The Simple, Obvious, But Nonetheless Powerful Way To Get People Back To Work

Friday, September 16, 2011

What usually happens when we have downturns is that our President and elected representatives, Democrats and Republicans alike, flail about while they wait for the economy to get better on its own, not because of and often in spite of the billions we may have wasted with misdirected, ineffective policies and programs. Whoever’s in office when the recovery occurs takes credit for it, and we move on. That’s not happening this time, that is, the economy isn’t recovering fast enough on its own because there are structural issues, big things wrong with the economy which will take time for it to fix, time we don’t have.

Every now and then, I take myself way too seriously. I find myself facing what appear to be difficult, complex problems, the kind that make your head hurt when you think about solving them. But then eventually, thank goodness, there comes a moment. You know what I’m talking about. It’s the one when I blow my diet on the grounds that stress is more harmful to my health than fat, after an hour or two of mindless TV, followed by a pass-out nap on my couch. It’s the moment when I realize that the problem wasn’t that complicated after all. I strip the problem of its extraneous detail and focus on its core elements, and a simple, reasonable, often elegant albeit sometimes radical sounding solution presents itself. This is one of those times.

Unemployment Benefits: Too little to be effective.

Tuesday, December 22, 2009

Unemployment compensation has been a tool for reducing the impact of any downturn since the 1930s. The idea is simple. In a consumer driven economy, when employers feel the need to lay off workers, one of the most effective tools at your disposal is to continue to pay the unemployed for humanitarian reasons, of course, but also so that their demand for goods and services will not decline so substantially as to make matters worse.

The Supply Side Economics of President Obama

Monday, December 14, 2009

President Obama is hell bent on helping the small businesses of America. “Better late than never,” some would say, but they would be wrong.

His idea is simple. Too simple. Make more money available to small business by leaning on our banks to make loans they really would prefer not to, and give those small business tax incentives to hire more people… Wait a minute. Just stop for a second. Why would any business, particularly a small, scared business with limited resources, a tiny drop in the ocean which is the American economy, expand its operations without knowing it can sell the additional goods or services it produces? …I’m waiting. …”On spec?” you say timidly. Hey! Who said that?! Maybe in a strong, surging economy, but not in the midst of the most serious economic downturn since the Great Depression. No way.

The Bass Ackwards Economics of Bailout II

Wednesday, December 9, 2009

Ours is a consumer-driven economy. Everyone knows this, including our government, which is why it keeps extending unemployment benefits. Do everything you can to keep people spending, even while they’re unemployed and looking for work. It is the most, and possibly the only really effective thing the Obama Administration and Congress have done to prevent an already horrendous recession from being even worse.

The same logic should apply to the design of any bailout. If you want to generate jobs in a hurry, give every dollar you (the government) can spend to the people who need it most, whose propensity to spend it is the highest, preferably 100%. What you shouldn’t do is give it to business, large or small, hoping they will use the money to hire more people. That doesn’t work. Particularly during a recession, companies are reluctant to hire people unless they have a proven market for whatever product or service they sell. As for public works projects, they take forever and don’t hire nearly enough, fast enough – directly or indirectly – to lead a recovery. (Funding public works projects in a recession is all about politics, and is not good economic policy.)

What to do when monetary and fiscal policy aren’t enough: The third tool for economic recovery and growth.

Saturday, October 17, 2009

Economists are worried that the jobs we’ve lost in this recession are not going to be coming back when the economy recovers. Unfortunately, the economy is not going to recover until the people who have lost their jobs find new ones, and that’s the rub. How are we going to get all these people back to work if the jobs they had are gone for good?

Traditional monetary and fiscal policy aren’t going to help here, nor will our government’s fixation on the stock market and solving large company problems.

The Obankruptcy of America

Tuesday, July 21, 2009

Our government has a worst-case scenario estimate of the total, long-term cost of federal government support of troubled firms and markets. It’s $23.7 trillion, with a “t.” This is not to say that the economy will need this level of support, but only that we’ve made commitments which could, conceivably, end up costing us this much. (See Politico’s piece by Eamon Javers, July 20, 2009, “Bailouts could cost US $23 trillion”, which will help put this number in perspective.)

Breathtaking, isn’t it? Overstated? Maybe. The Treasury Department says we’ve spent less than $2 trillion so far. Chump change by Obama standards.

In case anyone doubted that we’re in a financial crisis, we are and its name is “President Barack Obama.”

Maybe it’s his naïveté, his almost complete lack of fiscal and administrative management experience. Maybe he’s blinded by the light of a liberalism so profoundly simpleminded, it gives Liberals a bad name. That he has a sincere commitment to making America better, to fixing the multitude of our problems is not an excuse for the mess his level of spending and government interference with the economy will eventually cause.

We elected Barack Obama President of the United States government. He’s been hired, by “We, the People,” to manage our government for us. He is not the President of the Economy, if there were such a position, and he needs to get it out of his head that he can run it, the economy that is.

They say that the greatest mistake any salesman can make, even the very best, is to believe his own hype. “Yes we can!” was a good, very effective campaign slogan, but it’s time for a reality check. The election’s over. It’s time for Barack Obama to stop campaigning and start managing the government.

Whatever the precise causes of his fiscal recklessness, it’s got to stop. Either he comes to his senses and gets it out of his head that “money is no object” government isn’t tenable or, simply put, it’s up to the Republicans and some Democrats in Congress to provide the checks and balances which are their Constitutional responsibility.

If they’re not up to it or need our help, the good news is that there’s another election just 15 months from now.

-wf

Missing the Point: Breaking Up Firms “TBTF”

Monday, July 6, 2009

The Obama Administration has decided that “Big Business,” large financial services companies in particular, cannot be allowed to become “TBTF.” I didn’t make that up. In a world in love with text messaging, it stands for “Too Big To Fail.” Once again, our new President and his Administration have demonstrated their lack of respect for the power and intelligence of our capitalist system, and of our government’s relationship to it.

On the face of it, it seems to make sense. Never let a company become so large such that we, the people, have no choice but to bail it out when it gets in trouble. Unfortunately, it’s a reasonable assertion based on an unreasonable assumption by President Obama that is fiscally irresponsible and dangerously off base for a number of reasons.

Simply put, the assumption he’s making is that the economy is not capable of taking care of its own – the flip side of which is “Government knows best.” Not just any government, mind you. He’s not, for example, allowing that the Bush Administration would know what it was doing under similar circumstances. No. President Obama is talking about himself and his Administration which is one of the huge problems with his strategy. Its effectiveness depends upon who’s in charge.

“Well obviously the economy is not capable of managing itself,” so the President would argue, pointing to excessive risk-taking which helped initiate the current recession. Fine, but that doesn’t mean the solution is to take control of that economy. A much more effective and far less expensive approach is provide the minimum degree of regulation necessary prevent a reoccurrence of the bad behavior. AIG, for example, is an insurance company. Why don’t the same rules apply to insuring investments as to more mundane coverage such as home, auto and life insurance? Why, for another example, aren’t hedge funds regulated like banks? In fact, it’s arguable that the economy would ultimately learn its lesson and self-impose the same and even more severe controls on its own.

When companies fail to produce sufficient profits to justify their existence, the economy – not the government – will force them to morph into something that operates more profitably in the markets they serve. Behavior that produced losses will be shunned in favor of new business models that work. Unproductive components will be liquidated. Inadequate management will be replaced. It is, in fact, an ongoing process for the best managed firms which initiate such adaptive changes on their own and in advance of their problems getting out of control. Poorly managed companies, on the other hand, don’t understand or care, and end up having their lunch handed to them through a natural, albeit sometimes painful process.

These are things the economy does every day, at remarkable speed all things considered, all by itself – until government becomes impatient. Unfortunately, more often than not, severe government intervention either postpones the inevitable and/or alters the behavior of certain firms and markets in ways which are less desirable than what a more natural process would have suggested – wasting billions, even trillions in the process.

Is there nothing the federal government should do to help protect our economy in the event that an AIG, General Motors or Citibank fails? Of course there is: Provide support for related companies and, most importantly, for consumers whose livelihoods will be adversely affected. Helping them maintain their levels of consumption will not only serve humanitarian objectives, it will help prevent the downturn from becoming too severe. Beyond that, government domestic economic policy should manage the money supply within the limits of reasonably defined powers, and guard free enterprise against monopoly and other factors interfering with competitive market behavior.

What the government should not be doing is telling business how it should behave. There’s a difference, a not at all subtle and highly material difference between “assistance” and “control.” It’s a critical distinction President Obama doesn’t seem to appreciate. It’s one thing to help someone cross the street. It’s another thing altogether to tell them which street to cross and which direction to go once they get to the other side.

To be sure, there are those in the current Administration and Congress who would argue that the costs of helping affected consumers and small businesses greatly exceed the costs of bailing out and/or dictating the behavior of certain companies, but it’s an argument that has no merit. It’s factually incorrect as can be proven by considering how bailout monies might have been more quickly and effectively deployed through programs to protect consumers. As an effective and fiscally responsible means of stimulating the economy, the Obama strategy of intervention is counter-intuitive and just plain bad business.

Unfortunately, President Obama doesn’t seem to be able to help himself. He needs to get it out of his head that government is bigger and smarter than the economy. His is an arrogance born of naïveté which he has got to get over, for our stake of course, but, to play to his ego, if he has any hope of being remembered as a good, let alone great President.

At this rate, and if the Republicans can get their act together, he’ll be lucky to be re-elected.

-wf

Suggestion: Let’s use tax credits as down payments.

Monday, April 20, 2009

Hello, Obama Administration? Paying attention?

Let’s give consumers a tax credit encouraging them to buy fuel efficient cars, or any new car for that matter, but find a way for them to use those tax credits as their down payments. Maybe by letting us designate the manufacturer to receive the tax credit directly from the IRS?

This trick moves the benefit of the tax credit back to the point of sale where it will have its greatest impact. It enables the customer to put more down on the car, keeping the monthly payments lower and more affordable, leaving more of his or her disposable income leftover for other consumption.

Brilliant, even if I do say so myself. (And if not me, who will?) What do you think?

-wf

Common Cents

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.