Given the horrible economic indicators of the past few days and weeks, would you keep spending at current levels if there were a greater money supply? Not me -- but that's what Washington is hoping for with its economic stimulus package: to get consumers spending again to revive the economy.
I dunno, but this economic storm that's blowing ashore right now seems bigger and more serious than anything we've faced in a long time. Ross Perot, who, whatever you think of him, didn't get to be fabulously wealthy by being stupid about money, certainly thinks so. He told Newsweek yesterday, "The situation in 1992 was not nearly as bad as it is now. If ever there was a time when it was necessary to put our house in order, it's now. It's like having cancer and being in denial."
Patrick Deneen explains why we're potentially in far worse shape today than in the miserable stagflation days of the 1970s. Excerpt:
I'm not an economist, but one suspicion I have is that something fundamental happened in this nation during the past 25 years - that we moved from being a solvent to a debtor nation, both collectively and individually. [I]n the very years that the Fed was raising rates to all time highs [to break the back of inflation in the late 1970s and early 1980s], our national savings rate was around a whopping 12%. Since that time we have witnessed a steady decline of our personal savings, to the point now that we have a negative savings rate. Our profligacy is manifested both in our individual indebtedness through credit cards and other debts, as it is in our massive national debt to nations that fundamentally now own us - China and oil exporting nations in the Middle East in particular. It's their dollars, and no longer our own, that we are now proposing to effectively devalue to prevent us from feeling a modicum of the economic pain that we experienced in the late 1970s. And, since so few of us have any actual wealth that's not either theoretically found in our houses or that appears on our quarterly retirement statements from one investment firm or another, very few of us have any incentive to argue against the continued inflation of our "wealth."
I'm certainly not an economist, but it's hard for me to see how the wise thing for Americans to do now is to spend even more money, and put households more at risk. We are already maxed out in terms of debt. We can't pay off what we already owe. The prosperity we've enjoyed for the past couple of decades appears to me to have been built on poor stewardship of our financial resources instead of prudent investing. Am I wrong here?
And so, to keep the economy from falling like a failed souffle, our leaders are hoping that we'll all keep spending, or spending more. The failure to do so will almost certainly cause a lot of economic pain as the economy comes back to earth. So in order to delay that, individuals and families are asked to behave imprudently and, well, unvirtuously with our financial resources. Hmm. Is it just me, or do you sometimes get the feeling that the global economy in our day is a Ponzi scheme? Economic-minded readers, help me figure this out.
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There are many problems with the US economy. Unfortunately there is now little scope for avoiding a recession. There will also be increasingly long term problems, especially as the baby boomers retire.
Tejvan
www.economicshelp.org
Please excuse me for this long post, but I'm an economist and policy wonk...
Recessions tend to resemble periods of hangover from consumers' or investors' previous episodes of irrational exuberance. I don't think the best way out of a recession is to subsidize more such exuberance, but rather to support spending on necessities, wise tax changes, and public investments of long-term value to the country.
From a social justice standpoint, people should be able to have their basic needs met if they're unable to find work; they should have access to adequate food, shelter, health care, and education. It's hard for neighbors and charities (and even state and local governments) to meet these needs when the whole economy isn't doing well. For this reason, I think it makes sense to target some federal resources on ensuring that these kinds of needs are met while still leaving people with sufficient incentive to find and keep jobs. Consider the story in Genesis 41:33-38 where Joseph instructs Pharaoh on how to set up a food program for use during lean years financed by a 20 percent flax tax that would raise more resources when the economy was doing well.
One non-bureaucratic way to help with basic needs would be to replace all major federal taxes (personal income, corporate income, and payroll) with a 20 percent flat tax on gross income plus a 20 percent value-added consumption tax, and provide refundable income tax credits of $3,480 per adult and $1,160 per child (indexed for inflation in the future). This change would be revenue-neutral in terms of the federal budget. To provide immediate assistance, the tax credits could be provided right away, while the tax on consumption could be phased in over several years to give people time to adjust. The credits would exempt the poor (and near-poor married couples) from owing any federal taxes and would ensure that everyone would have some minimum resources for necessities. There would be no work or marriage penalty to receive the credits, and everyone would face the same marginal tax rates (a combined 33 percent for money consumed, and 20 percent for money invested, paid in state or local taxes, or given to charity). This would be a form of "progressive flat tax"--one with constant marginal tax rates, but with total taxes owed relative to income rising as income went up. Because income would continue to be taxed, the system wouldn't increase the tax burden on middle-income citizens as much as the "Fair Tax" would. Also, a 20 percent value-added tax has actually been achieved in other countries (with good tax compliance), whereas a 30 percent retail sales tax ala the "Fair Tax" has not. Note that imports are subject to a value-added tax whereas exports are exempt, so adopting such a tax would promote a more favorable balance of trade and more domestic jobs.
Another way to soften the blow of economic downturns would be to adopt counter-cyclical public works programs, increasing the federal contribution to such projects (in both relative and absolute terms) when and where unemployment rates are higher. Notwithstanding all of the political corruption with earmarks and "bridges to nowhere," there are many infrastructure projects that need attention to repair or replace deteriorating roads and bridges and ease traffic congestion, and state transportation authorities should be able to identify such projects even if they can't always afford them. Increasing federal contributions to cost-effective projects when the economy is slowing down would seem to be a wise public investment strategy of buying construction work when and where private sector demand is low.
I'm not sure how politically feasible either of these ideas would be, but they strike me as reasonable from both an economic and an ethical standpoint.
"I'm certainly not an economist, but it's hard for me to see how the wise thing for Americans to do now is to spend even more money, and put households more at risk."
Did anybody notice how the market was recovering somewhat nicely on Friday after Thursday's big sell-off until about noon? Then it started heading south again and went even lower than the day before.
Maybe it's just a coincidence but perhaps the unveiling of Bush's "stimulus" package had something to do with it? I'm not an economist either but I'm thinking the market knows a flim-flam man when it sees one.
I'm not an economist either but I'm thinking the market knows a flim-flam man when it sees one.
Sometimes it does. If only the market had recognized Bush for what he was in 2000.
Doesn't look good. The FED caused the mess, and it looks like the FED will continue the mess by once again lowering rates. The war, though some of you poopoo it, is a HUGE drag on our financial health. Seems there is no way out of a recession at this point. Many have mentioned that we have an instant gratification society, and that really is our downfall. Deregulating the banking and mortgage industries maybe wasn't such a hot idea, since they are traditionally very sleazy and prone to dishonest practices. The real estate complex gives big to politicians, and really had it's way with us. It's sad. Greenspan watched it unfolding and even gave his blessing. What a useless leader he turned out to be.
Five hundred bucks isn't gonna do squat. We're in some very deep doodoo at this point. The only saving grace is that those who own us don't want to see us tank, because they need us to keep buying their junk. Small comfort, huh?
Essentially, both parties turned their back on us, and allowed the money people to run wild. The FED should have been on top of this stuff before it got so far out of hand.
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