Thursday, December 3, 2009
I have previously documented how grim the unemployment situation really is. See this.
At President Obama's job summit, many different ideas for job creation are being touted.
Some of these are good, and some are bad. For example, any proposal which stresses restarting securitization markets is barking up the wrong tree. Shahien Nasiripour rounds up some of the various proposals, pointing out that some propose:
Using other TARP money to provide cheap financing for investors to buy securitized small business loans...
[Mark Zandi, chief economist with Moody's Economy.com] said federal money instead should be used to bolster the securitization market for small business loans, partly because it's not clear that the banks would want the TARP money if there are too many strings attached.
Given that the Fed, the Bank of International Settlements and many leading economists have all said that securitization is part of the problem, Zandi's proposal should be a non-starter.
On the other hand, the National Federation of Independent Business will propose a one-year payroll tax cut. As Bruce Krastig argues, a one-year payroll tax cut could be implemented in a revenue-neutral fashion so as to create new jobs:
It is my estimate that 2010 calendar year payroll taxes will be $680 billion. This is a massive amount of money. If the tax were suspended for a year a portion of this pile of money would go directly into the pockets of America’s 90 million+ workers. It would equally go into their employer’s coffers. The primary beneficiaries would be small businesses. In other words, this would go right to where it is most needed.
At roughly $700 mmm this would be a size equal to the entire two-year stimulus program of February 2009. But its impact would be multiples of that in terms of increased demand in the economy.
I do not have a big computer, but a program like this would result in a jump in GDP of 3-4% just by itself. A guess on job creation would be around 3mm. If you want a big jolt in the arm this is it.
Eliminating payroll taxes for one year would ... would put hundreds of billions back in people's pockets just before next year’s elections...
There is one significant flaw to this approach. It would devastate the Social Security Trust Fund. That is something that Congress will not allow to happen. Even with the benefits that may go with it, that would be a 'no sale'.
There is a way to do this Revenue Neutral to the Trust Fund. It is relatively easy. You just have to cut current and future benefits that the Fund pays out. That would be extremely unpopular...
There is one approach that could work. A “means” tax on benefits for a stated period of time. A simple rule: If one has taxable income over $150,000 they do not get benefits for the following year. If this were in place for approximately five years the Fund would have offset the shortfall incurred in the first year where no taxes are collected.
The number of individuals who are both 65 and earn $150,000 is not large. They may yell and scream at this, but they are small in number. Those same individuals have significant irons in the fire. They would benefit from the robust economy that would follow. To make it fair, the amount that had been withheld could be deducted from future death taxes that will come due. My point is, this deal is sellable. The bulk of the "Panthers" would love it.
These are the pieces for the largest stimulus effort in history. And it is budget neutral. Keynes would be proud. The results would be dramatic. The impacts would be lasting. This by itself would not right our economy. But it would give us three to four years in order to dig ourselves out of a hole...
Note: The Trust Fund owns $2.5 Trillion of Government IOU’s. For them (through Treasury) to repo $650b into the 1-3 year credit market over the course of a year would not represent a significant issue for the bond market. One consequence would be that this would drain available liquidity; precisely what the Fed has told us it intends to do. This would be achieved with less impact on supply and demand than other options available to the Fed. A drain of about $700b is approximately the right size.