Economics and Government

It seems as though everyone has an idea on how we can save the economy these days...from multi-billion dollar private company bailouts to additional economic stimulus packages directed toward the American consumer – so I decided that I should put some of the knowledge I have gained in my public sector econ class and come up with a plan of my own. I am certain that the proposed stimulus package in the form of wealth transfer payments is not the most efficient means of stimulating our economy – hiring additional IRS agents to determine which individuals will receive a check is extremely expensive and the cost for postage alone to mail out 50 million checks would be $21 million. Certainly, there must be a more effective and efficient way.

The latest figures being thrown around by Congress for the economic stimulus package are somewhere in the $300 to $600 billion range. To help put this in perspective, you need to realize that $600 billion is more than the federal government spent in social security payments to retirees and the disabled in the 2006 tax year. I believe the most efficient and expeditious method would be to temporarily cut Social Security taxes from 12.4% to 6.2%. This would provide approximately $400 billion in stimulus to American workers and businesses over the next tax year. Of course, the US government would have to borrow additional money to make up for the uncollected revenue, but they are planning on borrowing that money anyway for their multi-billion dollar stimulus plan, and this method is much cheaper – there is no need to hire additional IRS agents to sift through 140 million tax returns or buy $42 million in postage stamps. The tax cut also could be effective immediately, instead of 6 to 9 months from now when the stimulus checks would finally be mailed out.

Not only would this plan be much more efficient, but the effects would be felt immediately as employers would see savings of 3.1% in their payroll costs and employees would immediately see a 3.1% raise. For each American worker earning $45,000 a year, the employer would see a decrease in their portion of the payroll tax by $1,395. That means for a small business that employs 50 workers at an average wage of $45,000, they would have an additional $69,750 in profit for the year. The business could use these additional profits to: A) hire more workers B) lower the price of their product to capture a larger share of the market C) keep the extra revenue and invest in capital to grow their business or D) take the additional revenue as personal income and spend it in our rapidly shrinking economy…buying new automobiles, laptop computers or video games. Unemployment levels have been rising rapidly lately, so this form of economic stimulus would have the greatest impact on unemployment numbers, as employers would immediately have more cash to spend to hire additional workers.

An average American worker earning $45,000 a year would have $1,395 more in their pocket at the end of the year, which means they could stash some of it away in a savings account or CD – this would give the banks the liquidity they need in order to start lending again. Hard working Americans would also invest greater amounts into the stock market as bargain shoppers seek to take advantage of stocks that are currently priced almost 45% below their previous values, and consumers would once again head to Circuit City and Best Buy to spend their new found wealth. The positive effects of this stimulus would also be felt over a longer period of time, as workers receive the extra cash each pay period rather than in the form of a one-time refund check.