An Obvious Solution to Our Economic Woes

Two years ago, our country was on the brink of economic collapse, but with a Herculean (if flawed) effort on the part of the federal government, we managed to pull back from total collapse to mere stagnation. Unemployment has been hanging around 9.8% percent for over a year, and although we are creating jobs now, we are not creating nearly enough to absorb our growing population, much less to re-employ all those people who lost their jobs in the crisis. We are stuck, so we can either muddle through as we have been since the stimulus package started to run dry, or we can try something radical. Such as look at the facts and respond accordingly.

What are the facts? As I see it, in no particular order of importance:

1) We cannot afford to inflate the deficit any more than it is already growing, so the best solution has to be deficit-neutral.

2) An economy is strong not when everyone has a lot of money, but when money is flowing freely from one person to the next in a virtuous cycle that adds jobs and wealth to the overall economy. Therefore, a healthy economy needs to have appropriate levels of buyers, sellers, manufacturers, servicers, laborers, law enforcement, and financiers/bankers (among many other sectors) to keep the money flowing and the economy growing. If any one of these sectors fails, the money pipeline gets clogged and everything starts to shut down. Therefore, in an economy that is stagnating like ours is, we need to see which sector is proving to be the bottle-neck and address the problem directly.

3) Right now, we are seeing two sectors that are hurting the rest of the economy the most: the banks (due to the foreclosure crisis), and the buyers (who lost their jobs when the banks ran out of money). First, the banks: The credit freeze that started this mess in 2008 never really thawed; the banks over-corrected for the years of loose-lending practices by making only the safest bets, and who can blame them? Why should they lend to any normal human being when they can lend unlimited money to the federal government with money they get virtually for free from the Federal Reserve. Basically we're paying the banks to step between the Fed and our Treasury, so it doesn't look like we're just printing money. The added benefit is that the government can then afford to continue to give them all that free money without anyone actually having to pay for it. Clearly the banks need to be weaned off the government teat so they have a reason to go back to the business of lending real money to real people.

4) In the meantime, however, the real problem with our economy is that demand is sluggish, due to persistently high unemployment. Even with a constricted banking sector, corporations are sitting on record profits and close to $2 trillion in liquid assets, so they don't need loans or employment subsidies. At the same time, they are not spending any of that money (and therefore not creating jobs) because it seems unlikely that anyone will be able to purchase the extra output. With smaller businesses, they would also be able to get by for a time without the banks if demand increased and bulked up their sales receipts. So while we do still need to address the banking crisis, it is really the lack of demand that most crippling to our economy.

5) The Republican solution to this problem is to cut taxes, which has the virtue of putting more money into people's pockets, and they prefer to enact such cuts across the board. Unfortunately, this approach has already shown its limitations, what with the utter failure of the Bush tax cuts to create any jobs over the last decade. It was tried again in the Obama Stimulus package, but its success was limited because people tended not to spend the money but instead either saved it or used it to pay off prior debts.

6) The more typical Democratic solution is to spend money, particularly in needed areas such as unemployment benefits, food stamps, education, and infrastructure. This approach is far more stimulative and forward-thinking than tax cuts that ultimately lead to greater hoarding at the top 2% of our society, but it puts the cart before the horse: spending on infrastructure is supposed to create a large number of jobs all at once, but employing people directly happens to be the most expensive way to create a job.


Now, what is the appropriate reaction to this set of facts? Let's start by dropping the pretense that any of these solutions can somehow escape the label of "redistributing wealth" - including and especially tax cuts for the upper class. Our nations richest members may pay a much larger percentage of overall tax receipts, but they are the ones who financially benefit the most from our governments' operations, and it is only right that they pay for what they receive in the way of subsidies, favorable civil laws and courts, a tariff system that protects them from unfair competition from abroad, and a very expensive standing army that is stationed around the world, providing silent (and sometimes not-so-silent) oversight of America's economic interests. If the rich did not get taxed at a much higher rate than the lower classes, the poor would then be subsidizing the government largess from which only the richest Americans benefit. Therefore, cutting taxes for the rich - especially in this time of historically low income taxes - amounts to the redistribution of wealth upwards, which is exactly what we have seen in the years of the Bush tax cuts.

Any choice we make will have repercussions on wealth distribution in one way or another, so we have to stop acting as if we can choose not to redistribute wealth, and instead focus on figuring out the best way to unplug the clog in the economy, with the end goal being that if at all possible, absolutely everyone benefits. Nothing less than a win-win-win proposition will suffice, so please consider the following: The best way to pump up sagging demand in the economy is to give every tax-paying American a free debit card, worth perhaps $600-$1200 per year (exact amount to be determined at a later date). Here is how I see it working:

A) The first condition is that if you want the card you have to apply for it; there are several reasons for this, one being that that the money will then go to those who are most likely to spend it. In addition, those who are philosophically opposed to receiving money from the government will not be forced to participate. Finally, it would also weed out the fairly well-off; they will tend not to apply since they don't need it and the more well-off they are, the more it will seem like too much trouble to bother with, even if the application process is simple and painless. This will make the middle-class the greatest direct beneficiaries of the policy.

The only other requirement is that you must have paid a minimum amount of income taxes the year prior. This way it can be billed as a tax cut, because you are just giving people their hard-earned money back.

B) Upon a successful application, you will receive a debit card that gets topped off at $50-$100 every month. You can spend it on anything you want, but you must spend it or you will lose it, so the stimulative effect will be similar to that of food stamps (which has one of the highest ratios out there), except that a much larger portion of the economy will benefit.

C) The program should last for a pre-designated period of time, preferably at least 3-5 years. This will reduce the amount of uncertainty in the market by letting our corporations know the new level of demand that they can expect for a long enough period of time that they can plan ahead for it. This is a key point, because the augmented, sustained demand will give them both the incentive and the stability they need to start spending all that money that they've been hoarding over the last couple years. Once they start spending, there will be a virtuous cycle in which they employ more people who can then spend more money, and the economy as a whole grows far, far faster than we might otherwise expect. In short, this program could provide us with an unprecedented opportunity to ignite the entire economy with one, well-placed spark.

D) Then there is the question of how to pay for it. Despite the rise of the Tea Party movement and their credo of lower deficits, we have seen in the Obama tax-cut deal that it is still politically feasible both to cut taxes and to increase spending without paying for any of it, and perhaps this program should operate on the same principle. Although I am no expert at this, I estimate that this program would cost less than $50-$100 billion per year, which is chump change compared to the Stimulus and near-$2 trillion deficits. However, a better solution would be budget-neutral, and in this case taxing the richest Americans makes a lot of sense, not only because we all need this program and they happen to be the only ones who can afford to pay for it, but also because we would just be giving all that money right back to those same people in the form of increased sales receipts for their corporate holdings, so they don't really lose anything and in the meantime the economy grows and everyone will benefit well beyond the direct effect of the actual money spent.


In sum, under this program we can stimulate the economy, grow our way out of this recession, give Americans their own tax money back, make sure every American benefits, pay for it fully, and side-step the banking mess altogether. Of course, we will still need to deal with the banks and the housing market at some point, but a robust economy will inevitably ease those problems as well, and in the meantime these sectors don't have to be an obstacle to our overall economic progress.

While I have tried to maintain an ideological balance in the structure of the program, I know that Congress is now the place where good ideas go to die, but there is no way to know what will happen if no one even proposes the idea, so let this be my contribution to the discussion and if you like the concept, please pass it on to anyone you think might be interested, and let's see what happens!