How Would You Fix This Economy? Weigh In

by Darwin on July 18, 2010

The US economy is jacked up.  There’s no doubt about it.  Things don’t appear to be improving any time soon either.  Without giving a long-winded intro and background, I’m just going to lay out various factors influencing economic recovery, which in some cases are diametrically opposed, and then I’d like for you to weigh in on how you’d handle the situation to produce the best net benefit to America.

  • More Stimulus or Tighten our Belts – While we’re seeing just about the entire European Union tightening their belts and implement austerity measures (see country by country EU Austerity Measures), the US is taking the opposite approach and imploring the EU (and the US) to spend more to continue to stimulate economies, as well as continue to fund unemployment insurance which recently hit a snag in Congress for the most recent renewal attempt.  This is an exercise in spend now to stimulate in hopes of a recovery vs. tightening up now to instill confidence in markets so borrowing costs for the US don’t rise and inflation doesn’t set in at some point in the near future.  Two distinctly opposed camps.
  • Bailout to States or Allow them to Restructure Debt (Default) – It’s evident that states like California and Illinois are headed for disaster.  They are nothing short of astonishing in their attempts to continue to usurp future cash flow and fund current liabilities (isn’t that a Ponzi scheme?).  From stealing from future tobacco settlement funds to just not funding future pension liabilities, the states are in deep water and sinking deeper.  I don’t see how there’s any way out except for either a) default or b) a government bailout with federal tax dollars.  While the stimulus bills already sent billions of dollars in aid to the states, what I envision is another massive bailout in the future, akin to how the IMF and EU have to bail out Greece.  Seriously, is Obama going to let his state default?  And the home of the Hollywood left?  I envision a bailout.  The question is whether that’s right or not.
  • Extend Unemployment Insurance Indefinitely While Unemployment Exceeds 8% – Somehow 8% is the number Krugman and others have come up with, but essentially, proponents of “indefinite” unemployment insurance posit that as long as the unemployment rate remains above a particular level, the checks should keep coming.  Now, there is data supporting the notion effectiveness of those dollars going back into the economy and preventing human pain and suffering, but there’s also data showing that the unemployed (in aggregate, I realize some people simply CANNOT find work) don’t accept job offers as quickly while receiving checks.  Again, this is not to say people are intentionally living off the public largess, but this is what the data shows.  As benefits come to an end, people are more willing to accept a lower wage roll than what they were anticipating to pay the bills whereas if they can continue to get by on unemployment checks they may be more inclined to hold out for a job more aligned with their salary/career demands.  So, the question is, do you continue to extend benefits with no end in sight? Do you stop extending them now?  How do you decide when enough is enough?
  • Tax Cuts or Tax Increases – Again, two more distinct camps.  While the left argues that the wealthy and corporations should backfill the country’s economic woes via higher taxes, free trade proponents argue that you’re taxing the very people who actually create jobs.  Many of these maligned wealthy are actually small business owners where most of the real jobs are created in this country.  Sure, the well-off could always shoulder a greater tax burden, but if taxes get high enough, at what point do they stop hiring and growing their business or throw in the towel altogether?  Would you leave taxes at the current “Bush” tax rate, raise taxes only on the wealthy, or cut them again across the board in an attempt to fuel business expansion?
  • Small Business Incentives – Real Ones – It was ironic that at Obama’s job summit, he claimed to have invited the best and the brightest to talk about how best to create jobs in America.  But he invited unions and not the Chamber of Commerce.  What?  And the healthcare bill has created a new maze of regulations and loopholes companies will inevitably try and figure out to get around being forced to pay for healthcare for their employees while competing globally (i.e. if the mandate kicks in at 25 employees and you have 22-23 employees now, are you going to grow your business by breaching 25 next year? NO!).  With that in mind, virtually every piece of legislation in the past year has been staunchly anti-business, even if it were sold as pro-business.  So, what would you do to actually IMPROVE business conditions?
  • Housing – More Tax Credits or Allow Markets to Clear? The administration just can’t seem to stop tinkering with housing.  Rather than allowing the markets to crash, baseline and recover (which may very well have started by now if they left well enough alone), they embarked on a series of ill-conceived schemes ranging from forcing banks to reduce principal on mortgages to paying prospective homeowners $6500-$8000 back for buying a new home that they were eventually going to buy anyway.  After all the waste billions of dollars, and the other $1 Trillion (yes, that’s right) it will cost to bail out the GSEs Fannie/Freddie, we have nothing to show for it.  Housing is still flat to declining virtually across the country.  Should the government allow markets to clear?  Or should they continue to intervene with tax dollars in an attempt for for forestall the inevitable?
  • Targeted Incentives to Spur Business vs. Targeted Attacks on Industries? So, just in the past year, we’ve seen the complete vilification and ensuing legislation target the following industries: Insurance, Hospitals, Pharma, Devices, Banks, Hedge Funds, Real Estate, Investment Banks, and now Oil companies.  As the administration maligns industry after industry, it makes one wonder whether this is a country to do business in.  The only industry that’s had any favorable legislation would be the union-heavy big three auto industry and solar.  If we haven’t learned from Spain yet what happens when you try to subsidize solar, we’ll be schooled soon.  So, the question is, are there other industries where we should actually become more accommodative rather than destructive?  Should the government butt out?  Or continue to intervene?

These are just some of the opposing options being floated which tend to be split along party lines.  Being the objective, rational people we are that aren’t taking campaign contributions from special interest groups like Unions or Corporate coffers, we may find some middle ground or have different ideas.

Now, What are Your Ideas to Fix This Economy?

{ 6 comments… read them below or add one }

Early Retirement Extreme July 18, 2010 at 11:02 pm

It depends on what you mean by “best net benefit”. I don’t think the economy is that difficult from the microeconomics of a single person/family. (Sure, a country can print its own money, but seeing that the US is no longer resource independent and a net debtor, inflation can not be used to tilt the balance from savers to borrowers anymore. The US would simply be starved for resources. This has been a challenge since the 1970s.).

So back to the question. Consider the government as a big corporation with forced demand for its products. Is it better if it sells its products at below value and occasionally goes bankrupt requiring a forced bailout either through raised taxes or through inflation. Or should it sell its product at above value and occasionally reduce taxes or deflate the currency.

The simplest deal may be to disallow the government from borrowing money. That removes one variable from the equation. Then people can simply vote according to the service level they think government should have. Impact would be seen directly on the tax level rather in the future risk profile.

It would be a more honest and transparent way of doing business.

It is also a sure way not to get reelected … most voters prefer to get something for nothing; after all, this is the quintessential definition of politics.


Darwin July 19, 2010 at 8:22 am

Well, by best net benefit, that’s with the understanding that you’ll never please everyone. By extending unemployment benefits forever, that would certainly put people at ease that are out of work. Meanwhile, deficit hawks would howl. By cutting taxes across the board, people would be pissed that “fatcat” bankers vilified by Obama are getting a tax break. But the key is, what’s best for the country at large.


Financial Samurai July 18, 2010 at 11:40 pm

I think we should raise taxes by 5% for each tax bracket, not just for “the rich” and cause a nationwide spending slowdown as people have less money in their pockets.

That would FORCE the government to cut down their own spending, and force people to better educate themselves and get ahead. Raising taxes on all would also force people to stop having so many children.


Darwin July 19, 2010 at 8:26 am

Interesting…I haven’t heard economists blaming children for the recession. Actually, population growth is the key to economic growth and the only other place we’re getting it in significant numbers if from illegals crossing the boarder. Would you prefer illegals occupying a larger % of the population than children of lawful Americans?

I do like your idea though on ALL sharing the tax burden whatever increase is ultimately needed. As of now 47% of Americans don’t pay a dime in federal income tax. So, they get services and protection for free and couldn’t care less how they get it because it’s free. By everyone sharing some of the burden, perhaps that would increase accountability and scrutiny on wasted tax dollars.


Financial Bondage July 25, 2010 at 4:39 pm

Raise taxes? Government has done that since taxes began…. it keeps them from having to reduce spending and get on a budget.. .they simply raise taxes and take more from us, the already struggling taxpayer. Consumer spending makes up about 70% of our economy. If consumers don’t have money to spend, the economy goes south. Reduced government size and lower taxes puts more money back into consumers pockets so they can spend it and get the economy rolling again.


Darwin July 26, 2010 at 12:42 am

True, it makes you want to vomit in your mouth when you see how inept states and municipalities are that they’re closing national parks, shutting off essential services, etc. because they ran out of money and nobody will lend them more. They pissed it all away during boom times because they didn’t care about what would happen during the downside of the business cycle. Why? Voters don’t reward you for being cautious – they vote based on how much crap is given away. The federal govt’s doing the same thing but on a massive scale. It’s true revulsion.


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