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Friday, September 16, 2011

About The 3K Plan

The reason I am sure the 3K stimulus plan would work (at least temporarily) is contained in the following graph, which is derived from the Census Median Household Income series found here:

Click on the graph to get a better look at it.

The top line indexed to the LEFT is the actual changes in US Household REAL Median Income levels as reported by Census.

The rest of the lines look at one and two year percent changes, and they are indexed to the RIGHT.

The doubled line is the two-year percent change. I'm trying to make my graphs color-blind sensitive.

If you look at this graph in detail you can see that recessions are predictable years before they occur. They are purely and simply a result of real US household income long term negative changes. The recession, when it occurs, is the result and not the cause of real income changes, although the economic contraction does shove down incomes, but the pricing effect usually supports incomes more. In essence, the recession is the painful cure for the pre-existing malady.

Obviously we don't have 2011 Real Median Household Incomes yet, but they are going down. I can promise you that.

This should produce a deep sobriety among all those who still believe that we can inflate our way out of the current fix. Inflation cuts real median incomes decisively.

The reason that I know that the 3K plan would produce a temporary increase in GDP is that it would raise median incomes by at least 2.5K in real dollars in less than a year, and it would raise the lower income household real incomes by more than 10%. A five percent change in lower income households is usually sufficient to get us out of the pickle.

The question is - should we do it? Pretend you are the President and Congress. Would you do it? This will be the last such adventure we can afford, so spend your imaginary money wisely.

I had been thinking along the same lines but a slightly bigger amount more focused on unemployed, but both ideas have merit. I prefer my one year moratorium on all fed tax collections(which is 10x more expensive than your plan) but would affect business and individuals.
It would be interesting to see how much of a surge in imports occurred after such a stimulus. Politically the idea is dead, it would result in
no union kick backs to the ruling
party in the form of political contributions, and the per job expenditures would be too small for
politically useful slush funds in construction, school building, new
local and state buildings or repaved roads
Pretend you are the President and Congress. Would you do it?

During election season, sure. The other 18 months I'd continue ransacking savings. One step forward followed by 3 steps back. Same as it ever was, since 1913.
Another waste of money, in my view. Industry and individuals know that the$1.5 trillion dollar deficits will only get larger, meaning we can expect $1.5 trillion of new taxes on business and investment ( remember, Obama is a class warrior ) and huge new off balance sheet liabilities in the form of Obamacare liabilities for corporations. Why invest in the US, when Canada offers exactly the same access to the US market? A little more spending by consumers will do nothing for new investment, which is what is needed for job creation. We need more investment, not consumption.
Charles - I'm assuming that you are sane.

The question really is whether such a step could return more benefits over the long run than (quite literally) deficits.

I'm not convinced that it will.
This president will never do it, because he lacks advisors who would recommend it, and for political reasons cited above. And even if he wanted to do it, he doesn't have enough political capitol to get it done. Plus, at this point, he has no economic credibility with the public.

He's just too weak.
What would people think of an alternative plan where each taxpayer gets $3,000 to be used only to retire debt? Effectively we each get to transfer $3,000 of our debt to the Federal government.
Gregg - essentially that's what TARP and all the rest of it has been about.

I think giving the money directly to households, for them to use as they see fit, would have a better result than all the HAMPing, etc.

And let's not forget the housing tax credit, and the continuing subsidy of FHA, Fannie, etc.

Some don't have debt, but those individuals would spend it or save it as they see fit.
OT. Excellent reading!!!

"If you want to find out what happened with Solyndra you have to follow the money. I did."

Ron - Bruce is doing some darned fine reporting on the fun-and-games with money deals at the federal government.

Everyone should read some of his recent posts at his blog.
One-time or limited-duration policies have one-time or limited-duration benefits.

The Policy Ineffectiveness Proposition at least assumes that economic agents are forward-looking. The orthodox framework assumes that most consumption choices are impulsive.

Limited-duration policies may result in persistent losses, as it is easier to destroy a web of beneficial relationships than to build one.

If I had the power to do anything, I would do nothing. Power is not wisdom. My inaction would leave me open to blame and short-term pain. I would certainly not be re-elected. But my goal is not to extend my power. Ending foolish dislocations and malinvestment is the road I take. Your prosperity is my reward.
Foxmarks - after thinking it over for days, that's the conclusion I came to. Yes, this would work, but it would cause worse future problems.
Here's a chart that I think shows why we are in very big trouble over the long-term.
Here's an updated chart that adds civilian employment to the picture.
I thought about it for a while. The estimates I'm seeing in various newspapers is that the new stimulus would increase GDP growth by 1.5% to 2%. Let's stipulate that to be true.

It's still a terrible idea.

Stimulus increases GDP growth **while it is in effect**. The fundamental assumption to Keynesian theory is that the structure of the economy is sound, and only a rough patch needs to be smoothed out. But our economy is hosed, as it now stands. This isn't just a rough patch--we've got to re-tool. Plus, as it is we're only a year or two away from hitting the magic never-get-over debt/GDP ratio. If we spend more on stimulus, we'll destroy the currency.

We need to fix our problems. Reduce regulatory barriers to fixed investment and employment. Reform taxation to reduce barriers to fixed investment and employment.
Charles - I'm assuming that you are sane.

I can't be sane and in DC at the same time.

One-time transfer payment only further cover up structural problems. Until the FIRE sector (which includes government) is regulated more and all other sectors are regulated less, we will continue on the current path.
Yeah, that's my guess.

A structural problem may in fact be exaggerated by our efforts.

Because the 3K plan only distributed money to the private sector, it is less harmful than Obama's proposal, and far more effective in terms of generating growth in the short term.

But overall the net impact is likely to be more negative than not, especially when the additional debt is considered.

Obama's proposal really does not work. But I have some question about whether any proposal will work over the long run.
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