Running a National Sale

The demise of financial titans and the incessant warnings of economic Armageddon have unleashed a tidal wave of asset sales across the globe, eviscerating trillions in personal wealth. Stock prices are now low enough to bring back some buyers, but the contest between fear and greed remains undecided.

The same defensive mentality that allowed the sale of equities at fire sale prices threatens to cause a sharp drop in consumer spending, which accounts for 72 percent of U.S. GDP.  If this happens, the economy will slide into deep recession.

We need to put a halt to self-fulfilling prophecies of doom.  The key is realizing that recessions are usually consumer cycles, not business cycles.  They’re driven by weakening demand first for homes, then for consumer durables, and finally for nondurables and services.  As consumers stop spending, businesses stop investing, and the economy “recedes”.

The $700 billion “bailout/buyup/inject” bill and other Treasury and Fed actions will shore up the banks and provide credit.  Yet credit is only part of the equation.  Most consumer spending is not financed from borrowed money, but from the money we earn and the money we’ve saved.  But our instinct now is to hoard every dollar for fear it’s our last. If we all do this, firms will find no customers to whom to sell their wares.  Thus, collective and obsessive attempts to save can undermine the economy, leaving us with less output and, ultimately, less saving.  This is Keynes’ Paradox of Thrift.

To escape the panicked-saving trap, we need to immediately and directly stimulate consumption.  Having Uncle Sam send us checks won’t work.  Some eighty cents of every dollar of the stimulus checks we received last Spring appears to have been saved, not consumed.  The rather small personal income tax cuts advocated by Senators McCain and Obama would likely elicit a similar response.  And Senator Obama’s proposed employment tax credit will work only if employers know they’ll have customers.

Another option is for Uncle Sam to distribute gift certificates in the form of debit cards that expire, say, in six months.  But, as we saw post-Katrina, distributing these cards takes time and invites fraud.

A better way to spur consumer spending is for Uncle Sam to run a six-month national sale by having a) state governments suspend their sales taxes and b) the federal government make up the lost state sales revenues. The national sale could be implemented immediately.

Here’s how it would work. Uncle Sam would pay each state a fixed percentage – say 5 percent — of the 2007 consumption of its residents.  States would be required to reduce their retail sales tax rates by enough to generate a six-month revenue loss (calculated using 2007 data) equal to the amount they’ll receive from Uncle Sam.

For states with low or zero sales tax rates, implementing this policy requires making their sales tax rates negative, i.e., subsidizing purchases.  Shoppers would see a negative tax on their sales receipts, lowering their outlays.  State governments would reimburse businesses for paying the subsidy and, in turn, be reimbursed by the Feds.

States would be free to broaden their sales tax bases to apply the National Sale to all retail sales, not just the sales currently covered in their sales tax systems.  To make the policy progressive, states could also reduce sales tax rates by more for goods and services that are disproportionately consumed by the poor.

Would some retailers try to cheat the system and request reimbursement for subsidies they didn’t actually make? Yes. But stiff penalties and vigorous enforcement should make this a minor problem.

How big should this stimulus be? A 5 percent national sale extending for six months would cost the Treasury about $250 billion.  Can the government afford this?  Yes, the cumulated lost production from a deep recession is on the order of 10 percent of GDP – roughly $1.4 trillion, and the associated loss to Uncle Sam in tax receipts and extra transfer payments could easily exceed $300 billion.  It’s unlikely that a national sale will prevent a recession.  But it should shorten it and reduce its severity.  Hence, we suspect that Uncle Sam would quickly recoup much of his costs in running the national sale.

No plan is perfect, and this one has its flaws and risks.  But it will apply economic medicine where it’s most needed – on consumer spending, giving everyone an incentive to spend now and begin again to trust our economy and its institutions.

16 Responses to "Running a National Sale"

  1. Anonymous   October 25, 2008 at 3:54 pm

    i am not stupid enough to spend myself back into debt. already tried it. so did 250 million of my friends.

  2. Anonymous   October 25, 2008 at 4:27 pm

    Much of the financial meltdown has seen its conduit through the trade deficit, and a lot of the trade deficit is because of overconsumption. Up until now, the savings rates in the US have been zero or negative. Sure, saving too much is bad – Japan and some other Asian countries are poster boys for this. This economic problem will take time to work itself out, and after it’s over the US urgently needs to INVEST capital in tangible productive industries geare3d for the long term, not consumption and financial speculation. But I’m not optimistic: imports now exceed industrial production.(!) How is the trade deficit to be closed or even brought down to the point where it is relatively benign under such conditions?

    • Guest   October 26, 2008 at 11:08 am

      yes this is a problem. we have a lot of expert realtors who don’t know how to do anything else. and i’m not too sympathetic to their plight, inserting themselves by force in the middle of almost every real estate deal to capture their 6%.they may have to learn to clean toilets, they will not be able to build infrastructure for the most part. they lack the talent and ability.

  3. Guest   October 25, 2008 at 5:01 pm

    I don’t see much difference between this idea and sending checks. Either way the money just gets saved or pays down debt.If you want consumption, just get the govt to consume – build some bridges, dig some geothermal wells and generate power, hire the unemployed to insulate houses, hire some teachers and get everyone going to college that can pass the entrance exams. Build some old folks homes and train some nurses, open more head start schools and train a army of pre-school workers.Spending on public infrastructure and on our educational future isn’t a give away, it’s consumption that gives us a more secure future.

    • devils advocate   October 25, 2008 at 8:27 pm

      LarryI am disappointed by your planthe people want the govt “to do something” andJoe the Plumber and Joe the Carpenter need jobsso what’s going to get done in the first hundred days?both Dems and Repubs already are in favor of infrastructure(and the Dems for public works a la FDR)THIS IS WHAT WILL PASSborrow and spend by the poor would help because they would spend and love the govt for itand this part of your plan has a chance to passbut equating consumerism with patriotism won’t fly with debt-burdened top 1/2and their resentment may shoot it down

  4. Ben There2   October 25, 2008 at 10:53 pm

    What all “experts” are saying is that the world economic engine’s fuel is US consumer spending. Ok- then allow the people to SPEND SPEND SPEND THEIR EARNINGS! Radical OLD IDEA-NO INCOME TAX! Just think what could happen if the worker becomes the “DECIDER” and purchases what he NEEDS and WANTS. Government agencies would have to go “out of business”!Malinvestment would decline and over time WANTED goods and SERVICES would replace the useless, wasteful, ENSLAVING, purchase choices (ie: Military-Industrial-Congressional-Medicial-Financial Complex) that political “DECIDERS” profit from. Radical NEW IDEA-IRS becomes ERS(External Revenue Stimulas) mission- to return all past taxes to owner.

    • Guest   October 26, 2008 at 11:14 am

      then how does the govt make payments on all the treasury bonds it has to sell?if you say “print” i would agree, but they are resisting this mightily, largely at the behest of our creditors who do not want to see their receivable devalued (which is the same as lightening the burden of our payable.)

  5. Anonymous   October 26, 2008 at 4:29 am

    It would be better to forgive student loans. Young adults want to start a life with purchases of homes and cars but instead are living in apartments and taking the bus. Most have jobs but can’t afford to buy because of heavy student debt. Set them free and they will recharge the economy.

    • Guest   October 26, 2008 at 10:55 am

      yes it is a good idea, and make school affordable so future students can avoid those loans.but the tendency now seems to be to ensure that no loans are forgiven, at least not to consumers. sheila bair has commented on one aspect of this.

  6. Anonymous   October 26, 2008 at 4:40 am

    It would be better to forgive student loans. Young adults want to start a life with purchases of homes and cars but instead are living in apartments and taking the bus. Most have jobs but can’t afford to buy because of heavy student debt. Set them free and they will recharge the economy.

  7. villager   October 26, 2008 at 7:54 am

    Despite the impressive credentials of these authors, they “don’t get it”. The financial crisis and the recession are separate events occurring simultaneously with their impact becoming interrelated. A worsening financial crisis deepens the recession. More than bank liquidity and consumer spending are needed given the seriousness and cause of the maladies. Also, the economic paradigm needs to be revisited. With fewer resources being extracted from it, the planet is probably breathing a sigh of relief.

    • Guest   October 26, 2008 at 11:00 am

      they are talking their book. now we understand more about how they got where they are in academics.banks are to be permitted to delever but not’s time for another angry groundswell like we had after the first and second bank bailout plans in the House. as a result it seems to have cost “them” something to force through the third one, and the banks are getting less favored treatment from it.let’s do it again, can’t let up on these peeps. and that doesn’t mean electing obama, or mccain, neither one has said much about this whole situation. obama is actually wall street’s candidate according to the campaign contributions he has received.

  8. Guest   October 26, 2008 at 8:49 am

    The main beneficiaries would be retailers, not consumers. The tax holiday would in large part be absorbed by the retailers in the form of reduced promotional budgets and/or higher prices.

  9. Anonymous   October 26, 2008 at 3:22 pm

    Cancel many kinds of “consumer” debt, especially education loans. Eliminate all kinds of consumption taxes and raise taxes on finance and property. Raise wages.That wasn’t so hard, was it?

  10. Alex Tomic   October 27, 2008 at 12:43 am

    For the sake of the planet our collective sanity, perhaps a reduced economic output is not necessarily a Bad Thing, given how needlessly energy-intensive the American economy is. This is a once in a generation opportunity to reshape our pattern of consumption so that we all live well but sustainably.Let’s say everyone looked at their budgets and decided they no longer want to spend ~$50 a month on bottled water, and bought a filtration system. All of the plastic and energy wasted transporting bottles of water, especially when a great deal of it is tap water, would be reduced and despite the reduction of economic activity, all of us are better off as a result.

  11. Anonymous   October 31, 2008 at 11:46 am

    Rather than having the government subsidizing consumer spending–which got us into this mess–why not use that money to invest in infrastructure (roads, bridges, alternative transportation, etc.). All those workers who found jobs in the construction industry during the housing boom (and who have subsequently lost them) could be shifted into revitalizing our failing infrastructure.