ndmckinney|net

There is a paradox in the American economic recovery. GDP is expanding at incredible rates, and yet the economy keeps shedding jobs. While the official unemployment figure stands around 10 percent, including worker who are underemployed pushes “the full measure of slack in the labor market closer to 20 percent“. While economists and policy analysts are mixed as to what this means, one certainty is that there will be few gains in employment for the foreseeable future.

Is the problem that there just too much supply in the US labor market, or is there a fundamental change in the way the U.S. handles employment?

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NRC Handelsblad is reporting that container traffic in Rotterdam, Europe’s largest port, is down 15% and overall shipping traffic down 13.4%. The downturn is expected to continue through the remainder of the year.

This is, or course, reflective of the overall downturn in shipping. The Baltic Dry Index, a measure of the cost of shipping goods, is down to a quarter of what it was a year ago.

nrc.nl – International – Rotterdam port turnover drops sharply: “”

The recent incarnation of the Federal bailout (or rescue, depending on your point of view) of the banking system is yet another representation of the failure of the economic policy of “trickle-down” economics to actually function and only highlights the incestuous nature of Federal regulators, banking executives, and the financial system as a whole.

The concept, of course, sounds simple enough. By providing money to banks, they will, in theory, be more willing to lend that money to others. Of course, they will still be charging interest on those loans, so they will be receiving, essentially, windfall profits. The official line from the government is that the Treasury Department is taking an equity interest in the banks, so the government may actually “turn a profit” on the bailout money.

Of course, the money the government is using to buy that equity share is debt-financed, so the margins necessary will need to be rather large. If the crisis takes a while to end, and bank stocks do not recover in the next year or two, then the margins will need to be even greater to adjust for inflation, which is running a bit hot right now.

Why not turn the concept on its head? Here’s my thought for a bailout:

1. Instead of giving the money to banks, give the money directly to consumers. I have been critical of “economic stimulus” plans in the past, but that is largely because the two previous plans (1) were of paltry sums, (2) were nothing more than vote buying schemes, and (3) were unnecessary for the continued operation of the economy. By putting a substantial amount of money ($5,000 – 8,000) into the hands of consumers, one of a number of outcomes will occur. 
   1. The consumer will buy stuff. This keeps businesses functioning in our consumer economy. While this is also part of the cause of our economic problems, it is a stop-gap measure to help soften the blow.
   2. The consumer will pay off debts. This helps banks and other interested parties worried about their outstanding loans. Again, the overextention of credit and too much consumer debt has been a major contributor, but allowing the credit market to grind to a complete halt is equally bad.
   3. The consumer will save the money in the bank. This outcome will help banks with any liquidity issues. This ensures the consumer will get the value of their money, and that the banks receive an infusing of cash deposits. Besides, they will not owe any substantial interest to their depositors, and the overall cost to the bank will be far less than to the government.
   4. The consumer will save the money in case (“under the mattress”). This is the only bad outcome of my proposal, but the percentage of consumers likely to utilize this option would likely be insignificant. We haven’t had any serious bank runs yet, and FDIC has done an outstanding job in protecting depositors at failed banks.
2. Create/expand Federal loan insurance programs. One of the major problems at the moment is that the global credit markets are “frozen” by a lack of trust. As noted on NPR’s Marketplace this week, Federal deposits are backing up, indicating a breakdown in the system. Like the European governments, the U.S. should move to provide some sort of guarantee for bank loans, particularly to the small businesses everyone is so concerned about.

My solution is certainly more palatable to the average consumer and certainly is more equitable. While banks are the engine that drives the economy, it is consumer spending that powers that engine. 2/3 of our GDP derives from consumers, and that must be our priority.

[Photo Credit: "Stupid Faucet" by flickr user Cayusa.]