Archive for January, 2009

Helping the Unemployed

Kurt Brouwer January 30th, 2009

Here is a modest proposal to help the unemployed. Give unemployed folks some money.

Now, admittedly, there are issues with this revolutionary strategy in that we would not want to give so much money that getting on the unemployment rolls would be attractive. And, we don’t want to encourage people to stay unemployed.

Nonetheless, let’s run through the numbers quickly. According to this report from the government’s Bureau of Labor Statistics there are 11.1 million unemployed folks right now:

In December, the number of unemployed persons increased by 632,000 to 11.1 mil-
lion and the unemployment rate rose to 7.2 percent. Since the start of the reces-
sion in December 2007, the number of unemployed persons has grown by 3.6 million,
and the unemployment rate has risen by 2.3 percentage points. (See table A-1.)…

OK. So, assuming we wanted to help out the unemployed, what would it take to give them $10,000 apiece? Back in a moment with the answer.

First, let’s take a look at the current economic ‘stimulus’ plan as it wends its way through Congress. The sticker price is about $820 billion. But, that does not include interest charges. The Feds don’t have a lot of spare cash lying around so they have to borrow the money and pay interest on it. Admittedly, the Treasury is paying pretty modest interest rates these days, but still the tab — over the next 10 years of this plan — will run to about $1.1 trillion, or about $111 billion per year.

Now, getting back to the cash for unemployed folks. What would it cost to give every unemployed person $10,000 this year?

Answer: about $111 billion.

The January Decline

Kurt Brouwer January 30th, 2009

In the good old days there was something called the January effect, in which stocks often went up in January. This did not happen every year, but it occurred often enough to have a name. The rationale behind it was the stocks were oversold due to a rush of tax loss selling in December, so they bounced in January.

This year, we have not seen the January effect. Instead, we had a significant decline in January, led by — you guessed it — financial stocks.

Source: Bespoke

At a seminar for CPAs that we gave this week, one of the accountants asked me if there was a possibility the banks would be nationalized. Had you asked me that a couple of years ago, I would have said no.

But, things have changed. So, I told the questioner that there was a possibility that major banks would be nationalized. And, if this stock market trend continues very long, it would not cost all that much to buy them up.

Housing Affordability Index

Kurt Brouwer January 30th, 2009

Good news, that is for home buyers. As in most things, good news is relative. The housing affordability index, which measures how easy or hard it is to buy a home given current prices and mortgage rates, is looking pretty darn good.

All those folks who were complaining about how hard it would be for their children to buy a nice home. Problem solved.

Source: Carpe Diem

The higher the index the more affordable housing is for the average family. This is good, for buyers that is. But, really it is good for everyone in the long run.

Rangel Rule Would Eliminate Tax Penalties

Kurt Brouwer January 30th, 2009

Now, this is interesting. John Carter is a former Texas judge and a current U.S. Representative from Texas the district just north of Austin.

He has proposed legislation that would give ordinary taxpayers the same treatment as celebrity tax offenders. Not a bad idea:

All U.S. taxpayers would enjoy the same immunity from IRS penalties and interest as House Ways and Means Chairman Charles Rangel (D-NY) and Obama Administration Treasury Secretary Timothy Geithner, if a bill introduced today by Congressman John Carter (R-TX) becomes law.

Carter, a former longtime Texas judge, today introduced the Rangel Rule Act of 2009, HR 735, which would prohibit the Internal Revenue Service from charging penalties and interest on back taxes against U.S. citizens. Under the proposed law, any taxpayer who wrote “Rangel Rule” on their return when paying back taxes would be immune from penalties and interest.

“We must show the American people that Congress is following the same law, and the same legal process as we expect them to follow,” says Carter. “That has not been done in the ongoing case against Chairman Rangel, nor in the instance of our new Treasury Secretary Timothy Geithner. If we don’t hold our highest elected officials to the same standards as regular working folks, we owe it to our constituents to change those standards so everyone is abiding by the same law. Americans believe in blind justice, which shows no favoritism to the wealthy or powerful.”

Carter also said the tax law change will provide good economic stimulus benefits, as it would free many taxpayers from massive debts to the IRS, restoring those funds to the free market to help create jobs.

I laughed when I read the last part. By the way, I don’t really expect this to pass, but it is fun.

Economy Shrinks 3.8%, Less Than Expected

Kurt Brouwer January 30th, 2009

GDP Drops at 3.8% Rate as Spending Falls (Wall Street Journal, January 28, 2020, Jeff Bater & Brian Blackstone)

The U.S. economy shrank at the end of 2008 by the most in 26 years, according to a grim report Friday that hints the recession will deepen in 2009.

Gross domestic product fell at a seasonally adjusted 3.8% annual rate October through December, the Commerce Department said in the first estimate of fourth-quarter GDP.

Third-quarter GDP fell 0.5%. The back-to-back GDP declines were the first since GDP fell 3.0% in the fourth quarter of 1990 and 2.0% in the first quarter of 1991…

While the 3.8% decline marked the weakest GDP performance since a 6.4% drop in first-quarter 1982, it was still smaller than expected. Economists surveyed by Dow Jones Newswires forecast a 5.5% drop in GDP during the last three months of 2008.

In a short-term sweet but probably long-term bitter turn, inventories rose at the end of 2008. The inventory increase was troubling because it was likely unintended — the result of companies getting stuck with unwanted merchandise because demand has tailed off in the recession. Excess inventory will have to be worked off down the road and that signals production cuts, which in turn could mean layoffs that hamstring the economy even more.

“With inventory investment jumping in (the fourth quarter), there will be inventory liquidation in (the first quarter),” Insight Economics analyst Steven Wood said. “This suggests that (first-quarter) GDP will also contract, probably more sharply than it did in (the fourth quarter).”

Inventories increased by $6.2 billion in the fourth quarter, after going down $29.6 billion in the third quarter and $50.6 billion in the second quarter. The climb added 1.32 percentage points to GDP. Real final sales of domestic product, which is GDP less the change in private inventories, decreased 5.1% in the fourth quarter, after falling by 1.3% in the third quarter…

Next »