January 28th, 2010 by Al Lewis (alewis)

President Obama’s State of the Union speech proposed ways to help the middle class recover and also to create some jobs.   Naturally — and despite a proposed spending freeze – these initiatives will cost money.   He overlooked four initiatives that can also help the middle class, and  create jobs either directly or indirectly, but without costing anybody anything.

First, why not allow people to obtain a one-time interest-free loan from their own retirement accounts to use to pay off their credit card debt?     The middle class is buried in credit card debt, an average of about $7000 per adult, at very high interest rates.   A loan from their retirement accounts  would allow them to pay off that debt immediately, and then – with about the same monthly payments they make now to their credit card companies – repay their retirement accounts in about six years.   With no change in their monthly debt service, they instantly rid themselves of credit card debt and, six years later, become free and clear of the repayment obligation to their own retirement accounts.     By contrast, without this initiative, people making those same payments to their credit card companies will still be $7000 in the hole six years from now.

Second, why is there a tax refund anticipation loan industry?  12 million people a year borrow from their tax preparers against their tax refunds, often taking a haircut of 10% to get money instantly (sometimes, ironically, to pay credit card companies) instead of waiting a couple of weeks for their full refund.  Why not just add a line to the Form 1040 where people can ask for 99% of their refund electronically deposited on the filing date instead of getting the full 100% in two weeks?    Besides being a boon to cash-strapped borrowers, this initiative actually saves the government money because they pay out less in refunds.

Third, speaking of tax refunds, why do people even have to take their tax refunds in cash?   Why doesn’t the Government offer a “ShopAmerica Gift Card”?   People could direct their refund checks (or Social Security checks or any other government check) to a website where retailers and service providers would offer premium-value gift cards.   An example might help:  Suppose the Government owes you $500.  You visit this website and find that Marriott is offering gift cards at a 20% premium.  Your honeymoon is coming up, so you like that idea.  You direct your $500 to the website and get a $600 Marriott gift card in return.  You are $100 better off, at no cost to taxpayers.  Would sellers participate?   Some already do this on their own, but because, absent a central location, marketing is so fragmented and labor-intensive, they offer premiums of only 10% or so.  Creating an eBay-like central market for gift cards will reduce marketing costs enough to make the cards much more valuable.

Finally, why should people pay high energy bills when it’s well-established that conservation is a great, risk-free investment…if only they had the money?  What if there were companies that would do free energy audits and then – if circumstances warrant – make energy-saving improvements and then get paid out of the utility savings?  Including the repayments to the company, homeowners’ total utility budgets wouldn’t change.  Of course, once the companies were paid off, all the savings would accrue to the homeowners.   The Government could jump-start this industry by getting audits on government buildings, many of which are very energy-inefficient. 

While the first three initiatives would have an indirect effect on job creation, this initiative would directly create jobs for skilled craftsmen and electricians.   Maybe not that many, but at no cost to taxpayers.  

While the President’s heart and/or political instincts are in the right place, the answer is not always to throw money at problems.  Sometimes creative solutions can work just as well. 

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  1. Steve Reichenstein Says:

    Great ideas for the President to find OOB … to which I add :

    (1) Every one of the President’s proposals was “top-down”. That’s anti-market. Put money in the hands of the consumers … in a form that must be spent … and they will choose the winners and losers and who should be lent money and who shouldn’t.

    (2) “The 5% Solution” says the Fed should require all banks which borrow from and through the Fed, currently at less than a 1% interest rate, to cap their own interest rates to customer borrowers, including credit cards, to 5% above the Fed Funds and Overnight Window lending rates. Also, the banks should be limited to charging fees at no larger a percentage than the Fed charges them.

    Hey, while my bank creditors are borrowing at 1% due to the economic crisis they caused, they are charging me 30% plus monthly fees due to the economic crisis they charged. What’s wrong with this picture? Doesn’t a 30% spread sound like a huge incentive to create more economic crises!

    (3) “The 20-to-1 Solution” was suggested by Peter Drucker. (Yes, that Peter Drucker, the so-called inventor of management science, top business consultant throughout the 1940’s through 1970’s, and author of numerous best seller how-to-manage books starting with “The Corporation”.) Drucker was appalled by the exploding gap in compensation during the 1980’s.

    Drucker had always emphasized the impact and role of the Corporation in the Society and the fact that a thriving middle class had proven again and again to be necessary for both a thriving economy and a thriving democracy … and the very survival of Capitalism.

    So, Drucker proposed that the highest paid person in any Corporation should be (totally) compensated no more than 20 times that of the lowest paid. Until the 1980’s that was the gap between top and bottom in most companies.

    It wouldn’t cost the government or businesses a cent. It would raise average consumer purchasing power enough to restore the economy (and the middle class) and perhaps a few executives might be willing to work for that 20-times compensation. The President cannot command this; but he can require through Executive Order that all companies (and their vendors and subcontractors) who do business with the federal government do it. And, the Fed can require banks to do the same.

    I am pro-business, pro-capitalism, pro-banking, pro-market … and pro making money. But things are out of hand. The gap is too big. Pigs get fat while hogs get slaughtered.

    The bell shaped curve looks more like a heart monitor. If we looked at mode average rather than mean and median average for income, we would find the quintiles frighteningly similar to that of Tzarist Russia and our own Guilded Age of the Robber Barons … both exactly 100 year ago … both leading to radical political revolutionary movements … Russia’s succeeded but the Roosevelts diffused ours with “A Square Deal” and then “The New Deal”. It’s time for “A Different Deal”.

    The increase in health care costs is severely exacerbated by the fact that, during the period 2000-2009, real income of most Americans were flat or fell … despite an economic boom. Had mode average income tracked with economic growth, then the impact of increases in health care costs would not have been felt so hard and would not have created such a hostile environment.

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