I was presented with this compelling paper from Howard Hill, CPA. Given our current economic situation I wanted to share this letter in its entirety. I welcome your comments:
ECONOMIC STIMULUS 2010/DIRECT LEVERAGED STIMULUS
The American economy is in need of a boost to get people back to work. The best policy to achieve this goal is Direct Leveraged Stimulus. You have seen it in the past 2 years in various forms “Cash for Clunkers”, “The Energy Star” appliance discount program and the new “Home Star” energy efficient discount program. All of these programs are based on a premise that I suggested to the Obama Administration at the beginning of 2009, Direct leveraged Stimulus. I am calling for the expansion of these programs and the creation of others to the tune of $100 Billion, which will create 1 million direct manufacturing Jobs and at least that many ancillary jobs. The best part is the program will pay for itself.
Direct Leveraged Stimulus suggests that you give subsidies directly to consumers for the purchase of goods, which cost 5 to 10 times the amount of the subsidy, preferably for durable goods or services, substantially, if not entirely manufactured or performed in the United States. The subsidy is direct to the public requiring the purchaser to borrow or use his own cash to pay for the lion’s share of the good or service. No money is given directly to the purchaser; it is rebated to the retailer directly from the United States Treasury or local Government pass through agent.
“Cash for Clunkers”, is an example of this program. In order to get the $4500 subsidy you had to Purchase a vehicle. I was not in favor of the Clunker portion of the program, but the program still was very successful. The stimulus was direct as the money benefited the consumer directly. The stimulus was leveraged as the consumer had to borrow or pay from his own funds the balance of the car purchase. Most vehicles were purchased for $20,000 to $25,000. The program was initiated to get some of the older gas guzzling cars off the street and replace them with more fuel efficient vehicles. At the time it helped pull the American economy out of the economic ditch.
Direct Leveraged Stimulus is far better than any other stimulus program because it requires the consumer to put 5 to 10 times more money into the economy than the government subsidy. It is better than tax credits that everyone does not qualify for or understand and often don’t benefit taxpayers equally, and as we have seen with home buyer credit program, is open to fraud. It is better than the suggestion of reducing payroll taxes because consumers don’t have to spend the payroll tax savings. It is better than building roads because for every dollar you spend on roads you get a dollar of road. In the case of Direct Leveraged Stimulus you get 5 to 10 times of the amount of the stimulus you provide. Obviously it is better than unemployment for all of these reasons and the fact that Direct Leveraged spending will stimulate employment and boost consumer confidence. We need to put Americans back to work preferably in manufacturing jobs.
The best example of the policy is the Energy Star appliance program. This program gave a discount paid directly to retailers if a consumer purchased an energy efficient appliance. In this example the funds were given to the State of Illinois which administered the rebates. On April 23, 2010 $6.5 million of rebates were made available through local retailers. The discounts or rebates were 15%, and were used toward the purchase of an Energy efficient home appliance. The lines began to form outside retail stores at 4am. The program was suppose to be in effect for a couple of weeks or until the funds were expended, which ever came first. By 7pm the same day all the rebate funds were depleted. $45,000,000 of appliances were purchased in that one day, more than 7 times the amount of the subsidy.
Direct leveraged stimulus is without a doubt the best way to stimulate the economy and create meaningful jobs. Best of all the program is revenue neutral; it pays for itself in state and federal tax collections and expenditure reductions, for unemployment and other programs. The consumer is happy because he receives a subsidy, business is happy because they directly receive the subsidy and make a sale and best of all it costs the benefactor, we the tax payer nothing as it pays for it self in increased payroll, income and sales taxes. It also decreases the amount we have to subsidize unemployment as we put people back to work. The reduction in the unemployment rate will boost consumer confidence and stimulate growth in all sectors of the economy.
Direct leveraged stimulus works and is a current policy of the United States government. This program should be expanded to $100 to $200 billion. You can also include the manufactures themselves instead of giving a depreciation credit for the purchase of equipment made in the United States; give them a direct subsidy at the time of purchase paid directly to the manufacturer of the equipment. Provide subsides for natural gas buses, construction equipment or pollutant efficient manufacturing machinery. Require at least 70 percent of any equipment, good or service involved in the program to be made in the America. All in all Direct Leveraged Stimulus is the fastest, cheapest, easiest and most direct way to stimulate the economy. Congress needs to seriously consider this proposal.
The policy can be applied at the state and local level as well. State and local governments can provide subsidies for products produced and purchased within their boarders. It can also be used for the purchase of homes in lieu of tax credits.
Howard Hill, CPA
Labels: cash for clunkers, Direct Leverage Stimulus, Energy Star, Home Star, Obama Administration