Our nation is trapped on an economic treadmill. It is moving, but going nowhere.
The money printing by the Fed under its quantitative easing policies (QE1 and QE2) ignited the stock market, but created no significant bump in the economy.
The stimulus money that was spent at the end of Bush II, and the first two years of Obama, was aimed at supposedly “shovel-ready” infrastructure projects with the idea that the money would “trickle down” to the man-on-the-street who would spend it.
Well, something happened on the way to the mall, because it didn’t make it.
Many journalists, politicians, and academicians are blaming the poor economy on businesses for not hiring people. That is an unfair indictment, and usually comes from someone who has never run a company.
Now, the Obama administration is proposing to offer tax incentives to businesses that hire unemployed workers. The proponents of these solutions are looking through the wrong end of the telescope.
Absent an increase in demand, no sane business person is going to hire people just to stand around or build inventory, regardless of tax incentives. Demand comes first. So, how does the country create demand?
Consumer spending makes up approximately 70 percent of our total gross domestic product (GDP), which represents the total goods and services produced in the United States. The relevant problem needing a solution is: “How can we get money directly and expediently into the hands of consumers so that we can buy things that create demand, increase employment, and thus spend ourselves out of the recession?”
The quickest way would be to temporarily suspend employee payroll tax deductions. By that I mean the current 4.2 percent Social Security and 1.45 percent Medicare deduction. (Employers would continue to contribute 7.65 percent.)
This would be the equivalent of giving every wage earner a 5.65 percent after-tax pay raise. At an average wage of $52,500 per year, it would amount to $2,966 per year in additional spending money ($57 per week).
The total civilian employed workforce in 2010 was 139.3 million. At a macro-economic level, adding $2,966 in discretionary income for the entire workforce would generate an increase in aggregate demand in excess of $400 billion the first year.
The payroll tax affects the low and middle classes to a greater extent than the wealthy for whom much of their income is not subject to payroll taxes.
Because of sheer numbers, a tax cut aimed at poorer people would have a bigger impact on national spending than one for the more affluent, since poorer folk tend to spend a higher share of their income, while the wealthy save more.
In 2010 the GDP was $58.1 trillion. So, the average output per worker was $417,100 ($58.1 trillion divided by 139.3 million workers).
Sincere economists disagree about the existence and amount of a multiplier effect on aggregate demand created by injecting spending money into the economy. Even if the multiplier is only 1, a one-year suspension of the payroll tax deduction will allow an additional $413 billion ($2,966 per year times 139.3 million workers) to circulate through the economy, creating consumer demand, and prompting additional hiring of up to one million wage earners in order to produce those additional goods and services.
An obvious criticism of a payroll tax suspension is its negative effect on the already burgeoning federal deficit. This decrease in tax revenue the first year would be partially offset by the increase in consumer spending, and a surging economy with concomitant income, sales and excise taxes.
In subsequent years, add back the payroll tax deduction in 1 percentage point increments.
Make no mistake; this is not a cure-all proposal. But it will serve to “jump-start” the economy, and, when combined with judicious spending cuts and the elimination of onerous regulations, can move the country toward recovery.
We need an effective short-term stimulus to get people back to work. When the economy is sound, many options become available with which to repair our fiscal problems.
J.D. Holmes
Fayetteville, Ga.
[J.D. Holmes is a Certified Turnaround Professional (CTP) living in Fayetteville, Ga. An entrepreneurial businessman, he has founded four companies, managed four more, and consulted with over 100 distressed businesses.]
