Growth is flat, unemployment is high, and the economy overall just sucks. That’s actually the technical term, believe it or not.
“The Economy Sucks” is defined as “the period that sure feels like a recession, but isn’t technically a recession because people struggling to find an $8 an hour job to feed their kids don’t get to define when a recession begins.” Look it up!
There are a handful of tools at the disposal of the government and government-like entities when the economy sucks, each of which can fix a different reason for why the economy sucks.
If you’re a Republican, you might argue that the government can cut tax rates on corporations. This would, in theory, free up cash and allow them to hire more employees. More employees create more demand for goods, and the economy is moving upward again.
If you’re a Democrat, you might argue that the best way to stimulate consumer demand is to give money directly to consumers. This would, in theory, give consumers cash to spend on goods, which will drive up demand and cause employers to hire more employees to handle the new demand. The economy would be moving upward again.
If you work for the Federal Reserve, you might argue that the money supply is too tight. You would probably lower interest rates, which would encourage more spending, which stimulates demand, which causes employers to hire more employees. This gets the economy moving upward again.
But what if interest rates are already zero (or near zero), and they have no room to go lower? This is where it gets tricky.
If you’re the antichrist, you simply print trillions of dollars, hand that money over to banks, and watch in horror as they hoard the free cash and collect 0.25% interest on what was, essentially, free money. The Federal Reserve calls that plan quantitative easing. Some call it printing money. I suppose, theoretically, that’s increasing the money supply. We’ll go with that.
So these are our current options: cut taxes, increase spending, or let the Fed do something.
Cutting taxes isn’t going to help in this environment. I know that disappoints Republicans, but it just won’t. Corporate America is already sitting on over $2 trillion in cash. Reducing taxes is not going to make investing that money in jobs any more enticing than it already is. The tax rate could be zero and that money would still sit there. There simply isn’t enough demand to justify rationally investing in expansion.
Increasing spending to boost demand isn’t going to happen either. We tried a stimulus package once, and it got bogged down in stupid ideas (tax cuts), was too small by at least half, and didn’t target the money at consumers. It’s unlikely Congress, which just fought to the last man to allow itself to pay previous debts, is going to do anything positive on the spending front. Besides, Republicans have a 2012 election to win, and they’re not going to fix the economy if it means letting the black guy beat them again.
That leaves the Fed. They’ve already cut the interest rates down to almost nothing. There is nowhere to go on that front. We have also tried increasing the money supply. The Federal Reserve has twice engaged in so-called quantitative easing plans, where they essentially print a ton of money. QE1 was approximately $1.7 trillion in new money, while QE2 was maybe $600 billion.
What was the net effect on the economy of all that new money? Inflation, mostly. Gold went from $750 an ounce to $1,800. Food prices have skyrocketed (I think I paid about $75 for a box of Cap’n Crunch last night). Stocks went up, but only so long as QE was either flowing or about to flow. As soon as the spigot gets turned off, stocks drop…but the inflated prices do not.
As far as the elites are concerned, this is the only bullet left in their gun. That’s why the market has already started to price-in QE3 — or as I like to call it, Gold 5,000. But is there another option left unexplored? I certainly think so. Follow with me on this one.
Right now, the problem is demand. Consumers are not spending. They are not spending because they don’t have any money and credit is not available (would you extend a credit card offer to an unemployed person? Of course not!) But clearly there is enough money in the system, as inflation is rising. The Fed has already injected $2 trillion into the economy (and loaned untold trillions more to banks to make them solvent). So who has the money?
Corporations! They are sitting on $2 trillion in unspent, liquid assets — the kind of assets that, in normal economic times, would be invested in expansion and hiring. Right now, it is not rational for any one company to step forward and be the first to expand, the first to hire. If his cohorts do not go along and expand/hire as well, the investing company will lose out. Why? Demand won’t rise enough to make the investment worthwhile.
But what if ALL that money could be put to good use? What if we made it rational to spend that money on expansion and hiring, as opposed to having it sit in an account and earn meager interest? What if we made it rational to hire across the board? To invest across the board? To spend on increasing inventory and ramping up production? Wouldn’t that stimulate the economy?
If I were President Obama, I would come out the day after labour Day, right when Congress comes back to work, and introduce a bill to tax idle corporate cash (and cash-like instruments) at a 10% rate. The money from that tax would be diverted directly into the unemployment compensation fund. Ideally, he’d never see one penny from that tax, as employers would now find it extremely rational to go ahead and hire, expand operations, and so forth.
This would jump-start the economy in a way that no tax cut, no spending bill, and no Federal Reserve smoke and mirrors could. It would have the net effect of negative interest rates for corporations (another plan I’d be more supportive of, if it could work in the United States) without punishing the savings or credit of working Americans.
Politically, it’s a no-brainer. Let the Republicans defend their corporate masters over working Americans in a sinking economy. Let them explain to the American people why a quarter of American males of working age are not only out of work, but out of options. Let them tell the media how corporations deserve a giant bankroll, even if it means the economy is screwed for a generation.
Be bold, Mr President. This is the last, best chance you have to fix the mess you inherited.
— John Thorpe