The Only Stimulus Plan That Will Work

After the loss of about 2.5 million jobs in the United States in 2008, the new year has continued the worsening trend. On Monday alone, there were about 70,000 announced job cuts and this was likely much higher when you consider smaller and private companies that do not announce.

Caterpillar, Inc. (NYSE/CAT) was the latest DOW company to report weak fourth-quarter earnings. The company announced that it would offer buyouts to 25,000 workers in the U.S. Corning Incorporated (NYSE/GLW) announced on Tuesday that it would need to cut 3,500 jobs or 13% of its workforce to cope with the slowing economy. It is becoming the norm to see announcements of major job cuts on the wires, as companies try to cope with the new economy. The continued loss of jobs is worrisome and I expect the trend will continue, as companies slash payroll costs in line with slower revenues.

The problem is that the upward trend of lost jobs impacts consumer confidence and spending. People are saving more than in the last two decades and this is clearly not the objective of the economic stimulus programs. As I have said, unless the velocity of spending rises, the stimulus dollars may have minimal impact. For each dollar of stimulus received by the consumer, you want the dollar to be spent many times over. Coined as the multiplier effect in economics, you want a high multiplier. Failing to achieve this, the amount of economic stimulus would likely need to be increased to offset the lack of velocity in money. The Great Depression was reversed after massive and continued spending by the government, but then the emergence of World War II also helped the economy.

I sense that things will likely get worse before there is any improvement. Vice President Joe Biden came out and warned Americans to expect challenges ahead. The housing market remains in disarray despite a good existing home sales report for December on Monday. This report is not that significant, as what you want to see is improvement in the building permits and housing starts data, because this is the true indicator of the condition of the housing market. At this time, it remains weak. And unless property values stabilize or begin to turn higher, there will continue to be hesitancy from homeowners to spend.

The key to the economic stimulus program should be to encourage consumers to spend in a more direct fashion. This may be in the form of tax rebates for spending, a temporary cut in retail sales taxes, or some sore of coupon system for rewarding consumers to spend. You need a system that forces people to spend. I'm not convinced that the plan by President Obama to send a $500.00 check to those earning below $75,000 a year would work. In this economic climate, I could see people saving the $500.00 and not spending, which would defeat the purpose of the payment.

What the Obama administration needs to do is to take a creative approach to its economic stimulus programs and not just hand out money. 

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