What Should the President and His Economic Team do now?
Posted by Michael A. Kamperman on July 10, 2009
In his column in today’s New York Times, Paul Krugman highlights the lack of political will in Washington to step up and do more right now to help the clearly struggling economy. He raises the question “what the president and his economic team should do now?” Professor Krugman wrongly assumes the Federal Reserve is out of bullets. The Federal Reserve still has quantitative easing available as a tool to stimulate the economy. The Fed should get a backbone and begin purchasing trillions of dollars worth of U.S. Treasuries right now. What the president should do is stake his presidency on turning the economy around. Whether President Obama and his advisors realize it or not the die for his presidency is already cast, and as this economy goes so goes his presidency. President Obama is not inheriting the same situation that FDR inherited. For comparison purposes, President Obama assumed the presidency at the end of 1930, not the spring of 1933 like FDR. The world didn’t realize they had entered the great depression at the end of 1930. By 1932, the voters in many countries were ready to throw the bums out and try anything. President Obama will become the next Herbert Hoover if the economy keeps sliding, not the next FDR. Without significant intervention on multiple fronts, including quantitative easing, the debt-induced deflationary depression we have entered will turn in to a new great depression. If President Obama understood that his whole presidency is on the line, then he would toss his cautious and patient approach aside and he would be willing to take risks. What needs to be done to restore the economy starts with throwing out the window conventional wisdom and the post World War II economic playbook.
Professor Krugman wants a larger stimulus package. But temporary measures will not restore the confidence of businesses and consumers to spend money in the face of rising unemployment. What President Obama should propose is permanent stimulus. The U.S. should immediately give all recipients of Social Security a 20% raise. And, the eligibility age for full retirement should be lowered to 60. Additionally, the eligibility age for Medicare should be lowered to 60 as well. Most people cannot afford to retire if they have to pay for the full cost of healthcare. It will cost approximately $120 billion per year to offer all Social Security recipients a 20% raise, and it could be implemented in less than one month. It will cost approximately $180 billion per year to lower the age for full Social Security benefits to 60. The details for the cost estimates can be found in the book How America Can Escape the New Great Depression. Most of the extra $300 billion per year in checks will be spent by our older consumers. Because the Social Security checks are permanent, some recipients will actually go out and commit to a new car loan, or a new mortgage. It will cost the federal government approximately $100 billion per year to lower the eligibility age for Medicare to 60. This will be a form of permanent stimulus to employers who will see the health care costs permanently lowered for their older workers. Lowering overall payroll costs will prevent some layoffs and may he even lead to a few new hires.
The biggest benefit is we will reorder our society. The U.S. will have millions of new relatively healthy retirees who can volunteer for the charity of their choice. And, the retirees will open up jobs for younger workers boosting their confidence. All of a sudden the unemployment rate will go down because people will have left the workforce for the right reasons. Rather than putting more stimulus spending in the hands of Congress to build more bridges to nowhere, let’s put the stimulus money in the hands of the people. The critics will say this creates another unfunded liability between now and 2109. It can be paid for if the Fed will print money and repurchase $10 trillion worth of our outstanding Treasury bonds. Other critics will say printing money will be inflationary. The forces of deflation are very powerful right now. We need the Fed to try and create some inflation. We need for home prices to stop going down and start going up. Zero percent interest rates are not doing it. President Obama, have the audacity to give us hope.
