Note: I posted this first on The Bill Sebastian Forum in response to an op-ed piece Bill aired on his radio show. I have his permission to publish his pieces in the forum.
(Excerpted from one of Bill's op-ed pieces about the stimulus package which aired on Thursday, Feb. 5, 2009 on The Bill Sebastian Show on WHBY Radio)
(c) 2009 Bill Sebastian, Woodward Communications
On the face of it, this sounds like a great idea. I think the general concept of giving the money directly to the consumer to spend rather than directly to business is a better idea. The specifics of this proposal would save or stimulate selected industries by giving the American consumer a tax credit for purchasing products made by that industry. The plan would probably work to one degree or another, because you give the American consumer incentive to spend, and to spend on selected products, thus saving the selected industries and stimulating the American economy at the same time.
I'm sorry Bill, but I have to disagree with this plan, even though I said it would work, because there's a better way. First allow me to outline some reasons why it's not a good idea:
1) When the government funnels money, either directly to business or indirectly through another channel - military spending, infrastructure spending, health programs, whatever - the deluge of government funds seriously distorts ordinary economic function wherever that money goes. You've seen it already in the financial institutions that should have been allowed to fail but were propped up with a huge influx of both direct government funds and with government guarantees for their obligations. So we save these financial industry dinosaurs for now, only for what purpose? To make all that money evaporate and then fail with even more dire consequences? Any time normal fiscal decision making is influenced by government money the normal decision-making process gets distorted and thrown out of whack. Throwing one sector out of whack causes distortions and problems in every other sector. Witness the distortions in the home mortgage industries which impacted the Wall Street banks, which impacted the securities markets, which impacted people's retirement accounts, which impacted their discretionary spending.....it goes on and on. Funneling the money directly through the taxpayer doesn't make any difference. It still distorts ordinary fiscal and economic decision-making. Targeting certain industries or sectors will just cause those sectors to become money-pits of malinvestment, managed and operated for the goal of competing for and getting those government dollars, not for the goal of providing the consumer with a product the consumer wants and for a price the consumer is willing to pay. It is just not good economics, Bill. It's not a good idea. It has never turned out well and it never will. Money always influences the way things work, and the more money, the more influence, and if you use gasoline instead of lighter fluid, your grill will blow up, and you and well as your steak will get charred.
2) If you ARE going to funnel money to American consumers anyway, doing it through the mechanism of tax credits is a poor choice. The biggest reason why is the time lag. This economy needs help now, not in April of 2010 or later. And most taxpayers don't understand tax credits anyway. This is money they don't see now, and money not seen now will not get spent now. Furthermore, people who generally only file 1040-EZ returns won't get this benefit, unless some new tax form and new tax regulations make it possible for people with simple tax returns. And then of course, you get the IRS heavily involved and they'll think of some way to make it more difficult or to screw it up. And then how about the people who don't make enough to file, or -gasp!!- make their incomes through the cash economy? No, a tax credit is not a good way to get American consumers to spend.
3) Which industries do we want to save? Frankly, how many industries are there left that produce goods that Americans want to buy? The economic benefit may not be what proponents of these plans envision simply because there won't be enough American products made by American industries that will have enough of an impact on the economy even if all Americans go out to buy those goods. Oh, and speaking of that, up comes the next objection:
4) Encouraging consumers to buy specific products will drive up the price of those products. Simple supply and demand. Not much more I can say here; it's self-evident.
OK, I agree the economy needs stimulus. Serious stimulus, and seriously soon. But this plan isn't the way to do it. I give your co-worker co-talk-show-host Robbie Johnson credit for fleshing this one out: I don't remember the exact details of his proposal, but the general principle remains in mind: a national credit card. Or may you could call it a national gift card. This national credit card would have the following features:
1) a die-by date. Use the money on the card by this date or the card expires.
2) a spend-only provision. The money on the card can be used only for buying non-essential products and services. It's no good for food and rent. It can't be put in savings. It can't be used to pay the electric bill. It should, however, be available to be used toward a down-payment on a house.
Some of the advantages of a national gift card are that it can be implemented fairly swiftly, getting the stimulus out into the economy pronto; it doesn't involve filing a tax return; and the biggest advantage is that the consumer makes the decision about what to spend the money on, not the government. In other words, normal economic forces are in play here -- people making their own decisions about what to spend their money on. The only differences are they have a little more money to spend than they would have had, and the biggie here, Bill: they have to spend it or lose it.
Money funnel, funnel money, funny money. There are better ways. I like the gift card approach.
(Excerpted from one of Bill's op-ed pieces about the stimulus package which aired on Thursday, Feb. 5, 2009 on The Bill Sebastian Show on WHBY Radio)
Quote:
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Originally Posted by Bill Sebastian
It’s good to see that the Senate finally is getting hip to a principle that some of us have been talking about for months now. Instead of handing over blank checks to big firms they are now trying out the principle of funneling that money through us – the American taxpayer – the people who are paying the bills on this whole thing. New provisions for home buyers will give you a ten percent tax credit up to $150,000 worth of house. On new or used homes that are purchased. You will not have to be a first-time home buyer to get that credit. Just a day or two ago the Senate voted to add a similar provision for new car buyers. These people, in Congress, may be a little bit slow, but they’re beginning to see the light. They’re beginning to see that they can serve the American taxpayer while still serving their masters – the big money campaign contributors. Congress has been serving their masters for so long that they had somehow forgotten that they can serve all of us at the same time. But they’re starting to get it now. If you want to funnel money to any specific industry, funnel it through us!! Give us tax credits!! Big tax credits, for buying that industry’s products. Homes, good! Cars, good! We could probably add a couple other products to that list, too. Funnel it through us. We’re paying the bills, after all. Don’t send money straight to business. Don’t give us checks or tax cuts that we might simply latch on to and save. Give us tax credits that direct us where to spend. Because it’s spending that will get this economy moving again, not saving. We’ve got to save more than we used to, but at the moment we’re spending way too little.
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On the face of it, this sounds like a great idea. I think the general concept of giving the money directly to the consumer to spend rather than directly to business is a better idea. The specifics of this proposal would save or stimulate selected industries by giving the American consumer a tax credit for purchasing products made by that industry. The plan would probably work to one degree or another, because you give the American consumer incentive to spend, and to spend on selected products, thus saving the selected industries and stimulating the American economy at the same time.
I'm sorry Bill, but I have to disagree with this plan, even though I said it would work, because there's a better way. First allow me to outline some reasons why it's not a good idea:
1) When the government funnels money, either directly to business or indirectly through another channel - military spending, infrastructure spending, health programs, whatever - the deluge of government funds seriously distorts ordinary economic function wherever that money goes. You've seen it already in the financial institutions that should have been allowed to fail but were propped up with a huge influx of both direct government funds and with government guarantees for their obligations. So we save these financial industry dinosaurs for now, only for what purpose? To make all that money evaporate and then fail with even more dire consequences? Any time normal fiscal decision making is influenced by government money the normal decision-making process gets distorted and thrown out of whack. Throwing one sector out of whack causes distortions and problems in every other sector. Witness the distortions in the home mortgage industries which impacted the Wall Street banks, which impacted the securities markets, which impacted people's retirement accounts, which impacted their discretionary spending.....it goes on and on. Funneling the money directly through the taxpayer doesn't make any difference. It still distorts ordinary fiscal and economic decision-making. Targeting certain industries or sectors will just cause those sectors to become money-pits of malinvestment, managed and operated for the goal of competing for and getting those government dollars, not for the goal of providing the consumer with a product the consumer wants and for a price the consumer is willing to pay. It is just not good economics, Bill. It's not a good idea. It has never turned out well and it never will. Money always influences the way things work, and the more money, the more influence, and if you use gasoline instead of lighter fluid, your grill will blow up, and you and well as your steak will get charred.
2) If you ARE going to funnel money to American consumers anyway, doing it through the mechanism of tax credits is a poor choice. The biggest reason why is the time lag. This economy needs help now, not in April of 2010 or later. And most taxpayers don't understand tax credits anyway. This is money they don't see now, and money not seen now will not get spent now. Furthermore, people who generally only file 1040-EZ returns won't get this benefit, unless some new tax form and new tax regulations make it possible for people with simple tax returns. And then of course, you get the IRS heavily involved and they'll think of some way to make it more difficult or to screw it up. And then how about the people who don't make enough to file, or -gasp!!- make their incomes through the cash economy? No, a tax credit is not a good way to get American consumers to spend.
3) Which industries do we want to save? Frankly, how many industries are there left that produce goods that Americans want to buy? The economic benefit may not be what proponents of these plans envision simply because there won't be enough American products made by American industries that will have enough of an impact on the economy even if all Americans go out to buy those goods. Oh, and speaking of that, up comes the next objection:
4) Encouraging consumers to buy specific products will drive up the price of those products. Simple supply and demand. Not much more I can say here; it's self-evident.
OK, I agree the economy needs stimulus. Serious stimulus, and seriously soon. But this plan isn't the way to do it. I give your co-worker co-talk-show-host Robbie Johnson credit for fleshing this one out: I don't remember the exact details of his proposal, but the general principle remains in mind: a national credit card. Or may you could call it a national gift card. This national credit card would have the following features:
1) a die-by date. Use the money on the card by this date or the card expires.
2) a spend-only provision. The money on the card can be used only for buying non-essential products and services. It's no good for food and rent. It can't be put in savings. It can't be used to pay the electric bill. It should, however, be available to be used toward a down-payment on a house.
Some of the advantages of a national gift card are that it can be implemented fairly swiftly, getting the stimulus out into the economy pronto; it doesn't involve filing a tax return; and the biggest advantage is that the consumer makes the decision about what to spend the money on, not the government. In other words, normal economic forces are in play here -- people making their own decisions about what to spend their money on. The only differences are they have a little more money to spend than they would have had, and the biggie here, Bill: they have to spend it or lose it.
Money funnel, funnel money, funny money. There are better ways. I like the gift card approach.
That wouldn't help anyone.
I don't know how, they've not even been able to stop Food Stamp fraud, and they have cards with PIN numbers.
At least you don't live in CA, Tim, they're handing out IOU's for refunds this year. 
