Tuesday, August 14, 2012
The nerve of me. I’m nobody, and yet here I am telling you that monetary and fiscal policies, the traditional versions of them, don’t work. I might as well be telling you that prayer may make you feel like you’re doing something, but it doesn’t really accomplish anything, that any sense that it does is just wishful thinking and, in any case, impossible to prove. It is, of course, a flawed analogy, used only to make a point. The difference is that prayer is a matter of belief, while the efficacy of monetary and fiscal policy is science, social science, but science nonetheless. We don’t want elected officials who believe in the power of government. We want a President and legislators who understand the science of using government resources for the common good.
It’s only human nature that none of us, least of all our politicians in The White House and Congress, wants to admit that we’re powerless and inept, that even if our recovery programs are having a material beneficial effect, there’s no way to tell. The economy is too large, too complex, our programs too “gross” in their impact, for us to know exactly what happens as a result of our policy initiatives. The only thing we know for sure, in past few years, is that we’re not happy with the results.
What I’ve done, in Part 1 of this series, is list seven principles with respect to which effective recovery programs should be devised. In one way or another, and for whatever reasons, disrespect for one or more of these principles is why traditional government programs to encourage recovery haven’t had the impact we were hoping they would.
The one major exception is unemployment compensation because it goes directly to the point of maintaining consumer demand.
Trashing something is easy. Putting myself out there by recommending alternative programs, two of them to be precise? That’s harder, but also the least I can do. It’s how I earn the right to be critical. Here goes, starting with a comment about Mitt Romney.
Mitt Romney, for whom I will be voting in November, has outlined a five point plan to encourage economic recovery. Very briefly, he intends to:
1. Develop our energy resources with the goal of making us energy (oil) independent by the end of his second term.
2. Raise the quality of training and education to improve the productivity of the American workforce.
3. Stop cheating by our international trading partners and open new foreign markets for American business.
4. Cut the deficit on the way to a balanced budget.
5. Improve the climate for small business operations and development.
These are all admirable objectives, the prospect of which may have an immediate beneficial impact on business and consumer expectations. But they take time to accomplish, years that will go by before their impact on employment is fully realized. This series, by comparison has been all about government programs that have an immediate effect on consumer spending and on rates of un- and under-employment.
Targeted Consumer Incentives
Targeting is the real trick to an effective stimulus package. Here are three examples to explain what I’m talking about, one related to personal income, a second related to local markets, geographically defined, and a third related to markets for products and services.
1. Personal income and the propensity to consume.
Let’s start by comparing the impact of a tax reduction on two people, high income Bob, and low income Joe. Bob is successful and needs less for himself and his family than Joe, his struggling counterpart, who hasn’t been able to afford to buy everything, not even all the basic items his family needs. Joe’s “propensity to consume” is relatively high, maybe even 100%. Bob can afford to save money and/or pay down his credit card debt. Joe, on the other hand, spends every extra dollar he gets, as soon as he gets it.
Which consumer is more likely to spend, rather than save, the tax savings he enjoys? Even though Bob’s tax savings may involve considerably more dollars? The answer is Joe. You want your government policy to generate more demand? Give the money to Joe.
In a larger sense, suppose you have $100 billion to spend. Instead of blowing the $100 billion by spreading it all over America’s middle class, every dollar of it should be given to the lowest end of the economy, however politically tempting, because doing so will assure that 100% of it gets spent, gets injected into the economy immediately. No paying down debt. No savings. Nothing but consumption. Nothing but the consumer demand that depletes existing inventory and eventually drives businesses to order and make more.
The point is, what we need to do is target financial support to those families with the highest propensities to consume. How? By sending them checks or, even better, coupons – “What?!” (I heard that.) – that can be used to buy specific products and services, the sales of which are most likely to create employment through direct and secondary, so called “multiplier effects” resulting from those purchases.
“Coupons? What’s a coupon and what is it doing in my program?” Well, a coupon, for the purposes of these notes, is an instrument of economic policy, a voucher that makes it possible for the government to target the application and timing of funds it wants to inject into the economy for the purpose of stimulating employment. It is a “Targeted Consumer Incentive.” And no, its initials don’t spell any clever acronym.
A coupon is an emergency tool, for use in difficult economic circumstances like we’re experiencing now. You are, after all, tampering, hopefully in a constructive way, with the working of micro-market mechanisms that, for the time being, are not functioning well or rapidly enough to effect a timely recovery. The use of computer technology and the Internet allow these coupons to be both highly focused with respect to what they will buy, and to enable program adjustments as circumstances change. We can, in other words, track the use of these coupons – something we can’t do for conventional fiscal policies – to determine their effectiveness and make necessary adjustments on the fly, even to coupons we’ve already issued.
Giving people coupons, instead of cash, effectively prohibits the use of stimulus funds to retire debt and for savings. Every program dollar we give the consumer is spent. Put another way, the relationship between stimulus spending by the government and resultant increases in consumer demand is one-to-one. And coupon expiration dates force their expenditure to occur within a relatively brief period.
“Is he kidding?” No, I’m not.
To make you feel better, think of these Targeted Consumer Incentives as smarter, super-sophisticated, infinitely more capable cousins of the concept we used to call “Food Stamps” – a high tech tool for focusing stimulus dollars precisely where and when they will be most effectively. Coupons would typically cover a wide range of products and services, the scope of the coupon varying from time to time as publicized by the government on-line. And notice how these Targeted Consumer Incentives, as compared to the President’s stimulus programs, engage the public in the recovery process while giving investors and company executives the specific information they need to anticipate reductions in inventory and the need to expand output – and employment.
2. Local markets, geographically defined.
This time, instead of two people, Bob and Joe, consider two cities, similar in size, with established, reasonably diverse economies. One city’s economy is doing fine. The other’s is not. The question is, do you implement a fiscal policy that is available to residents of both cities more or less equally? No. You invest in the city where the dollars you have to spend will have the greatest immediate impact, and then let the secondary, multiplier effects of that local recovery spread elsewhere into the region and our greater economy.
What we need to do is target financial support geographically, to families in carefully selected communities. How? Through the use of smart, Targeted Consumer Incentive coupons encoded with parameters that determine precisely where stimulus dollars can be spent.
Mind you, it’s not necessarily the most needy communities that you want to select. It’s those communities where increases in consumer demand are likely to generate the most employment. Cash, instead of coupons, works here only to the extent that people buy locally. Unfortunately, particularly when you consider on-line sales, cash doesn’t afford us the level of precision impact that properly programmed coupons will enable us to achieve.
3. Markets for products and services.
By now, you’re beginning to catch on. In this example, we’re going to compare two industries, technology manufacturing that’s doing well, versus, let’s say, household appliance manufacturing that I’ll assume is struggling. Both industries are everywhere, with factories and distribution facilities here and there all over the country.
Once again, you have only $100 billion to spend. Just throwing that stimulus money out into the economy, without any special incentives attached to it to encourage the recovery of ailing domestic appliance manufacturing, is wasteful. Absent proper focusing, the effect of stimulus spending is diluted by the greater economy, rather than being laser-focused on a specific industry where the impact is likely to be the greatest. Get the point? Needless to say, the danger here is that, in our effort to encourage hiring, to fix a serious, current problem, we’re saving an industry, propping up companies that unmitigated market forces would have let die, or that we’re postponing the evolution of their next generations of products or services. Make no mistake about it. To put people back to work, we’re tampering with the economy in ways that may not be best for longer-term growth and economic development, so we’ve got to be very careful – “Thoughtful” is a better word. – with respect to precisely where we direct these targeted incentives.
Most importantly, remember that these are Targeted Consumer Incentives. Keep reminding yourself that ours is a demand driven economy, by which I mean consumer demand. I am by no means recommending that we give any incentives to businesses. Only consumers, the human kind.
By the way, just handing the $100 billion to specific companies – auto manufacturers and financial services firms, for example, President Obama-style – is even worse because it attempts to do for the economy what the economy does better for itself. Direct corporate support may save some jobs, but not in a good way, and it certainly doesn’t generate any more jobs by leveraging powerful, naturally occurring market mechanisms.
How do we target our consumer incentives for the consumption of specific industry products and/or services? Via appropriately programmed coupons that limit personal consumption to specific industry products.
Needless to say, this targeted stimulus spending we’re talking about is not for lazy government. Subject to careful study of consumer spending and markets, you want to focus every dollar you have to spend, injecting it into the economy where its impact, through both direct and multiplier effects, will be the most impressive and immediate. With great finesse, you need to leverage your program dollars to assure they generate the maximum possible employment, with the minimum potential for adverse side effects. “Finesse,” unfortunately, is not what Washington, not Congress or the Administration, does well. It’s a shortcoming we need to resolve by replacing our incumbents, not just with new faces, but with a new, more thoughtful, less purely political generation of elected officials. …Putting a seasoned, successful, professional manager in The White House wouldn’t hurt either.
New Job Interview and Relocation Assistance
Okay. At the beginning of this fifth and last – “Thank goodness!” (Really? Could you at least wait to comment until I’m finished?) – installment, I promised to make two recommendations. Targeted Consumer Incentives was the first. The second is about hooking up qualified un- and under-employed people with available jobs, wherever one or the other might be located. It’s a less powerful program than TCI, but very, very helpful to accelerating the pace of recovery.
You’ve probably read and watched stories on the television about there being unfilled positions, shortages of qualified employees in some communities while qualified people remain unable to find jobs elsewhere in the country. This problem is one aspect of the structural nature of the current downturn that I’ve talked about.
People tend to stay put, in the community where they feel comfortable. Unfortunately, there are times, even in the best of economies, when workers and whole families need to pick up and move to where the jobs are. The government needs to encourage and support this process.
Even with extended unemployment benefits and Targeted Consumer Incentives to maintain and stimulate levels of consumer demand, economic recovery may be slow, way too slow in the face of plant closures or other major adverse local economic events. To help increase the pace of recovery, government funds should be used to accomplish two things:
1. Help the unemployed find jobs in other markets. This is pretty much something people can do for themselves already, although there’s room for improvements that make standardized jobs data more accessible and facilitate communication with prospective employers across the country.
2. More importantly, our government needs to assist the unemployed applicant by subsidizing the costs of traveling to interviews and the costs of relocation once employment is confirmed. We need to make it easier and more affordable for the unemployed in one part of the country to fill open positions in other parts of the country for which there are not qualified candidates in those local markets.
I recommend that the government partner with firms like Google to use their facilities for data management and video conferencing to help accomplish the application-end of this jobs program, rather than attempting to implement the technology internally, inside the government.
3. It may also be necessary to work with prospective employers to make sure they’re willing to hire generally qualified individuals who may need training, and to cover the costs of that training, whether on-the-job or obtained outside the new employer’s operations. My point is that some employers will be hiring people ahead of them being fully prepared for their new jobs. That happens all the time, but, in this case, the extent of required training may exceed what employers are willing to tolerate in the ordinary course of business. Fine. Government needs to help by underwriting the training period while the prospective employer holds the job. As a significant by-product of this program, people looking for jobs are able to prepare for specific positions they have already obtained, rather than “on spec,” gambling that they are doing the right thing, only to be disappointed later when jobs they hoped they could find turned out not to be as plentiful as they had anticipated.
Because this second of the two programs is related to structural economic issues that are going to be around indefinitely, Congress needs to understand that the need for this program will be ongoing, well after the current recession has subsided.
Whew! Five, relatively long installments. Thanks for reading all this. I don’t know about you, but I’m wiped. Hopefully, candidates will find an idea, here and there, that’s helpful as they refine their issue statements and contemplate new legislation that could help put millions of un- and under-employed Americans back to work. At the very least, I like to think I’ve encouraged candidates and voters to think more carefully about the definition of economic recovery programs.
The entire series:
Part 1: The Magnificent Seven
Part 2: The Impotence of Monetary Policy
Part 3: Why don’t President Obama’s fiscal policies work?
Part 4: What’s wrong with tax-related fiscal policies?
Part 5: What can we do to encourage a recovery?