The Real Bailout Needed is a Consumer Bailout - Part 2

http://www.opednews.com/articles/The-Real-Bailout-Needed-is-by-Steven-Leser-090104-322.html
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January 4, 2009

By Steven Leser


The excellent responses, even harsh criticism from some to my first article on my proposed Consumer Bailout http://www.opednews.com/articles/The-Real-Bailout-Needed-is-by-Steven-Leser-081227-715.html helped crystallize some of the finer points of the proposal. They also made me surer than ever that the best thing to do to bring about a recovery is to address bailout efforts to the consumer.

To recap briefly before I go on, I wrote:

... the consumer is too deep in debt to be the engine that this country needs to drive the country out of the recession/depression. Second, without intervention, consumer debt will stifle the country's productivity and economic growth for the next 5-10 years. Third, if the consumer is the main force that drives the economy and affects whether the economy grows or contracts (recession), but the consumer cannot power the economy because they are in debt, something has to be done to fix that....

the consumers who agree to be bailed out will pay the government .125% more of their income in taxes each year for three years for every unit of debt that corresponds to one percent of their annual income up to a maximum of 12.5%. One of the more serious components of the current crisis that is just starting to become apparent is the catastrophic budget shortfalls in state and local budgets. Five to fifteen trillion dollars in additional taxable income for businesses all around the country would fix that portion of the crisis immediately as it seems to fix just about every other portion of the crisis. That is what I think is compelling about my bailout proposal. If you make a list of the problems in the economy and analyze the effect of this proposed consumer bailout, it eliminates them one by one from the bottom up...

There is another component to my proposal. The Government will pass legislation limiting the amount of credit that can be granted to consumers by percentage of annual income and type of debt so that the country will not again find itself in a position where a huge percentage of consumers are over leveraged. The government would also make it illegal to charge the kinds of percentage rates on credit cards we have seen in the past. Also, for those opting for the bailout, any negative reports on their credit ratings would be wiped clean.

Let me address some of the more important criticisms of the proposal:


Criticism 1 – This Consumer Bailout is not Affordable

Anytime you are talking about a government program costing in the trillions of dollars it is natural to have questions about how this program would be funded so these questions and criticisms are good and to be expected.

One thing that should be obvious is that those who would opt to have the government pay their debt would pay back on average between 20% and 30% of the money directly to the government in increased taxes over three years. That is part of the design of the bailout proposal.


Second, what happens with the money that is given by the government to consumer's creditors? Those creditors have to pay taxes on it. Whether the creditor is a bank, some other lending agency, Visa, or any other creditor, that business will pay taxes on that income. Let's assume a low average effective business tax rate of 25% to be conservative. Of the money lent to consumers, another 25% will be paid back to the government within one year in the form of taxes paid by creditors. Now we are up to 45%-55% of the total bailout being paid for by those who benefited most by it.


Third, what do the creditors do with the 75% of the money they receive that they do not have to pay in taxes? They invest it, they buy other goods and services, they pay salaries and other operating costs, pay back their own debt obligations, etc. Much of that also results in taxable income by those receiving this money. Let's assume that 2/3rds of that money, or 50% of the original outlay becomes additional taxable income. 25% of that (again, assuming an average effective business tax rate of 25% is 12.5% of the total bailout. Now we are up to 57.5% to 67.5% of the outlay by the federal government paid back to it in taxes. We can go another iteration and say that 50%-12.5% is 37.5% of the original outlay becomes taxable income for entities further down the road. We can say that 25% of that will probably end up being taxable income and results in another 6.25% of the original total outlay being paid back in taxes. Now we are up to 63.75% to 73.75% of the total bailout outlay being repaid.

Finally, what then happens to the economy when consumers are debt free, their former creditors are awash in cash, as a result Visa and the banks and lending industry are no longer in crisis, in fact the opposite? When there is more disposable income all around, more money is invested, lent (properly this time with the additional regulations I specified in place) and spent. We call that an expanding economy. What happens in an expanding economy? Federal income tax receipts grow. Some of that is already accounted for in my above explanations, but some isn't. I don't know if we get back to 100% of the bailout being paid back directly or indirectly, but if we don't, we get close.

Criticism 2 – This Bailout Proposal Penalizes People Who Have Kept Up With Their Bills
Of all the top criticisms, this one was the most difficult for me to understand. People who have kept up with their bills are still hurting in this economy. Their investments have suffered, they are at risk just like anyone else for layoffs, if they are small business owners, they might be getting less business or the people that owe them money may be having difficulty paying their bills. All of those things mean that no matter how thrifty you are, you are probably feeling ill effects from this economy or at the very least; the current crisis makes you more at risk to be hurt.

All of the people would benefit greatly from an economy that gets moving again. Those who do not request a bailout would not be financing those who do. This bailout is self-financing as I illustrated above.

Criticism 3 – This Bailout Encourages Bad Behavior
It definitely would encourage bad behavior if we don't include the additional legislation that I propose that specifies how much credit can be lent to a consumer based on his income. These limits are different depending on the type of debt that would be incurred. I'm guessing that total non-auto and non-mortgage credit would be such that the monthly payments could not exceed around 10% of monthly income of a household and total outstanding non-auto and non-mortgage debt could not exceed 5% of yearly household income. The legislation would also prevent lenders from charging exorbitant interest rates.

Criticism 4 – The New Legislation you propose that would Limit Creditors in How Much they can lend to Consumers is Unworkable
For people who earn almost all of their income from a straight salary, these limits are straightforward. For those whose income is commission based or dividend based or whose income is otherwise variable, or for those who have high net worth, there needs to be another section to the legislation that better deals with their circumstance. My suggestion would be that for people who have a net worth over $250K, they could have consumer debt up to 1/3rd of their net worth.

Those with variable incomes and net worth below $250K should have their debt totals determined by the following

Take the mean and median of their last 48 months worth of income and apply the 10% consumer debt limit to whichever figure is smaller..

Criticism 5 – This Bailout Could Result in Inflationary issues, Perhaps Even Hyperinflation.
Inflation is a concern, but I believe the risks can be managed. The bailout would be financed by issuing more bonds and as I already wrote, would be almost completely paid back either directly or by its effects on the economy. This bailout would not be financed by printing money. The Fed would have to be involved and would probably have to raise interest rates concurrently to ward off inflation. If you listen today to the government, the fed and private groups, they are all saying we are in a dangerous Deflationary situation. I still think there are inflationary risks with food and energy if we start to consume in similar quantities as prior to the beginning of the current crisis, but as I said I think this can be managed..

Criticism 6 – This Bailout is Really a Bailout of the Banking/Lending/Consumer Finance Sector (or other hated group) and I don't want to Bail them Out.
It seems that everyone wants to punish someone and everyone forgets that if we set out to punish people instead of focusing on what is going to fix this economy, we all will end up suffering for it. Libertarians want to punish the households and consumers who borrowed too much, Progressives want to punish the banks and consumer finance industry, Republicans want to punish organized Labor. For the current crisis to happen it required mistakes by consumers/households, banks, credit card companies, those who provide the underlying securities and financing for banks and credit card companies (the bond market, etc) and the government for failing to oversee all of the above and take action when things trended the wrong way. Now is not the time to concentrate on blame and recriminations. In fact, my bailout proposal bails out everyone, which is one of the reasons it has been a lightning rod for criticism. Everyone's pet economic and ideological whipping boys are helped.

We need everyone to have a 'Jeffersonian Louisiana Purchase' moment. What I mean by that is you have Jefferson, who was in his time probably close to what a Libertarian is today and believed that the government only had a the smallest amount of powers, i.e. only those specifically outlined in the constitution and no more. He did not believe in the elastic clause, and he definitely did not believe what his ideological opposites did, that if the Constitution did not explicitly forbid the government from doing something, that the government could do it.

Jefferson was given an opportunity to purchase the Louisiana territory from France but the problem was that the Constitution did not explicitly give him the power to make that deal. Recognizing that the purchase would solve several strategic issues for the country, not to mention more than double its territory, Jefferson made the deal. The point of this long-winded anecdote is that we are in an emergency. Exigency dictates that we accept that we may need to look beyond what would normally be the boundaries of our ideology to resolve the situation

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What I did not hear from those who criticized the idea is any alternate solution that resolved the current crisis and certainly none that addressed the issue of the overwhelming number of US households drowning in debt. Indeed, those who criticized the idea of bailing out consumers never acknowledged the seriousness of the household debt situation. As I wrote in the first article:

James Quinn, wrote an excellent article that completely outlines just how terribly in debt the American Household now finds itself titled "The Great Consumer Crash of 2009." Among his research, he found that "Household debt reached $13.8 trillion in 2007, with $10.5 trillion of that mortgage debt." He also had a chart that showed that the average household debt per person in 2007 was $47,000. As staggering as those numbers are, that was a year ago. It is likely that total household debt is now up to $15 Trillion Dollars.


Before thinking about the economy in terms of the overwhelming debt of the average household, I thought that infrastructure spending was the best way to pull the economy out of crisis. The adding of jobs and putting people back to work that would be accomplished by infrastructure spending is great. This does not address the debt issues, however. The unemployed would then be able to pay their rent/mortgage and try to keep up with payments on whatever debt they have, but there will still be little of the spending that is needed to fuel a recovery. I think the infrastructure-spending plan alongside a consumer bailout is a good idea, but by itself, it is going to make very little difference. This economy is going nowhere if we fail to address household debt.

Why should I, a person who has lived within their means, who budgeted wisely, who did the right and responsible thing be saddled with another goddamn bailout, especially of people who were stupid and overextended themselves trying to live beyond their means. Where is the bailout for those of us who did the right thing, who lived within their means?

All this would do is reward bad fiscal behavior, and add another monetary burden to the load that those of us who did the right thing. Sorry, but we can't afford to bail out everybody who was an idiot and spent like a drunken sailor.

wrong headed comments like yours are one of the reasons I penned this followup.

Here, let me go through them in painful, excrutiating detail so you know just exactly how wrong you are.

Criticism 1
Your self funding mechanism is much less attractive to those facing bankruptcy than actual bankruptcy. You are requiring people who voluntarily participate in this program of yours to pay an additional premium of 1/8 of their tax bill into your fund. People who are facing bankruptcy can't afford this additional cost, and they will simply opt out of your program due to the additional tax burden.

Criticism 2
Limiting the amount of debt that somebody can get. Sorry, but this is a penalty for those who've been responsible with their money. My wife and I have large lines of credit due to our responsible actions, a line that under your plan would be severely. Sorry, but that's once again punishing those of us who did the right thing.

Criticism 3.

Despite your payback plan, the initial payout for your plan will be money coming out of my wallet, my tax dollars. This debt will be accruing interest. Will you be paying this interest back to me? No, you won't. So why should I lend the government even more money, money that I won't see again for a long while and only after it has depreciated due to inflation, when I can take that money and improve my own situation, or simply keep my head above water? Again, you are penalizing those of us who have done the right thing.

Criticism 4
Your underestimation of corporate America's willingness to pay taxes is laughably naive. You are assuming that an American corporation actually pays twenty five percent in taxes? Sorry, but most of that money will go into offshore accounts and other structures that will either reduce or eliminate corporate tax liability, and your funding mechanism will be so much worthless paper. This won't be self financing, but rather a black hole, a money pit that only benefits corporate America.

Criticism 5
Yes, those of us who have done the right thing will be upset over this. We're being asked to bailout Wall St., Detroit, and now stupid consumers? Sorry, but this is just utter bullshit. Your plan isn't self financing, and indeed requires an initial injection of money that will come from. . .we the taxpayer. Sorry, but if you want to keep a solid base of taxpayers in this country, you can't continue to ask us to shoulder the financial burden for every idiot free spender out there.

Criticism 6
More debt at this point is not the answer. Right now we're already walking on the edge of a cliff. Our US Treasury Bonds are perilously close to being downgraded(at least one trader has already done this, and the big boys, S&P and Moody's are close to following suit), and once that happens, we're really screwed. Besides, with a return of virtually zero, how many people do you honestly think are going to buy up US Treasury Bonds?

Sorry, but your plan is naively optimistic, makes assumptions that aren't valid, and is in no shape or form connected to the current economic reality. All your plan would do is bailout those who don't deserve us, and again, leave those of us who did the right thing holding the tab for others' mistakes.

I make no invalid assumptions. My assumptions in fact, are conservative.

The fact is, you made a leap to conclusions without really reading my article and now you are desperately trying to defend what you wrote after the fact, but you cannot.

Every criticism that you have made is addressed and disproven in my article.

Namely your assumption that corporations will spend 25% of the money that they receive in taxes. You are assuming that these corporations will actually do that, when in reality they will do the same thing that they do with any other income, put the money offshore, put it in tax shelters, and minimize their tax burden any way they can. This is the problem at the root of your "self financing" scheme, and it fail miserably, thus causing the rest of your plan to also fail.

Explain that to me, and then we can proceed from there.

and responding to items that are already addressed in the article.

because I shouldn't have to pay for health care for folks who are not responsible enough with their money to figure out how to pay the premiums.

Do I need this - :sarcasm:

However that doesn't relate to the OP's original point, which is bailing out consumer's.

First off, the entire semantic notion of bailing out "consumers" rather than "citizens" is one that I find odd to say the least, but won't get into now

The notion of bailing out people who've dug their own hole is irresponsible. I have no problem bailing out my neighbor who's been screwed over by medical problems, etc.(another reason for UHC), however bailing out my other neighbor who bought a new house in the country, bought four new ATV's to ride around the country for years, who also bought two new vehicles and a trailer to tow the ATV's, yes, I have a problem bailing his ass out because he was a fool who dug his own hole, who thought that he could kite credit forever and ever amen. So do millions and millions of other Americans.

Furthermore, how much more debt can you really saddle not just our generation, but our children's children's generation? I have a huge problem, for reasons that I discussed above, with the OP's funding mechanism. It isn't a self funding proposition, and yes, it in effect hands even more billions over to the financial sector, who won't pay taxes on it, but rather squirrel it away in offshore accounts and other tax shelters.

Stimulate the economy with jobs, with infrastructure projects, with a green economy, proposals that actually yield concrete results and lift the tide so all boats float, I have no problem with that. But bailing out only targeted sectors of the economy, without changing underlying fundamentals, is simply throwing money down a rat hole. All we have to do is look no further than the Wall St. Bailout to see that:shrug:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x8048310

(I do not see reforming consumer credit going forward as a pre-ordained part of a plan as desirable. The competitive market effects of clearing the banks's consumer credit portfolios shakes up the market and I don't favor pre-regulation of a situation with so many unknowns... the economy is full of surprises. See how much competition the plan spurs before doing corrections. But that's a relatively minor point. Since what is needed short-term is irresponsible excess just open the throttle and, as with inflation, deal with the effects as the smoke clears.)

It makes sense from several perspectives. I especially like that it will inject money into a system where credit is "frozen" (wink wink nod nod). Cash will flow uphill to provide revenue streams for companies that are struggling and laying off workers. This is a win win. It is immensely preferable to dropping billions on the huge and rich corpo's only to watch them squirrel it away with no accounting of how they use our tax dollars.

But, in the same vein, there needs to be some real regulation for who gets what and why. If the bulk of your consumer debt was caused by reckless elective spending and self imposed credit card debt then the regulatory functions need to consider that. It may make sense for the regulatory functions to have the options of providing debt counseling and requiring credit companies to restructure debt and reduce interest fees.