Sunday, January 25, 2009

Saving the Economy

Two administrations and I think we still missed it on saving the economy. While everyone is focused on doling out billions, even a trillion or more to banks, financial institutions, car companies and any other organizations that are big, boisterous and failing, I think we are handing checks to the wrong sort of people.

To illustrate my point, think about what makes our economy run. The numbers vary by pundit, but something like 80 percent of new jobs are created by small businesses, well over half of all Americans are employed by small companies and 70 percent of our economy is consumer driven.

As human beings, we tend to be in a rush to put a bandage where we see bleeding without looking at what caused the bleeding in the first place or what consequences could occur from our treatments. We focus on the symptoms and try to stop them. If credit has dried up and credit is necessary for the economy to move, we throw billions of band-aids at those institutions that supply credit. If people stop buying cars, we throw billions more band-aids so that car companies can do … well whatever it is they plan to do to get people to buy cars again. What are the Big 3 auto makers doing with all that money, anyway?

President Obama is proposing a trillion dollars be spent on rescuing the economy and former-President Bush got Congress to appropriate 700 billion dollars to do the same thing. So that’s $1.7 trillion worth of band-aids being thrown in all kinds of different directions from infrastructure to big businesses to schools to green energy companies.

Sounds interesting, except that very little of that money is going to any of the large job creating and spending sectors of our economy – small businesses and individuals.

So here is what I think should have happened:

$700 billion from the Bush administration’s plan should have been made available to small businesses across the country in the form of low and no interest loans and in some cases outright grants. The portion served up as low and no interest loans would have ensured that a big part of that stimulus package got paid back to the Treasury instead of ending up as nothing more than give-aways to banks. The part that would have been available as grants could have been used for companies planning to embark on green energy businesses, school repairs and infrastructure repairs, thereby placing a high emphasis on the new direction we want to take the country.

A caveat to obtaining the funding would have been that new jobs had to be created or layoffs avoided. Instead of money given away to financial firms that have yet to thaw a frozen credit system and instead spent the billions they were given on buying up weaker banks (a la Bank of America’s purchase of Merrill Lynch), or simply hoarding the money for future use of what we are not certain, the money would have immediately hit the economy, spent to drive GDP and to create jobs. Instead of waiting to see whether banks would ever loan again, we would be seeing unemployment dropping and goods and services being purchased.

$1 trillion proposed by the Obama administration should be placed where it would do the most good to drive an economy that is 70 percent consumer driven – with the consumers themselves.

Consider if you will that $1 trillion and around 300 million Americans amounts to about $3,300 per citizen. Imagine handing a tax-free check to each American in the amount of $3,300. A family of four would get $13,200. A family of ten, $33,000. Tax free.

More progressive businesses have learned to give employees the resources they need to get their jobs done, then stay out of their way while they do it. This is the same train of thought. Now, will all 300 million Americans do the right thing with all that cash? Certainly not. But neither are all of the banks and car companies that were trusted with huge checks.

A few people, no doubt, would save some of their new found cash. Some would catch up bills and others would make purchases for themselves and their families. Probably buy a few things they really do not need but always wanted. And a lot of people would go out and just blow the whole wad.

But think what that means. Savers and bill payers are placing money back into the financial sector. Banks, lenders and credit card companies get a cash infusion. If only ten percent of the money goes into savings or paying off credit card bills, $100 billion reaches financial institutions almost as soon as the ink dries on those printed checks.

Whether to buy a few necessities, pick up some items that were once out of reach or simply blow the whole three grand, that’s instant money spent in the economy on goods and services. Companies sell, consumers buy, profits go up.

The study of economics teaches that consumers “vote” with their dollars by purchasing from organizations they favor and avoiding ones they do not. Purchases, then, are the most democratic way to honor trusted companies and let the poorer ones die off.

If we are going to spend this volume of tax payer dollars anyway, should we not spend it where we get the biggest bang? And, at the same time, have an opportunity to recover some of that money and place it back into the U.S. Treasury as loan payments are made by small businesses?

And, here’s another plus: state and local governments stand to benefit as well. The $3,300 checks would have to be given out free from state and federal income taxes. But sales taxes will be collected when purchases are made. If we assume the average state sales tax is five percent, just to make my math easier, and we assume that 90 percent of the $1 trillion stimulus money described here would be spent rather than saved, that’s $45 billion into state coffers in the form of sales tax revenues. Close to a billion dollars average per state.

We are living in economic times that are unprecedented since the Great Depression. It is time to think outside the box of band-aids and inject capital deeper into the economy than where we first see symptoms. To heal the problem, we need to do something bold and dramatic. Something that has never been tried before.