THE BLOG
10/06/2010 08:57 am ET Updated May 25, 2011

A Simple Fix

The worldwide economy is in a mess, everyone is suffering, and no one knows what to do. The economic machine was more or less working fine when all of a sudden, something happened and metaphors began swirling overhead like a gathering of vultures -- it went off the rails, it melted down, it froze, it crashed, it stalled, a freefall...

Something happened alright, something very simple, yet no one can find a simple solution. Part of the problem is that no one seems to agree on the cause. Political partisans trot out the usual tired arguments; Wall Street greed, CEO's are paid too much, the war, job exportation, taxes...

But it's none of the above.

Nor was it subprime loans, or people losing those homes, or the failure of the paper that secured those loans. And it wasn't the banks going bad either. None of that caused the recession.

So what did cause it? Well, all the above is bad news and bad news spooks people. When people get spooked, the stock market sinks. And when the stock market drops? People get spooked even more and then...they stop buying stuff. And that is what caused the recession. People stopped buying shoes, cars, homes, motorcycles, plasma TVs, cell phones, books, watches, air conditioners, snowmobiles, lamps, car stereos, curtains, jacuzzis -- all manners of stuff -- and they stop going to restaurants, spas, hair parlors, etc. Which in turns causes stores to order fewer shoes, watches, restaurants lay off waiters, servers and cooks, etc. And it ripples up through the economy -- manufacturers see orders decline, and they lay off people. When consumers slow their buying, it what is referred to as lowered "consumer confidence".

Ask anyone who actually runs a business what the problem is; no customers. The fix? Simple. Customers.

Both political parties have their solutions, but neither solution will deliver customers. The ideas are pretty much dumb and dumber. Let's start with the Democrats.

Their solution is The Stimulus Package. The idea, using more metaphors, is to "prime the pump" or "kick start the economy". So we build roads, bridges and schools and this will "infuse cash into the economy". This would be a great idea if the economy went south because of fallen bridges, washed-out roads and bad schools. But that's not what happened.

What did happen is a failure of consumer confidence which means that when people get spooked, they stop buying.

Despite the fact that we have around 90% employment, the problem is that those gainfully-employed workers are not spending. How do we get them spending?

The Stimulus Plan won't do it. And Return of the Stimulus Plan won't do it either. Why would it? Lowered consumer confidence is an issue of behavior. The construction workers getting money via The Stimulus Plan are going to be just as spooked as everyone else - which means they won't spend money. Doubling down on the stimulus could also backfire - when the results don't pan out, consumer confidence could ebb ever more.

And what about the Republican's solution? Gee whiz, can you guess? If a meteor were heading towards the Earth, Republicans would jump up and shout "Quick! Cut business taxes!"

They insist cutting business taxes would create jobs. Which makes no sense. The goal of business is to make profit, not to employ people. Ergo, in times of boom or bust, a business employs as few people as possible because it strengthens the bottom line. Are we to assume a business would use money from a tax cut just to hire someone for the hell of it? No. You employ more workers only if it makes you more money. And if makes you more money by employing more workers, you'd do it anyway. Tax cut or no tax cut. After all, the cost of labor is deductible.

What about a payroll tax cut? Even if you put more money in the pockets of working men and women - how do you know they'll actually spend it? They're not spending now because, again, this is an issue of behavior.

The solution? Simple. Get people spending. Unfortunately getting them to spend is not simple because people won't spend until they start feeling confident, and they won't feel confident until they start spending.

People will eventually get recession/depression fatigue, stop denying their pre-recession splurges and slowly start buying stuff. But when? Could be months.  Could be years.

But if we don't want to wait, here's a pro-active solution to uh...well...jump start the process.

Let's put a name on it; Consumer Direct Stimulus.

There's a number of ways to do it, but the most workable would be a government-issue credit card with a hundred bucks in the account, an expiration date. Give it a validation period of say, one week.

Use it or lose it.

Here's what would happen -- it would immediately feed money into the economy exactly where it is needed -- the marketplace. And instead of the government making choices where it will be spend, the appropriate agent will make those choices -- the appropriate agent AKA the consumer, taxpayers, citizens. After all, it was their choices that created this incredibly complex fabric of an economic system, and will be their choices that will fix it. (As an economist once said "millions of people making millions of decisions".)

Politically? Could be pretty exciting to voters to hear a political party running on a recession-fix platform that says let the taxpayers spend their own money. Funny, isn't it? A political party whose special interest group is the American public!

So what would happen? How would it unfold? Stores and service providers would see an immediate sales bump. The news media would be forced to report retail spending is up. And how does the stock market react to a retail uptick? It rises. The media will be forced report that too. Unemployment will halt that week because of the increase in retail sale. The media will also have to report that.

And that's only one week.

The following week consumers/the people/citizens will see another c-note with a one week validation period in their accounts.

And they'll spend it. As the retail uptick continues, stores will reorder with an increase. And wholesale orders will see a bump. And the media will have little choice but to report that too. The stock market will again rise. And if orders are up, then manufacturers will have to add on workers. If restaurants see more customers, they'll employ more waiters and cooks. If retailers have more customers, they'll hire more clerks and more people in the warehouse.

In a month job employment will rise, and when that happens fear will morph into relief. Another month of uptick, and jobs will begin to return to both the manufacturing sector as well as the retail front. Business will have to hire people to keep up with demand. We'll have turned the corner.

And that's after one month. Maybe two...

As the economy gains strengths, continue the plan, but dial it back $5 a week from $100, to $95, then $90, and so forth. Maybe keep it going at $10 bucks.

Oh, some might say that all that money rushing into the marketplace at the same time could bump up inflation, but since the balance and the validation period could be changed in seconds with a few computer keystrokes, the rate of spending stimulus money directly in the marketplace could be controlled. Inflation won't be an issue.

Jobs are created by free markets competing for consumer dollars. Full employment and a booming economy can return -- it just needs to be brought back up to speed in the only way it can -- through consumer spending.