The proposed package is currently being debated in the Senate. From the list of items in it, I fail to see how it can work. As mentioned in previous posts, the problem is that virtually everyone in the developed world, say one billion people, has lost confidence and/or been directly affected by loss of wealth, and there will be a flow on to less-developed countries.
I heard the other day, a reference to world wide losses of $30 trillion. I take that to mean total falls in equities, home values, commercial property, and other assets. The sum is enormous, but spread over one billion people, it is about $30,000 each, or at 2.5 people per family, it amounts to say $75,000 per household. That seems a reasonable approximation.
The percentage reduction in personal wealth per household is hard to determine, but could well be 20% or 25% for a family, say as an example, from $300,000 to $230,000. That has set those people back five, ten, or more years in their wealth accumulation. A stimulus package averaging less than $1000 per family will not fix that.
The proposed stimulus appears to be focused on a multitude of specific projects, rather than the general population. It is the general population that needs its confidence restored. Little other than time will heal that confidence, it will only happen as people adjust to their lower levels of personal wealth.
The stimulus, does not appear to be part of a long term plan. A longer term plan is needed. In an effort to be proactive, I repeat the Five Point Plan I proposed last November, which I would adopt instead of the proposed stimulus package [together with some updated comments]. It is still valid.
A Five Point Plan
Point 1 The US Government should announce that from January 1, 2010 Fannie and Freddie will no longer provide government backed mortgage finance, with their existing portfolios being run off over time. [Things are now worse, the objective is still valid, but the withdrawal could be progressive over three years from January 1, 2010]
Reason - There is no long term economic reason for government to provide this funding. Under Capitalism the market will find a way to service this market. Traditional banks and other lenders will assess the risks, then increase their home mortgage lending. They will charge sufficient for the risk. Non-recourse loans will tend to disappear. The market will become much more fragmented and less risky.
Point 2 The Government should institute an energy levy of say, $20 per barrel of oil, both locally produced and imported, and an equivalent tax calculation for natural gas. [to make it fiscally neutral this could be combined with point 3]
Reason - To provide funding for energy research and investment, and to encourage the population to use more efficient use of energy, whether for heating, or for more fuel efficient means of transport, cars, planes, buses, trains, or feet. Adding $20 to the current $60 per barrel, this would still be some $65 less than the peak price of $147 reached earlier this year. While that peak is still fresh in consumer's minds now is the ideal time to reinforce it.
Point 3 The Government should institute a 10% sales tax across the board on everything except financial transactions as many countries have with VAT or similar taxes. The VAT should be made overall fiscally neutral, by increasing benefits or lowering taxes for "95%" of the population. [If any overall stimulus is desired, it should be here, via a change from neutral to positive to consumers]
Reason - The tax would help discourage wasteful consumption. Net savers would benefit and lavish spenders would be penalised. Such a tax is much simpler and more equitable if it applies to everything. In addition, much of the underground economy and illegal immigrants would be unable to avoid paying such a tax. Also, foreign tourists who visit the country would start paying a federal tax for the transport and other systems they use. Thus the tax would generate new sources of revenue.
Point 4 The auto industry and any other distressed industries should be encouraged by government to adopt the same strategy as was proposed at one stage for distressed banks i.e. each be divided into good bank/bad bank, or here into good auto company/bad auto company. [no change to the comment]
Reason - Parts of GM, Ford, and Chrysler must be profitable. If so, these would be put into the "good auto" companies and continue to trade. Being profitable, they would attract investors and allow new car buyers to have appropriate new vehicle warranties. The "bad auto" companies would be run as liquidations until their operations were completely closed down. The process has to be seen to be fair to other car manufacturers.
Point 5 - The Government should commence a "United States Sovereign Fund" for investments and to help provide for future welfare requirements for the ageing population. In the meantime, the fund would invest nationally and internationally, on commercial terms, in bonds, equities, and major infrastructure requirements, for example in nuclear power plants. [no change to the comment]
Reason - Welfare costs will need to be met for many people in the future. Funds released from the run down of Fannie and Freddie should be used as part of the fund, as would TARP assets, and other assets such as the AIG stake. It would also manage the energy tax receipts from Point 1.
Auto sales
January auto sales were 657,000, 37% down on January 2008. The graph prepared by Autodata shows the Seasonally Adjusted Annual Rate of sales. It is now down to 9.57 million. For more, see Green Car Congress: US LDV Sales Fall 37.1% in January; January ...However, as can be seen most of the graph is still prior to September 2008, thus the SAAR rate is likely to continue to fall. There is little news from Detroit, but one cannot help thinking GM, Ford, and Chrysler should have changed their company names to; Titanic 1, Titanic 2, and Titanic 3.
Their customers are disembarking from them in droves, as they can see there is little chance of the companies avoiding the iceberg called 2009.
The best the three companies can hope is get their standby rescue vessels organised and ready for the impact. They are named; Chapter Eleven A, Chapter Eleven B, and Chapter Eleven C.
Museums
Perhaps as a sign of the Recession, even culture is being tossed out.
For example, Brandeis University trustees voted unanimously last week to close the Rose Art Museum on campus and sell all of its contents. Presumably as a result of heavy endowment fund equity losses. There had been no advance discussion with faculty, students, the museum's own board, or its director. The college said it needed money, and the museum's collection, all donated, of 7,180 works of art (many from the 1960s-70s) is said to be worth $350 million.
But why didn't the trustees sell just a few paintings to cover its $10 million shortfall? The American Association of Museums prohibits accredited museums like Rose from de-accessioning any art except to purchase new art. Brandeis avoids the prohibition by closing the museum, but perhaps the university could have worked out an agreement with the association.
This supports the views I expressed a year ago, when I wrote a piece about how museums needed to look to the Internet for visitors to survive and that smaller museums would close unless they looked to the Internet for visitors. The Recession is compounding their problems. My original comments can be seen at ViewMy belief is that museums which concentrate on 21C displays of what may loosely be called contemporary art with a view to competing with theme park entertainment, are sacrificing their heritage and they risk disappearing down a long Alice in Wonderland corridor ending only in smoke and mirrors.
I mentioned last year there were some signs of museums paying more attention to visitors, see the March 2008 NY Times report Museums Refine the Art of Listening - New York Times which echoes my February point about museums facing competition; "they’re competing for those customers with local shopping malls, movie theaters, even grocery stores."
The NY Times report also makes the following comment; "When the Museum of Modern Art opened its expanded $450 million home on West 53rd Street three years ago, the ticket desk began compiling the ZIP code or country of origin of every visitor, putting the information in a database. And at the Detroit Institute of Arts, officials recently discovered that the average visitor spends only four or five minutes in any gallery, rather than the 20 minutes the officials had expected. Only 7 percent bothered to read the wall plaques."
I would have to say, to record ZIP codes sounds a pretty half-hearted means of gathering useful data, and the 20 minutes sounds like a wild guess of how long a visitor would spend in a gallery.
Also from the same NY Times article; "A year and a half ago, the (MFA Boston) museum hired the marketing firm J.D. Power & Associates to try to understand what visitors want. “We found out that the No. 1 thing that gets people to the museum is our collection.” " The MFA sounded surprised at this conclusion!!
I think the Recession will cause many more small museums to shut their doors.
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