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 One of my favorite ideas yet

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Kamma

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PostSubject: One of my favorite ideas yet   Tue Oct 28, 2008 6:21 am

Quote :
Buy now: why Uncle Sam must put everything on sale

by Laurence Kotlikoff and Edward Leamer

The demise of financial titans and the incessant warnings of economic Armageddon have unleashed a tidal wave of asset sales across the globe, eviscerating trillions in personal wealth. Stock prices are now low enough to bring back some buyers, but the contest between fear and greed remains undecided.

The same defensive mentality that allowed the sale of equities at fire sale prices threatens to cause a sharp drop in consumer spending, which accounts for 72 per cent of US GDP. If this happens, the economy will slide into deep recession.

We need to put a halt to self-fulfilling prophecies of doom. The key is realising that recessions are usually consumer cycles, not business cycles. They’re driven by weakening demand first for homes, then for consumer durables, and finally for non-durables and services. As consumers stop spending, businesses stop investing, and the economy “recedes”.

The $700bn “bailout/buyup/inject” bill and other Treasury and Fed actions will shore up the banks and provide credit. Yet credit is only part of the equation. Most consumer spending is not financed from borrowed money, but from the money we earn and the money we’ve saved. But our instinct now is to hoard every dollar for fear it’s our last. If we all do this, firms will find no customers to whom to sell their wares. Thus, collective and obsessive attempts to save can undermine the economy, leaving us with less output and, ultimately, less saving. This is Keynes’ Paradox of Thrift.

To escape the panicked-saving trap, we need to immediately and directly stimulate consumption. Having Uncle Sam send us cheques won’t work. Some 80 cents of every dollar of the stimulus checks we received last spring appears to have been saved, not consumed. The rather small personal income tax cuts advocated by Senators McCain and Obama would likely elicit a similar response. And Senator Obama’s proposed employment tax credit will work only if employers know they’ll have customers.

Another option is for Uncle Sam to distribute gift certificates in the form of debit cards that expire, say, in six months. But, as we saw post-Katrina, distributing these cards takes time and invites fraud.

A better way to spur consumer spending is for Uncle Sam to run a six-month national sale by having a) state governments suspend their sales taxes and b) the federal government make up the lost state sales revenues. The national sale could be implemented immediately.

Here’s how it would work. Uncle Sam would pay each state a fixed percentage – say 5 per cent - of the 2007 consumption of its residents. States would be required to reduce their retail sales tax rates by enough to generate a six-month revenue loss (calculated using 2007 data) equal to the amount they’ll receive from Uncle Sam.

For states with low or zero sales tax rates, implementing this policy requires making their sales tax rates negative, ie subsidising purchases. Shoppers would see a negative tax on their sales receipts, lowering their outlays. State governments would reimburse businesses for paying the subsidy and, in turn, be reimbursed by the Feds.

States would be free to broaden their sales tax bases to apply the National Sale to all retail sales, not just the sales currently covered in their sales tax systems. To make the policy progressive, states could also reduce sales tax rates by more for goods and services that are disproportionately consumed by the poor.

Would some retailers try to cheat the system and request reimbursement for subsidies they didn’t actually make? Yes. But stiff penalties and vigorous enforcement should make this a minor problem.

How big should this stimulus be? A 5 per cent national sale extending for six months would cost the Treasury about $250bn. Can the government afford this? Yes, the cumulated lost production from a deep recession is on the order of 10 per cent of GDP – roughly $1.4trn, and the associated loss to Uncle Sam in tax receipts and extra transfer payments could easily exceed $300bn. It’s unlikely that a national sale will prevent a recession, but it should shorten it and reduce its severity. Hence, we suspect that Uncle Sam would quickly recoup much of his costs in running the national sale.

No plan is perfect, and this one has its flaws and risks. But it will apply economic medicine where it’s most needed – on consumer spending, giving everyone an incentive to spend now and begin again to trust our economy and its institutions.

Laurence J Kotlikoff is a Professor of Economics at Boston University and co-author of ‘Spend ‘Til the End’. Edward Leamer a Professor of Economics at UCLA’s Anderson School of Management and Director of the UCLA Anderson Forecast

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Dimidréas

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 7:33 am

/laugh?
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Shelarahn

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 8:24 am

Just nod your head and agree, Dimi. It's the only way
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Dimidréas

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 8:49 am

Shelarahn wrote:
Just nod your head and agree, Dimi. It's the only way

It's not that I disagree with the idea. The /laugh is pretty vague but was the response I had when thinking about the odds of something like that actually happening. The article actually makes alot of sense, as it's all interconnected and one event chains the next. I have personally been doing my part to save the global economy by continuing to live in my paycheck to paycheck fashion, having just bought the wifey some nice stuff for the living room and some games for myself ^,~
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Petrus

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 10:06 am

I have to admit that people don't like it when prices go up in any way, despite how great it would be for the economy to do it even for a short time, so this would unfortunately fall flat on its face in congress. A good idea, though, I agree.

Edit: I misread a part of the article, and I really do think the idea is good, but so many people are just blantantly against "government spending" that I can't see this working.


Last edited by Petrus on Tue Oct 28, 2008 10:30 am; edited 1 time in total
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grak

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 10:09 am

I still think the expiring gift card idea is a better one. It's simple and has an immediate effect. Dismissing it out of hand as flawed without giving it any more thought seems foolish.
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Kamma

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 12:26 pm

I think it was the fact that the card thing was tried (katrina) and didn't work as well as they had hoped? Theoretically they are equivalent.

Petrus, gov't deficit spending is how economies are stimulated (when monetary policy can't do anything more especially, ie when interest rates are such that real interest rates are already negative, like now). If we want to mitigate the recession, some sort of well targeted deficit spending is how it is done. Neither party wants to be responsible for a severe contraction.
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grak

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 12:50 pm

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Petrus, gov't deficit spending is how economies are stimulated (when monetary policy can't do anything more especially, ie when interest rates are such that real interest rates are already negative, like now).

While this is a nice sentiment, it only has long-term efficacy if the debt is paid down in good times. Otherwise, a tax break is not a tax break- it's a tax deferral. I'm totally opposed to deficit spending without legislated payback planning. It's true that a nation has to carry *some* debt to validate a fiat currency system, but at some point spending more money than you have will return to haunt you...

Just a note: Bush has increased the national debt by more than all other previous presidents *combined*. And we wonder why the GOP can't appeal to fiscal conservatives anymore? All they have left is the Jesus vote.
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Kamma

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PostSubject: Re: One of my favorite ideas yet   Tue Oct 28, 2008 2:31 pm

Oh well yes. But in crisis mode, to quote Keynes, in the long term we're all dead.

One of the principle issues I think in public policy is getting people in control of the fiscal reins in the good times who know it is their duty to run a surplus (\cheer @ Clinton). This is why it is so important not to let the Republicans into power.

Right now, when it comes to long run budget issues, we should be more concerned about reforming our health care system and revising social security than holding back prompt and decisive action to the crisis.


Edit: And it's my opinion to refrain from framing fiscal policy in terms of taxes. If you do, it just compounds the 'omg tax cut for me' rhetoric. It's not about taxes. It's about spending. Ever dollar of spending today leads to taxes someday. That's the true causation.

Edit2: Moreover, with the affirmation in the last two weeks that the USD remains the sole reserve currency (omg loving the exchange rate now.... who wants to bet when it hits $1.40/£?) the US can (and I read the markets as: is expected to and wanted to) float more debt. That's not to say we should keep the GOP Binge going even in the medium term. But, it is totally on the table in the short term.
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