More than twenty months after the financial and economic crisis erupted in August 2007, the U.S. economy continues to slip deeper into financial instability while simultaneously descending into a recession of epic dimensions and the worst by far since 1945.
As Barack Obama assumed the Presidency in January 2009, the financial crisis took yet another turn for the worse, requiring hundreds of billions more to further prop up banking giants like Citigroup and Bank of America, in the process diverting much needed funds for an economic stimulus required for economic recovery. Meanwhile, the fight intensified over what would happen to the remaining $350 billion in TARP funds—with banking interests, their lobbyists, the Federal Reserve, and even some interests within the Obama administration, advocating spending the remaining $350 billion on the banks, while more progressive elements in Congress, the AFL-CIO, and most community organizations demanded more government spending to create jobs and to stop housing foreclosures.
As 2009 unfolds, the risks and consequences could not be more grave. Since the current ‘epic’ recession began in November-December 2007, more than six million additional jobs have been lost—when the numbers of unemployed are accurately calculated to account for the five million jobs converted from full time to part time work and the million plus more ‘discouraged’ workers are added to the ‘official’ jobless estimates. Having started the recession in late 2007 with 7.1 million unemployed, more than 13.5 million are now effectively out of work. Given that virtually all economic indicators point to a continuing and even accelerating decline of the economy, it is not unreasonable to assume that another 5-7 million in 2009 may find themselves newly unemployed. That’s a likely potential jobless total of 20 million by the end of this year!
As millions have been thrown out of work in just the last three months, the incoming Obama administration raised its estimate of the amount of fiscal stimulus—government spending and tax cuts—needed to halt the accelerating economic downturn. First it was $175 billion, then $500 billion, then $775 billion and $825 billion. Then Republicans and conservatives demanded yet more tax cuts for business and the wealthy. And bankers demanded additional bailouts of even more than the remaining $350 billion left in TARP, despite having received from the US Treasury and the Federal Reserve more than $3 trillion in government funds since the crisis began.
In the week following Obama’s inauguration, outlines of his proposed program for the economy began to take initial shape. By mid-February it will be further clear what Congress will do with the proposals, adding, deleting and changing provisions. However, as of the last week of January it is becoming abundantly clear that the Obama-Congressional provisions will almost certainly prove ‘too little too late’.
Obama’s Economic Stimulus Program—An Early Review
The Obama initial economic recovery program proposes to create 3-4 million jobs by spending $550 billion, guaranteeing that at least 75% of the $550 billion (i.e. 366 billion) will be spent during the next eighteen months. In addition to the spending, Obama’s plan calls for enacting tax cuts of an additional $275 billion over 10 years. The total package thus comes to $825 billion, stretched out over 1.5 to 10 years.
But 3 million jobs (i.e. 75% of 4 million) created over the next 18 months barely makes up for the 3 million jobs lost since Obama was elected (November 2008-February 2009). And that still does not count the additional 3 million that lost jobs from December 2007 to October 2008, or the millions more that are anticipated to lose jobs from March 2009 through June 2010. In other words, Obama’s plan doesn’t even set out to reduce unemployment to even the 7.1 million level that existed when the current recession began. It only proposes to reduce the 13 million more unemployed by only 3 million!
A simply calculation shows, moreover, that the $550 billion for 3 million jobs breaks down to a cost of more than $183,000 per job created! Way too generous a margin for businesses that will like pay only one third that at best for each worker hired. That high cost per job created is due to the Obama program’s focus on spending on projects that take too much time to create jobs, on high cost infrastructure jobs, or on spending that simply does not focus on job creation at all.
The program’s $275 billion in tax cuts—mostly targeting business interests in various ways and distributed over ten years—will produce even fewer jobs. In the initial stage of a deep business cycle downturn, such as is the case at present, business tax cuts have virtually no effect on job creation or business investment. Businesses hoard the savings, use it to pay down debt, buyback stock, issue dividends, or divert the tax cut to other non-stimulus uses. Tax cuts are more effective in early stages of economic recovery, not in the early phases of decline. Even direct consumer tax cuts are largely dissipated by households, most of whom will choose to save the tax cut, retire household debt, or otherwise not commit the cuts to spending.
Not only is the magnitude of the Obama program insufficient, not only is too large a portion of the program wasted on tax cuts, but even the composition of the spending proposals are not structured either to retain or create jobs. And jobs creation-retention are now the key to recovery—along with measures that will stop the on-going collapse of housing prices that are in turn serving to continually undermine bank balance sheets, that keep roiling the financial crisis, and produce the general credit contraction that has in turn led to the collapse of consumption, business investment, and today’s mass layoffs.
So long as a half to a million new jobless are thrown onto the unemployment rolls monthly, and so long as millions more are thrown out of their homes as a result of foreclosures, the current economic crisis will continue to worsen, in terms of both its financial and non-financial dimensions.
An effective economic recovery and stimulus program must be one that addresses these two preceding primary tasks: jobs creation-retention and housing market stabilization.
A focus on retention of jobs is just as important as creation of jobs. Thus, a more balanced job creation program is necessary. One that addresses not only infrastructure projects, but other sectors of the economy in which jobs may be created more rapidly at lower cost per job, where job growth has been previously strong, and where imminent job cuts might be most easily prevented and retained.
Consumption is the big engine of the economy. It is now sputtering badly due to job losses and anticipated job losses, from the lack of inadequate income growth for tens of millions of middle and working class Americans for the last several decades, from the collapse of 401k plans, pensions, and household net worth, from the abrupt shut off of consumer credit, and from the collapse of the residential housing market itself. A program for housing sector recovery must therefore be viewed as necessary not just to staunch the excess housing supply entering the market, which in turn is causing housing prices to collapse and bank write downs to continue, but a housing recovery program must also be viewed as a consumption stimulus program.
With these key provisos in mind—and in contrast to the Obama economic recovery program—the following alternative economic recovery plan is suggested:
Recovery Requires A $2 Trillion Stimulus
The recovery proposals that follow require a minimum of $1.050 trillion to fund a comprehensive jobs retention and creation program that will create and retain a minimum of 13 million jobs—i.e. the amount that is needed at minimum just to check and contain the economic collapse. The housing program proposals that follow call for an additional $950 billion in spending, necessary to stop the collapse of housing asset prices and to provide a major consumption boost to the economy without reducing taxes and exacerbating budget deficits that will already exceed $1.5 trillion in 2009. The third section includes proposals to finance the $2 trillion program. The fourth section of the program addresses several long term income restoration elements associated with pensions, health care, and education that are necessary to sustain long term consumption demand, ensuring the recovery does not falter once again after two years.
PART I: Housing Market Stabilization & Consumption Restoration
Today’s housing asset price collapse is driven by rising housing supply, the largest cause of which has been rising foreclosures and defaults in the initial phase, but now increasingly determined as well by growing trends in negative equity and unemployment. One in ten homeowners are in foreclosure, delinquent or in default. Housing supply has consistently risen faster than banks have been willing to stimulate housing demand despite the $3 trillion Treasury-Fed liquidity program. Bankers and lenders have been on a veritable ‘strike’ in terms of lending.
An estimated 5-7 million foreclosures will occur over this cycle. Housing prices have fallen approximately 25%. The housing market is nowhere near bottom, and prices most likely will continue to fall by at least another 20% in 2009.
Treasury-Fed programs have not addressed this root cause of supply driven housing price collapse, now spreading from subprime to near prime to prime mortgages, to credit and equity lines, as well now to commercial property loans. Treasury-Fed programs have instead focused on the symptom of the crisis—i.e. deteriorating bank balance sheets driven by the housing asset (and other asset) price collapse. Treating the symptom has not resolved the fundamental problem.
The following measures are thus designed to directly address the core problem of excess housing supply and consequent housing price collapse. The measures bypass the banks and lenders now effectively ‘on strike’, refusing all but token efforts at stimulating loan demand. The measures target reducing housing supply coming onto the market, not stimulating housing demand. The problem of collapsing housing asset prices is too central, too critical, and too important to recovery to leave to the whim of bankers and lenders more concerned with hoarding cash and loaning only at excessive rates.
1st Measure: Reset Mortgage Rates for All Loans Originated 2002-2007.
All forms of loan financing for the residential mortgage market (30 year fixed, conventional, jumbo, equity lines, ARMS, etc.) should be reset to the Federal Funds Rate plus 1% to cover administrative costs. If banks can obtain loans from the Federal Reserve at 1% or less, as is the case today, then consumer-homeowners should be allowed to borrow directly from the government at similar rates.
All loans issued between 2002-07 are included in this provision, not just those facing foreclosure or default. The reason for the comprehensive reset is that the provision is designed to serve not only to rescue homeowners facing foreclosure, and thus stem the rising housing supply (and falling price) problem, but to serve as a consumption-stimulus measure in general.
The alternative to stimulating consumption demand in this manner is to introduce new consumption tax cuts. The latter are less desirable and effective than mortgage rate resets for the following reasons: First, tax cuts have a lower ‘multiplier’ effect and thus less total economic stimulus. Second, most tax cuts have a lag time that the economy at the moment cannot afford. Third, tax cuts will exacerbate the 2009-10 budget deficits already projected to exceed $1 trillion, which will potentially discourage other private investment. Finally, consumption tax cuts will also politically require corresponding business tax cuts, that will have little if any economic stimulus effect, will have even longer lags, and will unnecessarily raise the deficits even further.
Resetting for all loans issued between 2002-07, not just those in default or foreclosure, will further improve the likelihood of wider political support for legislative passage.
The resets should also apply to small business commercial property mortgages, where small business is defined as less than 50 employees and less than $1 million in annual net income.
2nd Measure: Reset Principle Loan Balances for All Loans Originated 2002 -07
Principle balances for all loans originated 2002-07 should similarly be reset according to the following formula: The rolling average for the property’s market assessment for the six years prior to date of origination between 2002-07. For example: a property sold in 2006, reflecting the inflated housing prices of 200 3-06, would be reduced to the average price for the property from 2000-2005. The artificially inflated prices of 2003-07 were not the fault of the homeowner but banking-lending practices and speculation by participants in the CDO-securitization markets.
The rationale for principles resets is the same as for interest rate resets above: i.e. to reduce the flow of supply of housing onto the market driving housing price decline but, equally importantly, to serve as a general stimulus to consumption demand. Like interest rate resets, resetting mortgage principal will serve to stimulate consumption demand with higher multiplier effects while avoiding a negative impact on the already heavily stressed budget deficits anticipated in 2009-10.
3rd Measure: Create Federal Homeowner-Business Loan Corporation (HSBLC) to Provide Direct Lending to the Homeowner-Small Business Property Markets
The Federal Reserve’s current strategy of committing funds to the mortgage market through lenders, to provide incentives for them to lower interest rates is not sufficient to revitalize the residential mortgage markets and prevent continued housing deflation. Nor is a focus on buying assets through Fannie Mae/Freddie Mac for a mere 20% of the market. The Fed’s focus on getting foreclosed homes resold to new buyers will not sufficiently stimulate housing demand to offset continued excess housing supply via foreclosures, defaults, and ‘walkaways’. In short, the Fed actions will do little to prevent continued housing price deflation which is at the core of the housing crisis, as well as a good part of the general banking system insolvency.
A new federal housing agency, a ‘Home Owners-Small Business Loan Corp.’, or HSBLC, must be created to provide direct lending to homeowners and small businesses. This is not a ‘Reconstruction Trust Corp’ recommendation to merely buy up mortgage assets, which cannot succeed so long as housing deflation momentum continues. The proposal for a HSBLC is more similar, but extends more aggressively, a ‘Home Owners Loan Corporation’ concept that was introduced during the 1930s.The initial task of the HSBLC would be to purchase existing mortgages in foreclosure, resetting rates and principal according to the aforementioned formulas. Thereafter, it would extend mortgage financing to all potential home financing, subject to the annual income limits set forth below.
To control initial costs, eligibility cutoffs for loan principle and mortgage rate resets might initially apply only to homeowners with annual incomes of $150,000 or less. That would cover the approximately 80% of taxpaying households and the vast majority of homeowners facing foreclosure. More wealthy homeowners could continue to access private mortgage markets. So too might homeowners whose lenders agree to voluntarily comply with the HSBLC interest and principal resets, thus providing positive externalities to the program.
Financing for the takeovers would be made available by the immediate transfer of all the remaining $350 billion allocated for the TARP program, which was originally designed to buy up mortgage loans. Another $600 billion recently announced by the Federal Reserve for the mortgage market would also be transferred to the HSBLC. The HSBLC would function as a combined depression era HOLC (Home Owners Loan Corp) and the RFC (Reconstruction Finance Corp) of that period, in one unified organization. It would extend, however, beyond residential mortgages to small business property mortgages, defined as companies with fewer than 50 employees and an annual net income limit.
The above initial $950 billion funding levels would enable the HSBLC to buy up all the subprime mortgages issued between 2002-07. Subprimes account for approximately 30% of the $4 trillion in mortgages issued over the period, or about $1.2 trillion. A $300 billion initial outlay would leave $650 billion for the remaining loans issued during the period.
Pre-existing mortgage investors with loans taken over by the HSBLC would be paid off through the above funding, at an initial rate of .25 on the dollar, and a second .25 over a 15 year period from cash flow generated by homeowner mortgage payments to the HSBLC. Additional revenue for the HSBLC’s staged expansion would be generated by packaging bonds and reselling to foreign and domestic investors as a special form of new US Treasury debt.
4th Measure: One Year Moratorium on All Foreclosures and Default Proceedings
A one year moratorium would be necessary to freeze immediately hundreds of thousands, and perhaps millions, of foreclosures and offset negative housing supply trends. It would provide a period of necessary transition, during which resets would take effect and the HSBLC was organized and began operations.
5th Measure: Optional Homeowners 40-Year Fixed Loan Extension
All homeowners with mortgages originating before 2002 or after 2007 would be eligible to optionally participate in a monthly mortgage payment reduction by means of extending their mortgages to 40 year terms. All mortgage lenders and their servicing agents by law would be required to reset their mortgages, at no cost to the borrower, to the new 40 year term should the homeowner so request.
Once HSBLC funding levels grow to sufficient levels, these homeowners would be allowed to refinance their mortgages with the HSBLC as well. Appropriate compensation to lenders would be determined by the HSBLC at the later date.
6th Measure: 15% Homeowners Investment Tax Credit
As yet another consumption generating feature of Part I, homeowners in the above group in Measure 5 would be eligible for a 15% homeowners investment tax credit, itemized on annual tax returns. The credit would cover items and categories such as home repair, upgrades and expansion, and major maintenance and improvements. Also included would be purchases of major home consumer durables, such as solar conversion, AC systems, and major home appliances like refrigerators, ovens, washer-dryers, etc. The purpose of the provision is to allow homeowners not participating in consumption aiding direct resets, to participate in alternative consumption opportunities.
7th Measure: Restoration of ‘Regulation Q’
While not a direct homeowner item, an equally important provision generating consumption demand is the restoration of ‘Regulation Q’. Previously a provision, but repealed in the 1970s, Regulation Q in effect established maximum ceilings above which banks and other credit card lenders could not charge monthly interest. This new regulation would be indexed to the annual core inflation rate in the U.S. economy.
PART II: $1 Trillion Jobs Creation and Retention Program
The composition of employment generation in any jobs program should be thoroughly and carefully thought out. The quickest way to retain and grow jobs is within existing industries and businesses, not primarily by creating new industries from scratch. The other quick path to jobs is direct hiring by government. A third fast path is promoting hiring in those industries having shown in the past high job growth rates, or potential for high job growth, such as health care and education. A job creation-retention program should also target jobs in the $50-$60K annual range on average, with workers receiving a pay level of $40K and benefits load of $10K and employers a margin or profit per worker no larger than $10k. Proof of job retention or creation should be required in turn for all government spending on jobs. With these caveats in mind, the following job creation and retention program is proposed:
8th Measure: $300 billion for infrastructure jobs
$200 billion in the first fiscal year and $50 billion in each of the following years. Projects with long R&D and capital intensive should be initially avoided. Labor intensive projects must be funded first. A limit of no more than $50,000 per job created-retained should be paid by the program.
9th Measure: $100 billion for further stimulating growth sector jobs
This measure targets industries like healthcare and related services with past rapid job growth, to ensure continued and induce further expansion of employment. There is no quicker and easier way to grow jobs than to focus on sectors where job growth is already robust. On the other hand, this measure might also include the construction of public hospital and clinics that have been dismantled over the past three decades. It could further include the construction of new doctor-nursing government training hospitals, to increase the supply of physicians and provide an economical medical services source for the low paid and uninsured. This was once done for agriculture and mining colleges in the 19th and early 20th century. It could just as well be done for healthcare and other essential services industries in the 21st.
10th Measure: $100 billion for manufacturing industry job retention and creation.
This should take the form of direct government subsidies, not investment tax credits and the like for which no proof of job creation has been required, or claims that are made by employers for job creation offshore. If necessary, the federal government should consider direct purchase and stockpiling of select manufactured goods—such as processed foods—for distribution to the unemployed, school programs, children of low wage workers, and as foreign aid in kind.
11th Measure: $300 billion Government Sector Job Creation-Retention
Spending by State and Local governments in 2009 is expected to drop by $100 billion, with mass layoffs yet to come in this sector. Job retention benefits are thus potentially great, and job creation and hiring can be undertaken relatively quickly, absorbing many of the unemployed relatively easily. The projected funding of $200 billion to States and Local Governments—to offset the $100 billion decline in spending and provide an additional net $100 billion—would include provisions requiring verifiable direct job retention or job creation. A third $100 billion in job program funding would apply to school districts to reduce class sizes and hire new teachers in core areas of science, math, English; to provide additional employment for special instruction for disadvantaged; and restore projected cuts in state and local pension funds. Fund disbursements should occur only once proof of hires are made or proof of layoffs averted. Part of the $200 billion for state and local government might be earmarked to revitalize the municipal bond market, providing bond measures in question were job creating in character.
12th Measure: $125 billion for bailout and consolidation of the Auto Industry
This proposal provides in the first year $50 billion, minus the initial $14 billion provided in the interim bailout of December 2008 to GM-Chrysler. To receive any funding the following preconditions must be met by the auto companies: First, a moratorium on all foreign plant investment and expansion projects. Second, strict compliance with more stringent new vehicle mileage requirements. Third, SEC access to all company offshore accounts and records. Fourth, community and union membership on company boards and local union participation on investment committees at all local plant sites.
In the second year another $50 billion is made available for the purposes of industry consolidation involving all three US auto companies, major parts suppliers, and major credit subsidiaries, GMAC and Ford Credit. The second $50 billion is targeted for purchase of a 50.1% majority share of the consolidated company’s preferred stock by the US government.
An additional $25 billion dedicated to funding ‘employee assistance’ for autoworkers displaced by merger and consolidation. This fund would create an auto industry domestic version of the ‘Trade Assistance Act’, and would be patterned after similar programs in Germany that provide workers 80% of income for two years until employed in equivalent paying work elsewhere, followed by a two year retraining of workers at similar pay if not re-employed within the initial two year period.
13th Measure: $125 billion for Emergency Unemployment Insurance and Special Domestic Assistance Retraining.
Current Congressional Budget Office estimates are for expending $79 billion in unemployment benefits in 2009, compared to $43 billion in 2008, for a $36 billion increase. That increase is predicated, however, on the assumption of a 9.2% official unemployment rate. At minimum, the official rate for 2009 will be 10.5%. That means a further projected need for another $20 billion. Given the massive increase of more than 3 million part time workers, mostly converted from full time, in 2008 and the expectation many of these will soon be laid off in 2009, it is imperative that unemployment benefits be extended to these part time status workers and their families as well. That will require another $26 billion unemployment benefits over the next two years. That brings the total unemployment insurance benefit costs to approximately $125 billion ($43 billion 2008 levels plus an additional $82 billion).
PART III: Financing the $1 Trillion Jobs Program
While Part I is financed by the transfer of $350 billion from TARP and reassignment of $600 billion from the Federal Reserve, new funding is necessary to finance the $1 trillion associated with measures six through ten above. Deficit spending via borrowing by the US government is a treacherous path, given the massive deficits left by the Bush administration and the additional trillions added to the deficits as a consequence of the bailouts of the banks and other financial institutions to date. A massive jobs creation-retention program of at least $1 trillion is necessary, but the deficit impacts must be avoided if possible. The following set of measures are proposed to fund the $1 trillion without impact on consumption or on deficits:
14th Measure: Retroactive Windfall Taxes: Oil-Energy Industry Windfall Profits, Executive Compensation, and Corporate Foreign Retained Earnings Taxes
Oil and energy companies have earned the highest profits for four years running in the history of corporate enterprise. As near monopolies they have manipulated price levels by creating artificial shortages to reap what economists call ‘rents’, or excess profits
unjustified by normal market conditions. The new financing should reach back and retroactively, for three years, capture the reasonable taxes the oil-energy companies should have paid. Thus a retroactive windfall profits tax should be levied on this sector and these companies.
Similarly, the excess compensation accrued to themselves by senior management teams in the Fortune 5000 companies should be taxed retroactively for the last three years, 2005-2007. The excess over the long term average for executive pay should be taxed as windfall compensation.
Thirdly, US multinational companies through various accounting schemes have succeeded in the past seven years in diverting hundreds of billions of dollars in earnings in the US to offshore subsidiaries and have refused to repatriate those earnings to pay corporate income tax rates. A major concession was introduced in the 2004 tax act that lowered their rates from 35% to 5.25% if they repatriated those earnings, estimated at more than $700 billion by Morgan Stanley at that time. The act required spending of the tax savings on job creation; instead most used the savings to buy back stock and make acquisitions. These companies should now be required to pay proper taxation for the past seven years’ diversion of earnings to offshore operations. Should they refuse to comply, their imported products to the US should be tariffed at the 50% rate until compliance.
15th Measure: Capital Incomes Tax Rate Rollbacks:
Rolling back capital incomes taxation to 1981, not to 1993, is necessary to raise sufficient funds to confront the current economic crisis no matter what the specific form fiscal spending might take in 2009 and beyond. Capital gains, dividends, interest and rent income taxation, and inheritance taxes have been the central causative factor in the radical shifting of the top 1% taxpaying households’ share of total national income since Reagan.
There are approximately 114 million taxpaying households in the U.S., and the wealthiest 1%, or 1.1 million, have increased their share of IRS reported income from 8% in 1978 to more than 20% today. This more than 20% share is approximately equivalent to that which existed for the wealthiest 1% in 1928. The severe shift and maldistribution in income in the U.S. since Reagan is heavily responsible for the runaway speculative investment contributing to the current financial crisis, as well as to the collapse of consumer spending so abruptly and deeply in recent months. No long term recovery is therefore possible without a basic re-restructuring of the tax system in the U.S., starting with capital incomes taxation.
16th Measure: Repatriation of $2 Trillion from Offshore Tax Havens:
The foregoing massive income shift in the U.S. has directly resulted in the diversion of trillions of dollars by wealthy investors and corporations to the 27 offshore tax havens, mostly island nations, which the IRS refers to as ‘special jurisdictions’. Conservative bank (Morgan Stanley) estimates in 2005 were the total holdings in offshore shelters had risen from $250 billion in the mid-1980s to $6 trillion by 2005. At least 40% of this total represents US investors and corporations. Recently the German government has moved on its wealthy investors diverting income to avoid taxation to the small nation of Lichtenstein. The US government must do the same.
Repatriation of only half, $2 trillion, and redeposit of those funds in US based banks would provide more than needed to restore liquidity to the US banking system, instead of attempting to do so at the US taxpayer expense as is presently the case. Noncompliance by US investor-corporations should be penalized at 10%. Severe pressure should also be applied to foreign (27 island nation) Treasury Departments to effect compliance and cooperation. If Germany can do it so can the U.S.
17th Measure: 6.25% FICA Tax on all Unearned Incomes above $332,000: A FICA tax at half the total rate paid presently by working families earning up to $102,000 should be imposed on the wealthiest 1% households (with $332,000 threshold earnings) on all forms of reported income by those households.
PART IV: Providing a Long Term Consumption Stimulus: National 401K Pool, De-Privatization of Student Loan Market, and 80% Coverage Single Payer Health Care
The key to recovery is to stabilize consumption demand, which is now in freefall due to massive job loss, cutback in hours worked, spreading wage and benefits reduction actions by business, collapsing 401k plan values, equity investment decline, multiple negative ‘wealth effects’, and general economic uncertainty. Tax cuts for business will have little effect in an environment of cash hoarding and low expected rates of return on investment.
Even consumption tax cuts promise little long term stimulus when personal debt levels have risen and consumers have shifted to saving from consumption.
The preceding $2 trillion program of jobs and housing proposals is designed to turn the system around short term, over the next two years. However, a more fundamental longer term problem exists in the U.S. economy. That problem is the depressing of consumption demand by the vast majority of the population, as a consequence of policies since the 1980s that have shifted relative income from the bottom 80% to the wealthiest households and corporations.
Consequently, new longer term, structural reforms must occur to sustain consumption demand in the US economy. Failing this, even the $2 trillion injection of spending will eventually dissipate over the longer term. Three specific proposals are designed to re-redistribute income, reversing the negative trends of the past three decades, and set the US economy on a longer term growth path. These measures all involve restoring disposable income to families in the bottom 80% income distribution by means of fundamental health care spending reform, by the creation of a national 401k pool financed by matching contributions from a 2% business to business value added tax, and by de-privatizing the student loan market.
18th Measure: Establish a National 401K Pool: The U.S. retirement system has been crumbling since the 1980s. Since the 1980s more than 100,000 defined benefit pensions have been dismantled and the remainder are under severe attack since the passage of the 2006 pension act.
The 401k approach to providing retirement income has proved to be a disaster. The average income balance in a typical 401k plans today is barely $18,000. For the tens of millions who had their defined plans displaced with 401ks, it is a crisis of immense dimensions, in particular for the 77 million baby boomers about the retire starting in two years. The repeated collapse of equity markets in the past decade has further shown that employer-provided 401ks is a failed model for providing retirement benefits. In the past year alone, the value of employer-provided 401k pensions has fallen by more than $1 trillion.
The US government should therefore ‘nationalize’ the employer-provided and managed 401k plan system. A single national 401k pool should be created. This pool would function separate and apart from the ‘pay as you go’ Social Security System. Kept legally separate, the national 401k pool would thus provide a supplemental retirement system to the Social Security System.
The pool would work as follows: each participant in the pool would be able to make individual deposits to the pool and withdraw limited amounts from it annually, just as under present employer-managed 401ks. Each account within the pool would be 100% portable and immediately vested. Voluntary deposits by individuals into the pool in their own name would be matched by equivalent government contributions. Government matching contributions to the pool would be funded by means of the introduction of a 2% national value added tax on the sale of intermediate goods (i.e. a business to business sales tax) that all businesses with annual sales revenues of more than $1 million would be required to make. Government investing of the pooled funds would be restricted to public ownership-public works projects, or government loans to publicly beneficial joint government-business projects such as alternative energy, green technology, and the like. Individuals would thus be able to invest in the growth and public welfare of the nation via deposits into the pool, even identifying projects of their choice.
Returns on the public investments in the pool would result in the growth of individual accounts, above and in addition to, individual and government matching contributions funded by the 2% business-to-business value added tax. Thus the individual’s share of the pool could grow from three sources: personal contribution, government matching contribution, and returns on public investment projects by the government. Government
provided insurance would guarantee no loss to the individual’s account from public investment. Individual’s accounts would not fall to less than the value of their combined initial deposits plus matching government contributions funded by the 2% tax, and could grow significantly more depending on public investment returns.
The Social Security pay as you go system would continue as an entirely separate system. Without having to make matching contributions to 401ks any longer, employers currently with defined benefit plans would be required to fully fund such plans if under-funded, as is currently the case for thousands of defined benefit pensions.
In addition, to ensure the proper funding of Social Security going forward as well, the projected Social Security Trust Fund surplus of $1.1 trillion from 2008 to 2017 should remain within the Trust Fund and not diverted to the general U.S. budget, as have surpluses of more than $2 trillion since 1987. Congressional resolutions to open the social security trust ‘lock box’ annually and transfer surpluses to the general US budget should be considered a felony.
19th Measure: De-Privatize the Student Loan Market. Originally operated as a grant system, then government loans system, as the student loan market grew it was increasingly privatized. The result was various forms of profit taking that came to dominate this market, which should be run as a public good and non-profit. Student loan lenders make money three ways: from charging market rates, from getting additional subsidies from the government, and by repacking and reselling student loans as collateralized debt obligations, or CDOs. The latter is largely responsible for the collapse of the current student loan market. The student loan market should therefore be returned to its original objectives of providing cost-only government financing to students.
20th Measure: Single Payer Universal Health Plan. The U.S. pays the highest rates of health care spending in the world for one of the lowest returns in health care quality and coverage. The U.S. current $2.3 trillion national tab for health care—double that of other single payer national programs—includes $1.1 trillion in payments to non-health services providers such as health insurance companies and other ‘middle men’ in the system. As a firsts step toward a truly Universal Single Payer system, a Single Payer system initially for the 91 million households earning less than $160,000 per year should be introduced. Households earning above $160,000 (top 20% incomes) would be exempt, but could participate for a fee. In subsequent phases, employer plans would be absorbed into the program, and the income bar would be raised by stages, eventually converting the program to a Universal system.