Where were we? Ah yes, we were going to suspend payroll taxes to provide the stimulus in the correct amount, to the correct people, and with the correct incentives.
We are going to get some stimulus soon, perhaps as soon as Jan 20, 2009. So the question is: what kind of stimulus is going to give us the best bang for the buck and best stimulate the economy? In the next two posts, I will show that the best damn stimulus is for there to be a payroll tax holiday for U.S. taxpayers.
We can agree on a few obvious criteria for the stimulus, I think.
- The stimulus must be big to be effective.
- It must be effective as soon as possible.
But wait, I think there are other criteria too! See more after the fold!
The criteria I am thinking of are a little more subtle, but no less powerful and important than those first two.
So lets review our criteria.
- The stimulus must be big to be effective.
- It must be effective as soon as possible.
- Gives vast majority of U.S. citizens cash money
- Let markets allocate the stimulus
- Restore Animal Spirits
- Promotes investment
- Reduces economic reliance on speculation
I explain each below:
We need to solve a huge problem. Many banks have money to lend, but won't lend it because they are afraid, correctly, that they might not get it back. So we need to recapitalize the entities (yes I mean real, live people) who might not pay them back. Many of the bad bets out there that are really hurting the banks are the result of lower and middle income people not paying their mortgages. Yes, they made a bad decision. Why should I and essentially every other person in the world be punished for about 30M people across the world making a bad decisions? Let's just recapitalize them. In other words, we need to give people money. This is then our next criteria for the stimulus.
- Gives vast majority of U.S. citizens cash money
When used correctly, markets efficiently allocate resources, so we should try to use this tool if we can. Let us use this as a criteria.
- Let markets allocate the stimulus
Next is probably the most subtle criteria, but I think the most powerful. If you've ever heard the phrase "Animal Spirits" in reference to markets, then you might know this, but if not, should know that it doesn't really make sense for people to start new businesses and launch new products and do all the entrepreneurial things that help to make the world way interesting. When you logically look at the numbers(reward), factor in the fact that you cannot know the future(risk), becoming a businessperson doesn't make sense. Usually, people start businesses despite this! But sometimes, everyone gets depressed and starts to horde cash. We are in one of these times. We need to find a way to restore those illogical, but ultimately healthy, Animal Spirits.
- Restore Animal Spirits
But hey, wasn't it overspeculation that got us into this mess in the first place? Yes! Yes! We do not want to our economy to be ruled by the speculative fervor of a casino! It should be based primarily on investment, not speculation! To take care of this, we have two more criteria
- Promotes investment
- Reduces economic reliance on speculation
In my next post, which will be done tomorrow, I am going to show that a payroll tax holiday is the only stimulus that fits all of these criteria today.
See you soon!