Kate’s Kitchen Table

Some Modest Proposals to Spur the Economy (And Create Jobs) September 13, 2010

Some very sobering and alarming statistics were published this weekend.  The number of Americans living in poverty has jumped from 13.4% to 15% – and while a 1.6% increase doesn’t seem so high, remember that it represents almost 5 million Americans.  FIVE MILLION.

These are levels that have been unseen in this country since before Lyndon Johnson’s “War on Poverty” was declared in the 1960’s.  The increase is the single largest yearly increase since the government began keeping poverty statistics in 1959.  Roughly one in seven of our fellow citizens is now poor.

We can point to so many reasons for this.  Of course, the immediate effects of unemployment and the housing crisis are primary.  There are also underlying structural problems with the economy that cannot be cured by simply putting more people to work.  This government erred terribly by trying to fix the economy by fixing Wall Street.  Wall Street doesn’t buy school supplies, and washing machines, and new cars – people do.  And until we can get people buying things – creating demand – nobody out there will be creating jobs.  As a business owner – why would I hire people to make things that nobody will buy?  To serve meals that nobody can afford to eat? 

There are some fundamental steps that the government can take to increase demand.  The first thing is to stop worrying about the federal budget deficit. It is axiomatic that if we can get people working and paying taxes, there will be less stress on the budget.  Though the Republicans will tell you that you can’t raise taxes in a recession, most Keynesian economist will tell you that you MUST deficit spend your way out of a recession.  It’s kind of like the rising tide lifting all boats.  Or that you have to spend money to make money.

Second, you must end the Bush-era tax cuts.  Economically speaking, we should end them for everyone – including the middle class – but allowing them to expire for the top 2% of wage earners in this country would go a long way towards plugging some leaks.   For a taxpayer making $250 K, the increase amounts to about $5,000 per year.  The wealthier the taxpayer, however, the more likely it is that he or she will have high mortgage interest deductions or other income tax credits that are unavailable to those who don’t itemize.  So, the impact of these would be even less.

Third, you must cut taxes that will spur demand in the lower third of workers in this economy.  This would be through a payroll tax holiday where the federal deductions for Social Security and Medicare are totally eliminated for six months, then gradually reintroduced over a period of six months.  For many working Americans, this would be about a 9% raise in pay.  For a guy making $10 an hour, this would be an increase of $36 per week or over $140 per month.  The gradual reintroduction (say 3%, 6%, 9%) would be so that people who were got used to having that extra money wouldn’t suffer the shock of suddenly losing it.  Employers would still have to pay their full share to the government during this entire time. 

Fourth – allow Americans to refinance their mortgages directly through the government at extremely low interest rates.  Right now, the Fed is lending money to banks at or near zero percent.   The government should allow ANY American homeowner – whether they are underwater or threat of foreclosure or just doing fine – to refinance a primary residence at 2% for a 15-year loan, or 3% for a 30-year loan.  The loan would have to have been issued before September 2008 to qualify.  A homeowner carrying a $250,000 mortgage at 7% for 30 years is now paying about $1665 per month in principal and interest.  If this was refinanced for 30 years at 3%, the P & I payment would go to $1055, an extra $600 per month that the homeowner is now free to spend on something else.  If the homeowners mortgage was $1 million, the refinance would save him or her almost $2,500 per month.   As a bonus, if the homeowner’s mortgage is owned by a bank that was bailed out through the TARP legislation, the government would reduce the banks repayment obligation by that amount – rather than pay off the homeowner’s mortgage.  So, for example, if the homeowner’s loan was owned by Citibank, the government will just reduce Citi’s TARP debt by $250,000.  If the homeowner is underwater – that is – paying on a house that is no longer worth what it was purchased for, the government will similarly refinance the REAL cost of the home, and the original lender will write off the total amount against its TARP windfall.  The government would completely pay off mortgages held by local lenders. 

Finally, there are plenty of people out there who don’t have mortgages, but are drowning in consumer debt that the credit card companies have made it ever harder to afford to pay off.  In 2009, the average credit card debt per household with debt was about $16,000.  About 14% of Americans have revolving debt that is more than 40% of their net incomes.  The government could directly issue loans at 3% to individuals for credit card debt up to a maximum of $25,000 for a period of up to 5 years.  For the consumer with $16K in debt, this would result in a payment of about $288 per month.   The consumer would agree that a notation would be placed in his or her credit report that would prohibit he or she from getting any NEW credit until the government was paid in full.

These proposal would take significant outlays of cash by the government and it does not seem as though there is the stomach for this on Capitol Hill these days from either party.  However, failure to take bold moves such as these will needlessly prolong and deepen this recession,  We need President Obama to act more like Franklin Roosevelt and less like Bill Clinton.