$300 billion tax cut? We must be insane

I’m thrilled Barrack Obama will be our president. He is the first person I’ve voted for who won, and I’ve been voting for 16 years. I read one of his books, The Audacity of Hope, and he had me hooked. Nevertheless, when he says a $300 billion tax cut was always part of his plan, “the centerpiece” of his campaign, I find that to be disingenuous.

His plan, as I understood it, was to keep tax cuts revenue neutral by lowering taxes on “95% of working families” while raising taxes on people earning more than $250,000 per year. Unfortunately, instead of revenue neutral, the proposed plan will cost $300 billion—and Republicans love it.

Nobody should love this plan. Although President-elect Obama promised relief for middle- and low-income families, now that our economy has tanked, we must examine any proposal under one light: How can we best use our money, funds we’re going to borrow, to yield the best possible return for the most number of citizens in our country—especially poor and middle-income families. Under that light, this tax cut proposal is coyote ugly.

Any economist, other than those few discredited, supply-side, trickle-down hypothesizers, knows that tax cuts are among the least effective methods of providing stimulus. Lower taxes can provide a quick boost, but benefits are limited by the psychological mood of consumers.

Right now, the mood in America is justifiably lousy. Most Americans save almost no money. Our national savings rate has declined steadily since a peak in 1975. Back then, we saved 14% of our disposable income. Now we’re saving 1%. (1) The savings rate dropped dramatically during the Clinton years, seemed to have bottomed at 2% for the first 5 years of Bush’s presidency, then dropped even further during the past 3 years.

We seem to have stopped worrying about saving for the future. Most Americans believed they were saving much more than they truly were. Since 1991, average homeowners received an annual boost in wealth equal to a whopping 120% of the their investment in their home! Here’s how I arrived at that: Take a 6% per year increase in the home value, now multiply by 20 because most homeowners have been investing only one-twentieth of the purchase price of the home.

In other words, say I put $10,000 down to buy a $200,000 home. Then the home’s value increases by 6% next year. That’s $12,000, which works out to 120% of my original investment of $10,000. We experienced that kind of growth in personal wealth from 1991 through 2005. So most of us spent our paychecks as if consumerism was going out of style. Well, it is.

Conspicuous consumers are dead. They have no retirement savings. They don’t trust Social Security to be solvent by the time they retire. And the $100,000 equity they thought they had in their houses? Gone, and not coming back any time soon. A new wave of foreclosures is due to overwhelm the real estate market from middle 2009 through the end of 2010.

So Mr. Obama, I have bad news: If the government lets me keep $1,000 more of my income this year, I’m not spending it. I’m saving it. And that will not stimulate our economy. I have more news: Families earning $250,000 this year? They aren’t changing their consumer habits one bit. They aren’t depriving themselves of anything they want to buy, and they won’t change their habits when they get a tax cut. Giving them tax relief won’t stimulate the economy either.

To provide true relief from our economic woes, we need to re-establish the market for houses. For details on a modest proposal to rescue home prices, see my blog entry from December 30, 2008.

To stimulate the economy now, the government must invent jobs, but they have to be meaningful jobs, not make-work nonsense. We need to repair roads, bridges and schools. We desperately need a new electricity grid, one that uses superconductivity to eliminate power loss over great distances. We need nuclear power plants, wind, solar and geothermal energy generation. We can put millions of people to work building the infrastructure necessary to replace a carbon economy with a clean future.

By the way, improving these technologies will eventually take power, figuratively and literally, away from Russia, Venezuela, Saudi Arabia, Iraq and Iran. Personally, I think that would be good for everyone on Earth.

Copyright by Todd Lederman, 2009

1. U.S. Department of Commerce: Bureau of Economic Analysis. (2008). Retrieved 1/8/08 from: http://www.bea.gov/national/nipaweb/Nipa-Frb.asp