Depression, Recession, Whatever...

I'm not very optimistic about a turnaround to the US financial meltdown any time soon. The fact that we got into this mess by borrowing and spending rather than saving and producing belies the solution of borrowing trillions more.

The Bush administration doubled the national debt from somewhere around 5 trillion to something in excess of 10 trillion. Borrowing another 2-3 trillion is going to help somehow? It's as if I was personally in debt up to my ears, and the solution is to lend me more money. And then to use that money to spend more. It's as if the purchase of say, a new car, would somehow make meeting my monthly mortgage payments easier. I guess I could argue that a new car would get me to work quicker and in more comfort, and that therefore I'd be more productive and make more money. Sounds a bit delusional, doesn't it?

I think there are some possible solutions, but none of them are getting much press, and not all of them involve borrowing more money. Here are a few that come to mind:

1. Slap a retroactive windfall tax on anyone who made more than a couple of million dollars in the financial sector over the last, let's say five, years. I don't know how much money would be raised, but it would have to be many billions of dollars. And the tax would have the added benefit of exacting some vengeance against some of the folks who've robbed us blind. Or maybe a better plan would be to have all those excess earnings forcibly traded for mortgage backed securities, collateralized debt obligations, and credit default swaps.

2. Impose a floor on the price of gasoline. If the floor was set at $4/gallon, with the current price at around $2, the feds would get $2 in tax. If the price goes above $4, the tax would be zero. I think the US consumes somewhere around 350 million gallons of gas per day. $2/gallon amounts to something like 1/4 trillion dollars per year. This tax would decrease consumption, encourage use of mass transit, decrease greenhouse gases, and raise a pile of money. We survived $4/gallon gas for a few weeks last summer, and I'm sure we could survive in the long run. The rest of the developed world has done OK with prices 2-3 times higher than what we pay.

3. Put a tax on securities transactions. The tax could be some fraction of a percent and would be insignificant to the average people and the average investor, but would hit speculators hard. The New York stock exchange trades an average of $55 billion/day. A quarter percent tax would raise around $34 billion/year.

4. Remove the cap on wages subject to FICA taxes. I wasn't able to find a definitive number on how much money this would raise, but it looks like it would be something on the order of $100 billion per year.

The above four things might raise something like a trillion dollars a year and would finance a big chunk of the proposed stimulous. IMHO, based mostly on my Fred Eaglesmith-like love of trains, that money should be spent on infrastructure projects like light rail and high speed transit systems.

There are a bunch of other things that can be done to heal the financial system. I'll address some of those in future posts.