Real Stimulus: Money In People's Hands

July 02, 2009|By John D. Hartigan

Lately we've been hearing a lot of cheerful talk about "green shoots" of economic recovery, but out in the real world unemployment keeps on rising. Lack of business is forcing companies to slash their payrolls, and even before all the downsizing expected at Chrysler and General Motors, the number of active U.S. job-seekers who can't find any work has just topped 14.5 million. That's the worst labor market collapse in 26 years, and it can't be allowed to continue. It's time for the government to launch an all-out effort to bolster consumer purchasing power so private-sector employers can generate the sales revenue they need to save existing jobs and create new ones (about $50,000 per year per employee).

The simplest and most equitable model for this effort would be the 2008 stimulus program that granted taxpayers refunds averaging $950 per family. Though limited to a single three-month period, distribution of those rebates worked like a charm. They were sent out in May, June and July; the families receiving them went shopping, and second-quarter spending on food, clothing and other nondurable goods increased by 3.9 percent. Unfortunately, the rebates weren't continued, and consumer nondurable purchases plummeted 15.2 percent over the next three quarters.

To get things moving in the right direction again, the government needs to pick up where it left off and start sending out a new round of tax refund checks every few months until family spending rises enough to make it profitable for companies to stop laying people off and start hiring them back. However, it might be hard to sell this idea to President Barack Obama because he's persuaded himself that it's more important for the government to provide financial aid to banks than to consumers.

Defending that policy at Georgetown University in April, he rejected the view that "government money would be better spent going directly to families and businesses instead of banks" and insisted that subsidizing banks does more good than subsidizing consumers because each dollar the government supplies to a bank "can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth."

But that's not what's been happening. Despite massive infusions of government funds into banks and other financial institutions, there hasn't been any significant increase in their lending, let alone an increase equal to eight or 10 times the size of the infusions. On the contrary, a June 5 Federal Reserve report indicates that, for many months now, total credit extended to consumers has actually been declining rather than expanding.

Granted, the government's interventions have kept a few major banks and credit insurers from failing, but that hasn't helped anyone except the stakeholders who would have suffered heavy losses if those institutions were shut down and liquidated. For example, the main beneficiaries of the Treasury Department's $45 billion rescue of Citigroup were the Citigroup creditors who would have ended up with far less than the $500 billion owed them if Citigroup had been forced into bankruptcy. Similarly, the big winners in the Federal Reserve's $173 billion bailout of AIG were the financial institutions that took advantage of the Fed's generosity to cash in their holdings of shaky AIG credit default swaps for a cool $50 billion.

It's too late to undo these ill-advised handouts now, but it's not too late to ensure better use of tax dollars in the future. Since the "multiplier" theory isn't working, the government should scrap its bank subsidy programs and use part of the $1 trillion or more this would save to give taxpayers quarterly rebates averaging the same $950 per family they received last year. Those rebates should begin immediately and continue for at least four quarters. This would cost the government about $400 billion (roughly a third of its individual income tax revenue over those four quarters), but it would be well worth it. Even if only half the money flowed from consumers' pockets into employers' payrolls, it would still be enough to put 4 million people back to work.

With a 12-month payoff like that, there's no better investment the government could make.

John D. Hartigan, a Chevy Chase resident, is a former vice president and general counsel of Salomon Inc. and a past member of the Public Policy Committee of the New York State Conference of Catholic Bishops. His e-mail is hartlex@comcast.net.

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