A conservative compromise for stimulus

by Rocket Finance

As a man who recognizes that free markets are not perfect, but are the best system yet devised by man to discourage sloth and reward industry, I have been almost put into shock by the direction of the United States financial system over the past six months and our supposed government solutions. Our country is in a panic and those elected officials who bend toward socialism are seeing a golden opportunity to grab more power for themselves.

I am not going to use this post to explain why 825 billion dollars in more government spending will not create jobs or to explain how taking money from tax payers, filtering it through the Washington bureaucracy, and then giving part of it back to various groups or industries subject to the whim of Congress is a bad idea. I am not even going to detail the millions of dollars worth of pork present in the current bill that does not encourage the employers to fill one private sector market-driven job. You can read about the pork in other places. I recommend starting here.

Fortunately, we have at least one Republican (conservative) who plans to oppose the bill. Idealy, as a fiscal conservative, I would prefer that we shut down almost all domestic federal spending and cut taxes . . . but that isn’t going to happen with liberals in charge.  Therefore, being a powerful, influential member of the press, I want to propose a compromise.

Let’s cut social security.

I’m not the only one with this idea.

The Obama stimulus package is going to cost close to $850 billion up front and will become $1.3 trillion by the time the interest  accrues when supposedly pay off this debt. Every person in the Unites States who earns a paycheck, currently sends 12.4% of his gross income to social security, up to $90,000 in annual salary. Full-time employees pay 6.2% and employers pay the other half. Self-employed workers pay the entire 12.4% of gross income. My proposal is to cut the social security tax in half for 2009 and 2010. There are several ways to reduce this tax – remove the employee obligation, remove the employer obligation, or simply cut each contribution in half.

Many will then ask, what about those who are currently receiving benefits from social security? Will the government have enough money to cover those commitments? Well, 2009 projected Social Security revenue for the Federal Government is close to $950 billion dollars. The United States is projected to send $650 billion in benefits to social security recipients in 2009. If we cut social security revenue by half, we are left with a $175 billion shortfall in 2009 and while the numbers will change slightly, a similar shortfall in 2010.

I propose that instead of spending $850 billion to $1.3 trillion of new debt on projects that may or may not stimulate the economy, and whose usefulness or value will be hotly contested, why not use that debt to finance a $175 billion dollar shortfall in social security and give every person who earns income a tax break?

Liberals could not portray this as a “tax cut for the rich”, because people who make over $90,000 annually will only get a tax reduction of $5,580. Chump change for a millionaire or multi-millionaire. Furthermore, everyone, even minimum wage earners pay the social security tax. Conservatives would get a tax cut that truly supports business and decreases government dependency.

Businesses would  benefit from the added capitol. Some businesses would actually double their profit margin, depending on the industry and how the percentages are divided. Employers would have the freedom to give pay increases or invest more in infrastructure. They could pay down debt or even pocket the difference. A reduction in overhead could help many employers save jobs. An employer with a $1 million payroll, would have approximately $62,000 in extra capital to work with.

Everyone making less than $90,000 annually would get a 3.1 to 6.2 percent take-home pay increase – with no added burden on their employers. Employees with a sudden pay increase could pay down debt, invest more for the future, or simply save more money from each paycheck. The added money in the system – spending, saving, investing – would help to thaw the credit markets and the Fed would not have to print more money and drive down the value of our currency.

Anybody have a better idea?

  1. 18 Responses to “A conservative compromise for stimulus”

  2. By Deamiter on Jan 28, 2009 | Reply

    I was right with you until I read in the last paragraph, “Employees with a sudden pay increase could pay down debt, invest more for the future, or simply save more money from each paycheck.”

    Did it occur to you as you wrote this that while this is exactly what tax cuts would do, none of these actions actually stimulate the economy?

    As soon as the economy starts recovering, you’re right on about the long-term effects of your proposed tax cuts, but right now the worldwide corporate mantra is “conserve cash.” Workers would not see pay increases if you give more cash to companies, nor are workers willing to spend more if you give them tax breaks.

    Of course, as soon as the economy starts ticking upward again, this would be a huge boost to growth, but that’s never been the point of this stimulus. The idea is to trigger a recovery sooner, not simply to build up fuel to accelerate the inevitable recovery when it happens.

    That’s not to say I’m all for this spending package, but at least I see why creating short-term infrastructure work now is more likely to trigger a recovery than throwing money at people and corporations that will only START spending it when they feel the economy has turned around.

  3. By rocketc on Jan 29, 2009 | Reply

    Deamiter, did you say that you were “right”? :)

    Workers might not see pay increases right away, but companies solvency would be increased and that money does not get stuffed under a mattress. It would be used to purchase needed items for the business or at worst, stuck in a savings account somewhere . . . and help bank cash reserves – also good for the economy.

    It is a great myth that government infrastructure work is a way to stimulate the economy. I hope to address this further in a future post. Infrastructure work is temporary and creates more dependents on the public trough. Furthermore, this stimulus package has a surprisingly low amount of “public works” jobs and most of them do not appear until 2010 or later.

    This is not a short term stimulus package, it is a giant lump of pork that increases the size of government and throws money at pet liberal projects like the NEA, STD prevention, Amtrack and more.

  4. By Deamiter on Jan 29, 2009 | Reply

    As I said, you’re quite right that giving companies cash helps the economy, but (and here’s the important point) ONLY IN AN UP ECONOMY! Even companies with cash right now are looking to conserve that cash. Money that goes to banks is not being lent. Once the economy turns around, these factors would certainly act to accelerate the recovery, but they would do nothing at all to hurry up the START of the recovery.

    As for infrastructure work, you’re making blanket statements that are quite unjustified. I dare you to defend the conclusion that the infrastructure work that created our interstate highway system has had no beneficial effect on the economy.

    Sure, employing more construction workers for a few years won’t directly help the economy once those projects are completed, but again you don’t seem to make any distinction between ending a recession and accelerating growth after a recession.

    Similarly, I agree that there are pointless expenditures in this bill, but if all you see is a “giant lump of pork” you’re not actually TRYING to understand the reasoning behind some of these expenditures. Maybe you don’t want to, or you’re so sure there is no intelligence behind those evil liberals that you can’t imagine them having any reasoning, but that’s more a personal issue than a political one.

  5. By rocketc on Jan 30, 2009 | Reply

    The problem with infrastructure work is that it is full of waste. The best way to remove the waste is to make sure that the work is required by the consumer. Federal “make-work” projects are a really bad idea. I am for removing “infrastructure” from the federal budget and letting all of those projects be handled at the state level.

    Recessions are ended by the market and most of the time, they are ended through tax cuts – Kennedy, Reagan, and W all demonstrated this. Cutting cap gains, social security or any number of taxes would jumpstart this economy more quickly than any government expenditure. We need our government to spend less and take less from our economy.

    In fact, the economy is hurt worse with deficit spending because it drives down the value of the dollar and then when government runs out of cash to pay all of the new employees . . . they either have to raise spending again or fire all the new employees and we are back to where we started.

  6. By Deamiter on Jan 30, 2009 | Reply

    Isn’t deficit spending a hallmark of Reagan and Bush Jr’s legacy?

    Are you claiming that the interstate highway system has not paid off? Are you one of those people who thinks that every inch of highway should be tolled so we can privatize our highway system? Perhaps you are impressed with the quality of privately run tollways currently in various states?

    And of COURSE “the market” of many individual companies has ended (and created) most recessions — the market IS our economy. To claim that tax cuts can trigger the end of a recession, though, it pretty wild. I’ve heard CEOs talking about “maniacal cost reductions” and saving cash no matter what, and I know MY vice president is much more interested in banking profits than spending a penny more than necessary. They claim that this won’t change until we are SURE that the economy is recovering.

    I don’t hear anybody saying they’d spend more money if they had more money, which is what you seem to claim would happen if we got tax cuts! Every management statement I’ve heard in the last two months is that we take every penny we can get our hands on and keep it safe just in case the recession is worse than we hope.

    In this environment, placing orders and maintaining basic infrastructure stimulates the economy as purchases ripple through the system. It won’t help the economy once the economy turns around, but triggering the turn-around is the whole point here.

    You never addressed this basic point — do you see no difference between triggering a recovery and accelerating a recovery?

  7. By rocketc on Jan 30, 2009 | Reply

    W was certainly not a fiscal conservative – especially when it came to spending. And much of our current problems are due to interest rates that were lowered (by the government) too far. I’m sure you know the rest of the story. It is clear that his tax cuts kept our economy afloat in the aftermath of the Clinton recession and 9-11. What government spending helped us to recover from that recession?

    Reagan’s spending was primarily in defense -something that the government is expressly required to provide under the constitution. Much of the other spending in his budgets were due to the liberal Congress that was in power for both of his terms. The point is that tax revenue increased under Reagan and the economy grew by leaps and bounds due to his tax cuts.

    As for roads – I just think that states can do a better job of taking care of the roads including the interstate. And you would see some market forces enter in as states with better roads would attract better businesses . . etc. We already see retirees and businesses leaving high tax states (like WI and MI) and moving to low tax states (like FL).

    Your business would not protect it’s cash so tightly if they knew that the Bush tax cuts were going to be made permanent or if social security taxes were cut or if cap gains taxes were cut or removed altogether.

    Yes, government spending can sometimes give a jump-start to an economy, but it is just delaying the inevitable. We have to pay that money back eventually and the new workers that are hired with the new money eventually have to be let go or the budget has to be increased.

    Tax cuts spur investment, saving, and spending – all based on the market. Government spending is just regurgitating dollars that have already been earned or dollars that we hope to earn. It does not create more tax payers.

  8. By My Life ROI on Feb 23, 2009 | Reply

    Rocket –

    I see some of the same political speak in this post.

    Do you have any solid economic education? Because it seems sometimes you gloss over basic economic principle to make a political statement… which is fine as long as you make it obvious that you are making political conjectures.

    I agree with you that this stimulus bill is wrong for a lot of reasons. There is pork spending just like in every bill.

    But to deny that government spending has less of an impact on GDP than tax cuts… is pretty ludicrous!

    Do you know who Martin Feldstein is? A well-known conservative economist from Harvard. He was a top economic adviser to Reagan. : “While good tax policy can contribute to ending the recession, the heavy lifting will have to be done by increased government spending,” Mr. Feldstein said.

  9. By rocketc on Feb 23, 2009 | Reply

    First of all, what is meant by “heavy lifting? Secondly, his statement is at odds with many economists.Henry Morganthau from FDR’s administration and Christine Romer from the Obama administration are two examples.

    Government spending did not make our economy the greatest in the world. That is a fact, plain and simple. In fact, just about every economy with large amounts of government spending is faltering as we speak because they are dependent on the US economy. When our economy weakens, all of the dependent economies falter as well. When our economy tips to the socialist side of things, we will have not economy to prop us up . . . except for China which is moving toward the free market, oddly enough.

    The best economies in the world are not command economies, they are free market economies. Hong Kong, Ireland, India, the US (for now), etc.

    Did you see the article where Putin himself seems to warn the US against experimenting with socialism?

  10. By rocketc on Feb 23, 2009 | Reply

    By the way, Feldstein’s address also included tax cuts in his endorsement of spending. http://www.nber.org/feldstein/EconomicStimulusandEconomicGrowthStatement.html

    ROI, to what do you attribute the US economic turnaround in the 1980′s: increased government spending or tax cuts?

  11. By My Life ROI on Feb 23, 2009 | Reply

    “Heavy lifting” means what you think it means, don’t play semantics…

    No one is talking about command economy vs free market economy.

    And again, you are arguing politics. I would agree that the tax cuts aided the recovery in the 80′s as part of the fiscal policy. BUT what really got us out of the recession was the lowering of the interest rates. In the 80′s rates maxed at about 20-21% (federal funds) and 14% (discount). Within a year they had both dropped to 9-10%. This is MONETARY policy. This is why conservative economists, like Feldstein, are not advocating the same ol song and dance. Rates are pretty much at 0% right now… we can’t go lower. Taxes can not do all the work, just like they didn’t in the 80′s. Good tax policy is necessary, but must be accompanied by a logical assortment of government spending.

    Congressional Budget Office: http://www.cbo.gov/ftpdocs/50xx/doc5042/doc14-Entire.pdf#page=33
    “Both recessions were brought on by monetary
    restriction aimed at bringing inflation under control. Lower interest rates after mid-1982
    permitted the recovery to begin.”

    Rocket, try and think about what we are talking about with all politics aside… cause this is numbers to me I could care less what politician did what. It does not make you a socialist to look at the economy using unbiased empirical glasses.

  12. By My Life ROI on Feb 23, 2009 | Reply

    ^

    Oh, so I don’t attribute the turnaround to government spending OR tax cuts. I attribute the recovery to smart monetary policy which is not available to us anymore.

  13. By rocketc on Feb 23, 2009 | Reply

    So the Reagan tax cuts had nothing to do with the huge gains that we saw in the 1980′s?

    And Hoover’s huge tax increases on the rich, estates and corporations had nothing to do with the Great Depression?

    What is smart monetary policy?

  14. By My Life ROI on Feb 23, 2009 | Reply

    If you don’t want to read my posts I can stop replying… let me know.

    You are putting words in my mouth. Did I say that the tax cuts had nothing to do with… No.

    This is what I said: “I would agree that the tax cuts aided the recovery in the 80’s as part of the fiscal policy.”

    This is smart monetary policy: “BUT what really got us out of the recession was the lowering of the interest rates.” …. Really anything that is an effective use of the monetary transmission mechanism (which is broken right now)

    Your all over the map, Rocket. Before you try to wage war on 5 different fronts you should understand the trap in which you have fallen in for your primary argument.

    I am not blaming you… many people attribute the tax cuts to the economic recovery (trickle down). But they also don’t understand that there is a difference between monetary policy and fiscal policy.

  15. By rocketc on Feb 23, 2009 | Reply

    ROI, I do understand the difference between monetary policy and fiscal policy. The Reagan administration’s fiscal policies allowed for good monetary policy.

    My original post was about a way to increase people’s paychecks and reduce business outlay without a huge change in our way of life and without a huge amount of debt against our government.

  16. By rocketc on Feb 23, 2009 | Reply

    I didn’t see where you addressed the 80′s until I looked in my spam folder . . . one of your comments ended up there.

    I agree that we need some taxes and while income taxes are at a relatively low level, there are all kinds of other taxes that can be reduced further. I also recognize that we need some government spending, but the amount of waste that is in the system is so large that more federal spending is not a good idea.

    I would also add, that while it is possible that no one on this thread is advocating for a command economy, it is clear that our government is quickly heading for socialism at breakneck speed.

  17. By My Life ROI on Feb 23, 2009 | Reply

    Are you sure you understand the relationship between the fiscal and monetary policies of Reagan’s administration?

    I don’t think there is any empirical evidence that could prove your statement “The Reagan administration’s fiscal policies allowed for good monetary policy.”

    In fact, I have already posted a link in which the Congressional Budget Office disagrees with you.

  18. By rocketc on Feb 23, 2009 | Reply

    I was on the phone when I typed the comment above and I was trying to make the case that The Reagan tax cuts got the economy on a firm footing, I believe that the recovery was underway before the interest rate reductions.

    That is not to say that the interest rate reduction was a big part of what happened in the 80′s. Tax cuts deserve a huge amount of the credit. From your report:

    Real consumption led the way out of the recession, increasing at a 7 percent annual rate in the first six months of 1983.

    http://www.house.gov/jec/fiscal/tx-grwth/reagtxct/reagtxct.htm

    Tax cuts and reduced interest rates in the 80′s were good for the economy. Federal spending and great debt will only serve to further inhibit growth.

    Along the same lines, the Bush admin’s taxes were good for the economy, they allowed interest rates to fall too far.

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