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Posted by on Dec 1, 2008 in Economy, Miscellaneous, Politics | 2 comments

Hopeless Economists

I had a simple notion to help ease the economic crisis. Instead of funneling endless amounts of public money to financial institutions in hopes some will trickle down to consumers and businesses, give consumers and businesses the money directly. And the mechanism to do this? Suspend the payroll tax for a year and pay Social Security benefits with some of the borrowed money now being shoveled by the ton into bank coffers. This would give an immediate 6.5 percent pay raise to all workers, and a 6.5 percent shot in the arm to the bottom line of every business.

I wanted to get this idea out. And instead of trying to reach policy makers, I went to the people they go to for their ideas–think tanks. And lo! I got some responses. It turns out this idea is already under discussion in thinktankland. But there are concerns about such an approach, Namely, that consumers might not spend the extra money they get but save it or pay down debt. And business might not use the extra money to hire people but just to improve their cash flow situations.

Such objections illustrate the tragedy of letting economists set economic policy. These worthies think only in economic terms. They only try to figure what economic objectives might be realized with what policies. When the challenge now with the economy is as much (or more) political as economic.

The economy is going into the tank. Nothing, absolutely nothing, can prevent this from happening, with all the horrid results this portend. The question now when it comes to government actions is whether Americans will see their government as being on their side in this sinkage, or just bailout artists for banks and financial institutions. Whether government cares about Wall Street or Main Street.

Whatever the economic upshot of a payroll tax holiday, it is a populist approach. It says your government is helping you–directly, without banking intermediaries skimming off the top. While the present approach of the Paulson Gang looks like bankers-helping-bankers.

The New Deal in the 1930s didn’t bail out the economy. WWII did that. What the New Deal did was prevent a social revolution in this country. Washington seemed to care about “the little guy.” And the little guy stuck with our present form of government.

Economists don’t seem to understand this. At least the ones now setting government economic policies in this country. If a new batch doesn’t tumble to reality soon, God help us all as things continue to deteriorate.

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Copyright 2008 The Moderate Voice
  • DLS

    1. I hate to be the spoil-sport who actually knows more and better stuff than his critics believe,

    but if people retrench and reduce their spending or service debt and save instead of spend and borrow, and we get a deflationary spiral, that’s simply what was meant to happen sooner or later.

    The current home-equity-as-ATM and living-on-credit-card mentality, while still ongoing, is not sustainable.

    As to a payroll tax holiday, that’s more irresponsible than a gasoline tax holiday. Social Security and Medicare are unsustainable as it is. Why not instead end the payroll tax, put the “needs” into a revised income tax (made more progressive, naturally), and include additional taxes so as to make Social Security, at least, solvent.

    Nobody equates the federal government only with a favored few on Wall Street, and not everyone is so childish or short-sighted to assume the federal government instead should be everybody’s big, surrogate parent. Not only the Detroit Three (whom most sane people do _not_ want bailed out, nor the equally obsolescent UAW) but other companies have come to Washington for bailouts and other kinds of handouts, and Obama meets with governors tomorrow, who will be pleading for, it isn’t hard to guess, more bailouts and handouts of all kinds. (“Populism” that is simply appeal to the lowest-quality nature within our society: “Fast relief!”) Some failed cities (which may or may not yet have corrected their own wrongful ways, such as city income and other taxes) no doubt are next in line. (It wouldn’t surprise me if all of NYC metro came stampeding to Washington for relief from reality using Other People’s Money, for example.)

  • DLS

    2. The current economists are coming to terms with the threat of deflation rather than the decades-old concern about inflation, which was first tamed in the early 1980s and then diminished to the point where it wasn’t on our minds throughout the 1990s and this decade until the recent run-up in oil prices that has since reversed. The general approach to the economy now is to try to stimulate more economic activity by being willing to lower interest rates close to or to zero per cent (federal funds rate), if necessary, and expansionary (inflationary) monetary policy and other confidence lifting moves are contemplated “if necessary” such as having the Fed purchase Treasury bonds.

    At least general policy like that is not only the kind of broad policy we’d expect, but superior to the appeal to base instincts (on which vote-buying is based) of people in the name of populism, such as letting judges rewrite mortgage contracts to expropriate creditor-lenders in favor of borrowers (“the people!”).

    And a general stimulative and expansionist approach to try to forestall deflation is (under the given conditions) orthodox, while the following suggested bailout scheme has all kinds of moral as well as economic defects.

    “Chevy Volts should be sold to the government AT PREMIUM and WITHOUT A BATTERY WARRANTY. Each vehicle should be sold at a profit. And in so doing, and assuming sufficient battery pack quantities can be produced, they could be released earlier than the November 2010 deadline”

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