Roubini Is Right

While I’ve occasionally disagreed with Nouriel Roubini’s prescriptions for our economic woes, I have to say that he’s right, but several years late, in his Washington Post Op-Ed today.

I tried planting this exact idea (except as a full “holiday”) during the summer of 2008, when a stimulus plan was being floated by the Bush Administration.  I even called a couple of reporters and a friend who is a Fellow at the American Enterprise Institute to say they should slip the idea into the mix of things being discussed as we went from bad to worse in the subprime crisis.

At the time, I was looking at the resets in 2/28 ARMs that were causing so much consternation, and noted that a wage-earner making $30K a year would get an immediate benefit of a couple hundred dollars a month, an amount that would move nearly a third of all potential defaults in subprime land into the zone where they could afford their higher monthly payment.

At the time, the “snowball” effect of foreclosures and forced sales had not yet precipitated the nationwide 20% + decline in housing values, an impending problem that would take down Fannie and Freddie if it took hold.

My logic was similar to Roubini’s, with a couple of additional thoughts –

1) That it equally affected employers and employees, and was truly a major cash benefit to the entrepeneurs and small business people who paid self-employment taxes over 15% off the top on their first-dollar earnings.

2) That it offered no benefit to employers who sent jobs offshore.

3) That it didn’t reward the beneficiaries with a lump sum, which has nowhere near the stimulative effect of smaller amounts of money in consumers’ hands every week or month.

4) That it gave the same percentage benefit even to part-time workers, who would surely spend the extra $20 or $30 they might have in their paychecks each week.

5) That it could be implemented almost immediately, since the entire mechanism for payroll deductions would still keep the accounting for individual retirement benefits correctly, even though the net pay would rise.

6) That it was actually tax relief on tax money that had already been paid in, yet borrowed to spend on other projects, so it was eminently fair to look elsewhere to pay back this additional borrowing down the road.

It didn’t happen, and if memory serves, President Bush proposed a $150 billion finger in the housing dike that didn’t do much more than increase corporate profits in businesses that weren’t suffering from the housing bubble problem anyway, and did almost nothing to prevent the rest of the disaster from unfolding.

What might have been is only speculation now, along with the idea I floated in 2007 that the Social Security Trust Fund should stop lending all of its surplus to fund the unfunded deficit (mostly Middle East wars), but should be redirected toward preferred stock investment in Fannie and Freddie.

The way I saw it at the time, there were (justifiable) doubts about the financial soundness of those companies, though it would take a major decline in housing to hit their exposure, which averaged in the 70 LTV neighborhood.

Still, such an investment had the nice characteristic of being long duration, like the Social Security obligations.  In ten or fifteen years, Fannie and Freddie could begin paying down the preferred stock, just when the peak of baby boom collections was straining the system.

If there had been an extra $150 to $200 billion in equity in those companies at the beginning of 2008, it wouldn’t have been such a great CDS bet for the hedgies, who took out a profit of $492 billion in CDS cash settlements the day Fannie Mae (alone) went into receivership.  Instead, that money changed hands, and we got the bailouts.

One point in favor of doing the burden shifting that Roubini suggests is completely valid, in my opinion.  He suggests we “pay for” the payroll tax holiday by letting the top inocme tax rate revert to 40%.  All taxpayers stood behind nearly $14 trillion of private debt at the peak of the crisis through an alphabet soup of Fed programs and the much-hated TARP direct investment. Clearly the top tier earners and investors were the major beneficiaries of this selfless sacrifice by all of us.

Why shouldn’t the taxpayers who have already paid $3+ trillion more in payroll taxes than has been spent on Social Security and Medicare benefits get a break?  Certainly there are plenty of so-called fiscal conservatives who want to pretend that payroll tax money doesn’t exist when they justify their screeching about continuing the artificially low income tax rates of the 2001 and 2003 Tax Acts and simultaneously talk about cutting Social Security benefits.

$700 billion is a lot of dough to make up in our Federal budget so we can make sure the highest earners among us pay 36% instead of 40% as a top rate on their last dollars (not first dollars, like payroll tax) over $250K per annum. If those same upper income folks are still paying Social Security and Medicare like the proles, they’ll even have a nice offset.  If they already figured out how to avoid those taxes with their earnings, then they’ll keep getting that free ride as before.

I agree with Roubini that we should be recycling that $700 billion through businesses enjoying a 7.6% decline in US-based payroll costs, and a concomitant increase in take-home pay that will be more than 10% for most middle class wage earners.  In my much more realistic “percolate up” economic model, I would say that most investors will do just fine as they see a very real and sustainable increase in demand for their products.

I’m just saying, why not?  Trickle down didn’t work too well when the French aristocracy kept it going through the 18th century, and our latest experiment shows it works just about the same way today.

hh

One Response to Roubini Is Right

  1. roger erickson says:

    dozens of bright people have been advocating this for years, even decades; especially Warren Mosler http://www.moslereconomics.com

    nice to see that Roubini has finally read widely enough to plagiarize shamelessly (either that or one of his bimbos whispered it to him)

    he references no history for the arguments, just some of the old arguments themselves

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