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.