Wheel of Misfortune
December 23, 2008
The American Gross Domestic Product (GDP) is estimated in the range of $13 trillion. GDP is the total market value of goods and services produced in a country. It includes consumption, investment, government spending, and the net of exports minus imports. Knowing what we do of government efficiency (that’s an oxymoron, isn’t it?), the bigger their share of the pie, the worse the system works in terms of efficiency, wealth creation, and the advancement of standard of living.
Government projections are also not the most reliable. Take the Iraqi conflict as a good example. Original cost estimates were between $50 and $60 billion. In April of this year, Vanity Fair magazine estimated the total cost to the point of extrication to be in the range of $3 trillion.
So, when I hear of a $750 billion bailout for the folks on Wall Street, my temptation is to consider this as only the tip of a very large iceberg. As I read and listen to various commentators on the subject, nobody believes this to be even close to accurate. Double it as a minimum, I hear. I’ve seen total estimates (all destinations considered) as high as $4.6 trillion.
Makes me wonder how this would roll out if administered a little differently. Now, don’t get me wrong. I’m not a fan of any kind of bailout. Free market and all… let ‘em fail if they can’t do it profitably, I say. But, let’s just imagine that the money is going to be spent one way or another… and let’s use a range of $1.5-$4.6 trillion for the total figure. Now, instead of doling the money out to Wall Street or the Big Three auto makers (as a start), let’s work from the other side of the equation.
There are approximately 116,011,000 households in the United States. One-half of these have an income above the median, one-half below. Median income is $50,233.
Now let’s look at a real, and more direct, method for stimulating the economy. Remember that I’m not advocating stimulus of any kind, just thinking out loud here. What happens if we take the middle man out of the picture, and just pass this bailout package over to the consumer… and let’s be careful to place the money into the hands most in need. Apportion the money only to those in the lower half of household income brackets. Not fair, perhaps, but this is for the sake of illustration only.
If the higher-end guestimates of the bailout are accurate, this would add $79,303 to each of these 58 million households. If at the lower end, the figure would be $25,860. Even if the $750 billion figure were accurate, this would still place an additional $12,930 into each household in the average lower portion of the income range.
When seen from this perspective, it doesn’t take an economics professor to see these figures (even at the lowest level) as absurd… and fast approaching obscene. A Grade 5 student can easily see that the government cannot take in this kind of money from taxpayers (in aggregate), then turn around and hand it back to the lower half of household income earners. So… how on earth can the government begin to contemplate passing these monies out to a relatively small group of operators instead. Of course, you’ll say this money is not just tax revenue. It’s new debt, new investment, and newly printed money. Well, for starters, new debt is just later tax revenue. Government as an investor is antithetical to the free market. Newly printed money is just Parker Bros. Monopoly money come to life. Double the number of dollars in circulation, and each one is now worth only 50 cents.
But… to my point. Aside from the absurdity and obscenity of the total figures involved, what would happen if all that money were given directly to consumers, rather than to the middle men? They’d spend it. That’s what. Without a select few taking 5% or 10% or 20% (or higher) off the top, the money would be directed by consumers to the best available deals. That’s what a free market is all about. This may or may not include investments on Wall Street. I’d guess not, for the most part. This may or may not include the purchase of American-made automobiles. I’d guess this would be a mixed result. The bottom line is that, given a choice, the consumer knows better where to put his money than a short list of producers. Quite frankly, what is proposed in this bailout is not far from the Soviet command economy so demonized in days gone by.
Maybe some of these consumers would use the gift to pay off credit card debt. Of course, that’s not what Wall Street wants them to do. Wall Street wants to lend more money so consumers can buy more stuff that they don’t really need… and pay more interest at the same time. Spend, don’t save. The wheel needs to go around just one more time.
I saw a news piece this last week about financial institutions exercising their ‘fine print’ rights to raise credit card interest rates without prior notice. With so many consumers now getting deeper into credit card debt, they’re being hit with rate increases that will leave many in an untenable position. Of course, Congress is stalled out in addressing the loan shark rates being charged for credit card debt. Their explanation on the newscast was that ‘there is much resistance coming from the financial sector’. Huh? Who’s running Congress here? Hmmm… Let’s see now. The financial sector accounts for close to $200 million in contributions to both sides of Congress. Who’s running Congress, indeed.
Therein lies the answer to my question.
Best of the season to you and yours,
Kevin Graham