Sunday, 28 September 2008

Bad idea from left field

I was sipping my first coffee this morning with bleary eyes after my son had us up at 3am due to a nasty cold, and I found an email from my cousin with an interesting idea.  The Fed had just bailed out AIG, an insurance company that insures investment risk, for $85 Billion.  The email proposed that instead of bailing out anybody (including the $700 billion for the banks this week), the government should just divide it up between all of the voting aged population, and send it out.  It is called the "We Deserve It Dividend."  

Now, the email invalidated itself right off the bat with some atrocious math.  It claimed that dividing the $85 Billion between roughly 200 million people would give each of us $425,000.  I did a little double take, but my morning brain gave it a temporary pass.  Of course, it would really be only $425.  Snopes has already put this one to bed.

Once I had gotten past the voodoo economics, I thought about it a bit.  It does have some persuasive power as an idea.  If we reject the foolishness of supply-side trickle down economics, we could conclude that the exact opposite is preferable.  "Trickle-UP" economics would contend that giving the poor and middle classes money would drive up demand, stimulate production, produce jobs, and create economic utopia.  This is why this email has gone viral, and I received it from my cousin.

The problem is that both forms of trickling are equally oversimplified and wrong.  In the case of this "dividend," or Bush's "Economic Stimulus Check" for that matter, it just can't work out long-term.  Here's why:

1) Where is the money coming from?  
China mainly.  China holds about $1.5 Trillion of our debt, and continues to be our biggest foreign customer of US Treasuries.  In return for buying our debt, they expect a modest rate of interest in return.  However, it adds up when you are talking about such large sums.  So, it is not that the US government has money bursting from its coffers, and we can just ask for it back.  Taking this dividend would indebt our children and our children's children for generations.

2) Where would it go?
What would people do with the money?  Would they go shopping, and drive up consumption as it is hoped, and drag us joyfully from ruin?  I don't think so.  First of all, any sensible person would first use the money to pay off debt.  The average American has $9800 in credit card debt, and would be foolish to do anything but pay that down first.  Then there are back mortgage and car payments to make.  So, in essence, the vast majority of the dividend would just go right back to the banks, stimulating nothing.  

3) What would people buy?
Assuming some people were in good enough financial condition, or were stupid enough to go shopping while in debt, what are they likely to buy?  Since our manufacturing base has been destroyed by Reaganomics and free trade, buying things in the US has little overall impact on the US economy.  This is especially true for consumer electronics, which are nearly universally manufactured in Asia.  Therefore, much of the benefit from consumption fueld by this dividend would end up overseas.

So, though the government sending out money would probably prove popular (or populist), it would be a very bad idea.  Many of the people who received this email probably figured that out halfway down the page.  It is my misfortune to require a two-page research paper to work through it...

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