Occam’s Economics: A simple, back-of-the-envelope plan to regenerate consumer spending – immediately.

Thursday, July 9, 2009

Let’s talk about giving all $697 billion* of the first stimulus plan which has yet to be spent to the 14.7 million** people who are currently unemployed. Com’on. Think about it. I dare you to take this plan seriously.

For the sake of discussion, I’m going to make some gross, simplifying assumptions:

(1) Ignore the substantial unemployment benefits the unemployed are already receiving.

(2) Overlook the fact that, while the unemployment rate is currently 9.5%, 3.5% is typical of a healthy economy. No recovery plan, in other words, needs to push unemployment to 0%.

(3) Pretend the millions of Americans who are still working, but who are under-employed as a result of the recession and whose family incomes are seriously depressed… I’m going to pretend these families are okay. (They’re not.)

These and other issues not elaborated here are obviously important considerations which will need to taken into account, but not right now. I just want you to focus on the core concept.

$697 billion divided by 14.7 million people is an average of $47,415 per person, tax free. I don’t know the pre-recession average annual disposable income of these families, and that could be a problem if it’s higher than $47,415, but I suspect I’m okay. We could, in other words, completely regenerate the consumer spending lost by the recession for a full year in one fell swoop just by giving what’s left of the first stimulus package to the people who need it most.

Simply put, what I’m suggesting is that we’d be better off giving our stimulus dollars to the unemployed whose needs are such that they will not hesitate to spend every dollar we give them. Give the money to them gradually over the next year until the natural process of economic recovery takes over. (We’ll handle the transition between receiving subsidies and returning to employment through a negative income tax to make sure they have a substantial financial incentive to return to work.)

Forget about public works projects and various economic development programs, the nature, duration and location of which may not be the most effective, most timely means of getting people back to work. Let’s ask ourselves, “What can we do that will have the most dramatic and most immediate impact on the economy?”

The simple answer is, give the money to consumers whose incomes have been so depressed (or eliminated altogether) by the recession that their propensity to consume is 100%. For all intents and purposes, they’re going to take every dollar you give them and spend it, immediately. They’re not going save any of it. They’re not even going to use any of it to pay down their credit cards and other debt except to make mortgage and car payments. And they are certainly not going to take months, maybe years to build something with it. They’re going to spend it. All of it. Right now. (This paragraph was excerpted from “A second stimulus package?!” which I posted yesterday.)

What? This is too simple, too straightforward a concept to work? Let me get this straight… We’re in a national economic crisis so severe that the Administration is considering a second round of $300 to $400 billion – more money we don’t have – even while $697 billion of the first emergency stimulus package remains unspent. I think a little simplicity that focuses our attention on the problem we’re trying to solve may be exactly what we need.

Is the idea too pure, too kosher for Congress because it doesn’t have any “pork”? My apologies, but I thought that was one its advantages. Are there implementation issues? Of course, but they’re almost certainly less than the mess we are now realizing with the stimulus funds we’ve spent, and still haven’t spent, so far.

I know it’s not the way Washington usually does things, but sometimes, the simplest, most obvious solution is the one that makes the most sense.

-wf

*The Washington Examiner, July 8, 2009, “First stimulus package spending at glacial pace; Obama wants another?”.

**The Bureau of Labor Statistics, Unemployment Statistics.


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