income does not result in a large increase in spending. Instead the consumer banks the money and/or pays down debt. Further, it would affect people below the cutoff for the payroll tax–i.e. people in that portion of the income distribution who are most likely to spend the money. Hence it would satisfy the effective criteria of good stimulus. To make up for the short fall in revenues with Social Security and Medicare a gasoline tax would be phased in gradually as the economy got stronger. There is the added bonus that this tax would have positive implications for both the environment (global warming) and reducing our dependency on foreign oil.

Federal grants to state governments. Many state governments are seeing a reduction in their revenues and are burdened with balanced budget amendments forcing many state governments to reduce expenditures. During a down turn in the economy this will only exacerbate the the bad economic condition. As such, the federal government should give states money to meet their budgetary needs. However, these grants would be conditional on states implementing fiscal restraint in terms of future budgets. That is the state’s budget cannot grow by more than the rate of inflation plue the rate of population growth. This would prevent states from seeing the federal government as an endless well of money and making our already precarious fiscal situation dramatically worse.

Extend unemployment benefits. Again this could be done rather quickly and would put money in the hands of those most likely to spend it.

Raise the age for entitlement programs. The age at which one becomes eligible for Medicare and Social Security would be raise at least 5 maybe 10 years. The recession, even absent any additional spending, will likely increase the national debt to GDP ratio substantially. I think it would be nothing short of a miracle if that ratio doesn’t go above 75%. Currently the U.S., contrary to the imaginings of Paul Krugman, depends to a large extent on foreigners buying up U.S. government debt. Medicare and Social Security are seriously out of actuarial balance and adding that to the mix could make borrowing problematic for the U.S. That is we could have to borrow at a higher rate which would act as a drag on future economic growth. And we will need that growth to help fund these various mandates and also reduce our national debt to GDP ratio. Raising the age of elibibility for Medicare and Social Security would signal that the U.S. takes seriously the problems with Medicare and Social Security and would help move them somewhat close to actuarial balance.

Those are the main parts of “what I would do”. I wouldn’t necessarily be opposed to additional spending on things like improving/upgrading our current infrastructure if it could be both timely and would likely produce a decent “multiplier effect”. The reason for restricting it to current infrastructure is that we know much of the current infrastructure is beneficial in that it enhances productivity. Building a series of pyramids out in the desert on the other hand would have precisely zero impact on productivity in the medium to long term and we would risk repeating Japan’s mistakes that lead to their lost decade. Lastly, since we are engaging in a session of “make believe” I would veto any bill that had anything other than the above items unless it was crystal clear that additional items would be both timely and helpful to the situation. I’d then tell the Congress, in front of the American people, “You are doing it wrong. We are in a serious situation; stop acting like business as usual.”

Further none of this addresses the problems in the financial sector. There, I’ve admitted it, please don’t bring it up in comments, it is the subject of another post. This is what I think would help to reduce the depth and duration of the recession. Would it “jolt the economy” out of recession or “jump start it”? No. President Obama is lying when he uses that rhetoric. Nothing can do that short of a miracle.

Finally, I have made several posts arguing that the current recession is bad, but not catastrophic bad as argued by President Obama and some of his supporters. My next post I hope to lay out at least one way in which this situation could end up being quite bad. Not “Great Depression Bad” but still pretty damned bad and why I’m not a fan of the current “business as usual” approach to this crisis.

Image:  Newsday.

FILED UNDER: Economics and Business, Government, , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    Steve, that’s not a bad plan. If you’d make one change, I’d probably go along with it. There’s a big difference between people who’ve held office jobs all their lives and people who’ve done physical work all their lives and Social Security needs to take that into account in determine the Social Security retirement age.

    I suggest that a middle ground be created between Social Security Disability and Social Security Retirement. You’d become eligible for the middle ground at age 60 (maybe 63) and there would be guidelines for inclusion that depended on what you’d actually done for a living.

    I don’t know what to call this middle ground. Something non-stigmatizing.

  2. Pete Burgess says:

    Steve, what about corporate income tax? And, looking out a little further, what do you have against The Fair Tax? As an idea, there is no better. Implementation hurdles tend to turn people off who are used to instant gratification. Have you ever addressed The Fair Tax in this forum? Or anywhere for that matter?

  3. gawaine says:

    Just because I feel negative today:
    1) Have you looked at life expectancy by ethnicity lately? There’s already rumblings that the current age numbers are racist, because they pay so much more to people who live longer, and life expectancy is highly correlated to race. While raising the retirement age seems like a good idea, this “nation of cowards” would probably be scared off from any such idea fairly quickly. (In addition to race, I believe there’s a correlation to how much money you made before retirement. I don’t have the research in front of me, so I could be wrong, but I’d rather not have Social Security become a program that mainly gives income to people who earned six figures and had full health insurance before they retired, and doesn’t give anything to people who couldn’t afford to save for retirement).
    2) Limiting grants to state government based on future commitments by the state government? I don’t think we need more fiscal control of the states by the federal government, especially when a future congress could just repeal that part of the law if it became inconvenient. How about just repealing unfunded mandates? Let states raise taxes where they need to, or cut services.

  4. M1EK says:

    Raising the SS age would, if older workers are in any kind of demand, make unemployment worse for younger people – who are more likely to need the jobs in the first place. And if the older workers aren’t in any demand, as is the case in my profession, it just ends up screwing them.

    I don’t know how to fix that, but I’d sure as heck like to tax social security as regular income, too. Not sure if that would make the above better or worse.

  5. tom p says:

    There’s a big difference between people who’ve held office jobs all their lives and people who’ve done physical work all their lives and Social Security needs to take that into account in determine the Social Security retirement age.

    This is indeed an issue. I have been a carpenter for most of my adult life. At the age of 50 I have arthritis in both hands, bursitis in both elbows and shoulders, I battle tendonitis on a not too infrequent basis, 5 of my 7 cervical vertebrate have degenerative bone growth on them which like to pinch nerves from time to time, and my 3rd and 4th lumbar vertebrate are broken (the spurs on one side) and from time to time can cripple me if one of those pieces moves against a nerve. There is more.
    If todays economy does not push me out of my chosen profession, these may very well.

  6. Steve Plunk says:

    Not bad but not enough. Let’s keep in mind how much consumer and business confidence plays in all of this. Without both the cautions taken will slow any recovery.

    So why is confidence down?

    Fear of tax increases. Obama should promise not to increase taxes and reassure both private citizens and business.

    Fear of increased regulations. This is a big fear of business. Again slap a moratorium on new regulations and watch business exhale and get back to work. And for gosh sakes quit talking about regulating CO2. That’s just stupid.

    Fear of higher energy prices. A reasonable energy policy that doesn’t cater to environmental extremists. More exploration and drilling, new nuclear plants, and a realization coal is essential. The current path the administration is taking will handicap any recovery.

    Those are just three areas where fear must be addressed and calm returned to the country. Without confidence in the future we will never move beyond the present.

  7. odograph says:

    It doesn’t really strike me as fiscally responsible. I don’t see enough on the spending side to compensate for the “immediate and permanent reduction in the payroll tax”

    On that, I think you’d do better means-testing entitlements, rather than changing ages – both from a fairness and a net effect perspective.

    Of course heck will freeze over before the middle class gives up entitlements to themselves, and that is the problem nationally, as well as in the California microcosm.

  8. gawaine, I can’t think of anything more politically unpalatable than telling one group of people they need to work an extra five years than another group of people becuase their life expectancy is greater.

    It sounds as though you are advocating Social Security be an explicit welfare program. I’m not generally opposed to that, but the government needs to be honest about it instead of telling me my money is being put in a “lockbox” for me. I’m interested in how they plan on gauranteeing returns on “my retirement” money.

  9. SavageView says:

    It would be easier to respond if you had numbered your proposals, which are just a reprint of Greg Mankiw’s proposals.

    Anyway, 2 and 3 are already in the stimulus. 1 is just your and Greg Mankiw’s underhanded mechanism to blow holes in Social Security and Medicare. 4 has nothing to do with an economic stimulus (and really is just part of 1).

    I’m wondering if you and your mentor, Mankiw, ever estimated the multiplier associated with the Iraq Stimulus Plan (ISP) of 2004-2008. I certainly don’t recall either of you expressing concern about whether it was less than one or that it might completely crowd out private investment (the Treasury View). But I guess in your minds, we paid for the ISP out of current account.

  10. Steve Verdon says:

    Savageview,

    Please, a revenue shortfall made up by having another tax is “blowing holes” in the program? I’d take you and the rest of your comment more seriously if you could at least pretend to be honest.

    Odograph,

    The first part of your comment makes no sense.

    Means testing essentially punishes those who save for retirement. Not exactly a good idea. I mean really, people enact programs that discourage savings then act shocked when people don’t save.

    Finally, those programs will be cut one way or another. The longer the delay, the worse the cuts will be. And this also highlights why having such programs can be such a mess. Once it you start robbing Peter to pay Paul you can always count on Paul’s support, especially when you can make changes to rob Paul when he is too young to vote.

  11. SavageView says:

    Please, a revenue shortfall made up by having another tax is “blowing holes” in the program? I’d take you and the rest of your comment more seriously if you could at least pretend to be honest.

    And I would take you more seriously if you knew something about either economics or finance. You might want to review the following if you can understand it.

  12. Steve Verdon says:

    Oh and Savageview, the payroll reduction, or more accurately a counter-cyclical payroll tax was one that Keynes supported.

  13. odograph says:

    I think my post is self-consistent Steve. We can cut taxes, but only to the extent that we make real cuts in expenditures.

    In your response you say cutting would hurt savers, but then you move on to other people’s contradictions about “robbing Peter to pay Paul”

    … I know that you know that SS is not a saving program … so you must have some other meaning here?

  14. Steve, FWIW, I appreciate the thoughtfulness and depth of understanding you bring to the table. This has been a great series of posts. Now, if only you knew anything about economics and finance…

  15. just me says:

    I absolutely agree that not all jobs are created equal, and some jobs like carpentry, construction etc are going to be way too hard on somebody to expect them to work until they are 70.

    My dad was an optometrist, he died before he ever collected a dime of social security or claimed medicaid benefits, but his job wasn’t that physically demanding, and 70 would have been doable. I can’t imagine expecting a person to keep roofing into their 70’s before becoming eligible for benefits.

  16. Steve Verdon says:

    Odograph,

    I think my post is self-consistent Steve. We can cut taxes, but only to the extent that we make real cuts in expenditures.

    Right now that would be a bad, bad thing. How odd for you to be arguing for short term fiscal restraint.

    GET HIM BERNARD!!!!

    In your response you say cutting would hurt savers, but then you move on to other people’s contradictions about “robbing Peter to pay Paul”

    You appear confused here. Yes, a program reducing peoples out of pocket expenditures in the future will likely reduce their savings.

    As for the Peter/Paul analogy I don’t see how that work too well for you. The Paul in the example is essentially an infant today. He will be robbed in about 15 years to help pay for retirees working at that time. He’ll have less income, due to payroll taxes and probably higher than todays if nothing chagnes than he otherwise would have, and hence will save even less.

    By the way, I skipped over Dave’s comment about different types of jobs. I think that is a good observation and should be looked into, but the bottom line is everyone is going to have to take a hit on Social Security in some or another, those who have phsyically demanding jobs and retire earlier might have to settle for smaller payments over a longer horizon.

  17. Your last point is important as there is an implicit assumption that those who will retire early due to wear and tear will also be dying earlier due to that same wear and tear. What happens if an earlier retirement allows these worn out individuals to scheive the same lifespans as those that kept working due to lower physical stress jobs? Isn’t there a high inverse correlation between edcuation and the degree of physical labor a job requires? Any danger of reading too much into that?

  18. just me says:

    I think that is a good observation and should be looked into, but the bottom line is everyone is going to have to take a hit on Social Security in some or another, those who have phsyically demanding jobs and retire earlier might have to settle for smaller payments over a longer horizon.

    I don’t think this would be an unfair trade, the problem though is medicare coverage. If John the roofer wants to retire at 65 and get smaller payments on his social security but can’t get medicare for 5 more years, chances are he is going to have to roof until he is 70 anyway.

    Also, I remember when my mother in law was debating whether to file for her social security at 62 or 65 (she had already stopped working to help my brother in law take care of his kids) my father in law did the math and figured out that she wasn’t really going to lose anything over the long haul, and would more likely come out ahead by claiming social security at 62 for a smaller payment each month.

  19. tom p says:

    By the way, I skipped over Dave’s comment about different types of jobs. I think that is a good observation and should be looked into, but the bottom line is everyone is going to have to take a hit on Social Security in some or another, those who have phsyically demanding jobs and retire earlier might have to settle for smaller payments over a longer horizon.

    and…

    What happens if an earlier retirement allows these worn out individuals to scheive the same lifespans as those that kept working due to lower physical stress jobs?

    and….

    If John the roofer wants to retire at 65 and get smaller payments on his social security but can’t get medicare for 5 more years, chances are he is going to have to roof until he is 70 anyway.

    Ok, to inject a little reality here…

    A sheet of 4×12 5/8’s fx drywall weighs 112 lbs. How many commenting here can lift, carry, and hang that, repeatedly through out an entire day (adding up to 40 sheets per day, the minimum expected for a team of 2) for 5 days a week? Now… Do you really think any one can do it at 69 yrs of age?

    When we are young, we try to take care of the older guys as best we can (so we do all the humping, etc) but I have a good buddy who is 63 yrs old and still trying to carry on because of the healthcare conundrum… but he can not find a contractor who will believe in him.

    My ownself? I am 50. The idea of handling a screwgun for 8 to 10 hrs per day, 3 days in a row with my arthritic hands… I would rather hump that 112 lbs all day.(at least it is not lead lined drywall)

    I am not looking for sympathy, I chose this path, but I do not honestly think any of you, have even the vaguest idea of the price we pay. I am 50, been doing this sh*t for almost 30 years, another 20????

    And for the record, I am not picking on any of the posters I have quoted here, just trying to say that, the ideas some people have of the life we live (and all of those quoted acknowledged this) and the reality are wildly different.