What started off as a very severe recession now has all the feeling of a very long, zero- to low- growth period of stagnation that could go on for decades. Many young people are not entering the work force, the long-term unemployed run the risk of being out of work so long that they exit the workforce permanently and many people over the age of fifty who are laid off are retiring early rather than finding new jobs. With the baby boom retiring en masse, the country runs the very real risk of settling into a long period of zero to 2% growth. Such anemic growth rates mean that we will never grow out of our debt problems and that our huge trillion dollar plus annual government deficits will continue for a very long time into the future.
Doing nothing is no longer a viable option. We ought to cut government spending, especially in defense and healthcare. But, if we do, and don't do something to address the demand side of the equation, we run the risk of prolonging this period of little real growth as unemployment will spike in the short run.
We need bold action. I don't like the Keynesian idea that says that we have to increase government spending to stimulate the economy. Government stimuli are inefficient and short-lived and do not result in a permanent improvement in growth which is necessary if we are going to be able to pay back the debt taken on to finance the stimulus.
Rather, what if the United States Treasury borrowed $2 trillion dollars in a series of 100 year bond offerings at say 4.5%? Rather than have the government waste the money on unneeded projects or squander it on more bank bailouts, the $2 trillion of proceeds could be distributed to the American people. Every adult over 18-years-old in the U.S. would receive a check in the mail for something like $12,000. Two parent households would receive $24,000. People would make their own decisions as to how to spend the money. Some would pay down debt which is hanging over the economy preventing growth so this would be good. Some would save the money which could finance new business ideas and ventures and thus stimulate growth. And some would just spend it, which in a time like this with little to no consumer demand for companies' products would be a great thing. Such a large increase in consumer spending just might be the jolt the economy needs to jerk itself out of its depression and start moving forward again. The effects of reigniting the productive capacity of the American people and our businesses would, I hope, not just impact one year, but rather extend many years into the future.
I know what you are going to say. Such an undertaking would increase the amount of debt on the country. Not necessarily so. If the country's growth rate just increased .3% more each year as a result of this plan it would end up paying for itself. In other words, it would be free to enact as we would have much greater resources in the future to repay the debt when it comes due in 100 years because of the increasing growth achieved. The economy in the future years would be much larger because of the increase in the growth rate so there would be much greater tax revenues to pay off the deficit, even if we left marginal tax rates unchanged.
As part of the plan, I would also propose enacting a permanent 70% inheritance or estate tax on all estates of more than $1 million. This alone, over fifty years, would be sufficient to pay back our entire government debt outstanding as there are tens of trillions of dollars of wealth held by our more elderly citizens. But, if we did so, and to avoid getting in this mess again, I would also favor passing a constitutional amendment prohibiting the federal government from any borrowing in the future. Government would have to run like a family runs its budget. If they are running out of money, they would have to cut salaries and if that didn't do it they would have to cut back programs and lay people off. No more taxing our grandchildren to pay for our consumption today.
A large estate tax also helps address another equally big problem in our country, the fact that huge inequality has led to large disparities of opportunity amongst our young people. We have become a country of inherited wealth and status, an idea we revolted against 230 years ago. We need to return to being a meritocracy in which skilled, innovative, hard work is rewarded, not just being a rich kid member of the lucky sperm club.
Even more controversial, if you wanted an even bigger jolt to the economy, I would have the Fed print $1 trillion of new currency and distribute an additional $6,000 to every adult. That would bring the total windfall for a two parent household to $36,000. Certainly this would be sufficient to significantly reduce their mortgage balance, fund a down payment on a new house or even buy a new car, all things that will increase demand and get the economy going again.
Given our trillion dollar deficits going forward, we know the Fed is going to be printing money anyway to try to fund a portion of the deficit rather than having to borrow the monies. The only difference in my plan is the proceeds go to the people instead of to failing banks or to fund the government and increase its size. And, while such a one-time printing of money will be inflationary, even some controlled inflation is a good thing in a world where everyone; banks, government, businesses and consumers are drowning in debt. By printing money it allows debtors to repay their loans with slightly less valuable currency thus reducing the real cost of debt on everyone.
The magnitude of the plan makes it seem crazy. But to move a $14 trillion economy takes bold action. $3 trillion is not very large relative to total cumulative US GDP over five years of some $70 trillion. I find the plan attractive because it is fair. Everyone is treated equally, even future generations as we create the growth and tax revenues needed to get rid of the huge government debt our young people will have to face up to in the future. The money doesn't just go to bankers, or to the wealthy like a tax cut does, or to people who are underwater on their mortgages; it goes to everyone, and we leave it up the people to decide what they do with it.
Alternatives like cutting taxes on the rich in hopes they create jobs or increasing wasteful government spending to act as a stimulus make no sense and will be completely ineffective. Doing nothing means decades of little to no growth. Here is a bold plan that Keynesians and deficit hawks can both embrace as it stimulates demand and growth and reduces deficits in the short run and eliminates government debt in the long run.
John R. Talbott, previously a Goldman Sachs investment banker back when that was an honorable profession, is a best selling author and economic consultant to families whose books predicted the housing crash and the economic crisis. You can read more about his books, the accuracy of his predictions and sign up for his financial consulting services at www.stopthelying.com