When people have a permanent job and they receive a cash infusion like a bonus or a tax rebate, they tend to spend the money on the things they always wanted to have but were obliged to put off in favor of using the money for other priorities. But now that they have the money, their pent-up demands will remain pent-up no more.
Thus, to get out of our current economic predicament, which we all agree will happen when the consumers will start spending again, we need to work on a long term solution to the looming problem of unemployment while at the same time do something to immediately infuse cash into the pocket of the consumers or, if the situation requires, do a series of cash infusions.
And while we do all that, we must not neglect to do something just as important. We must try to understand what happened in the years past that got us into the current predicament, we must work on a measure to prevent similar things from happening again and we must weave the measure into our permanent solution.
Experience tells us that the moment cash is infused into the pocket of consumers, those who have a job will spend the cash right away while those who do not have a job may spend some of the money but only if they see the promise that a job will be coming their way soon. Otherwise they will save the money or reduce their debt.
And so, to counter the reluctance of this latter group, the plan to infuse money into the pocket of the consumers must be designed in such a way as to negate the opportunity to do anything but spend the money. This will stimulate the economy which will offer the unemployed themselves a way to participate in the creation of jobs and thus improve their own chance at finding one soon.
And the best way to accomplish all of this is to lower or suspend the value added tax (VAT) which is a tax originally designed to discourage consumption and encourage saving. Every country has a VAT in one form or another which it collects in one way or another. For example, in Canada it is called the Goods and Services Tax (GST) and it is imposed on the consumers with every purchase of goods that is made and every service that is rendered.
What is important here is to reduce or suspend the VAT not permanently but for a short period of time such as a month or two. And the reason for this is to let the consumers know they must not put off their purchases indefinitely or they will lose the opportunity to save some money.
At the end of the period, an assessment is made to determine what effect the move has had on stimulating the economy and, if need be, repeat it once or twice more. Conditions may also be attached to the scheme such as the lowering or the suspension of the VAT for only some classes of goods like those made locally but not the imports, or the purchase of cars but not the textiles and so on.
This move will result in the creation of a virtuous cycle which will start with the raising of the expectations that will lead to the increase in economic activities that will lead to the rise in the level of optimism and back to the high expectations again. And this in turn will do much to help establish the proper climate for creating the kind of high paying jobs that will outlive the economic cycle during which they were created.
By stimulating the economy for the short term and by putting down the foundation for the creation of high paying jobs in the long run, we would have created the climate for rejuvenating the economy which is what will help us face the challenges of the future. But the job will not have been completed without us doing one more thing. To understand this part, we turn our attention to the following.
Like a body that is invaded by a virus, economic bubbles form and they get pricked all the time sending shock waves throughout the financial system. In fact, the making of a bubble starts with what may be called a moral virus that sends the participants in the financial system into a delirious state of fantasy. And the more the body becomes infected the more resistant it becomes to accepting reality. The result is that the participants cling ever more strongly to the belief that everything is fine and that things will get even better. But the pricking of the bubble happens anyway, the shock wave begins to hurt and everyone asks: How did it happen?
Let that question remain a rhetorical one and let us do something that science fiction writers do all the time. Aiming to have a happy ending for the horror stories they write, the writers use a neat little trick. They make the hero of the story anticipate the horror that is about to hit the group - perhaps a crew on a spaceship or an expedition of scientists on a far off planet - and they get the hero to do something about it. The writers get the hero to prepare an antidote that will work against the disease even after everyone has gone mad and has become cut off from reality.
The hero does it by constructing a system that triggers itself automatically when the time comes. A computer or a robot warns the crew that everyone has been infected and instructs them to submit to treatment. If the warning is ignored and everyone goes mad and becomes cut off from reality, the antidote is administered automatically by spraying it through the ventilation system.
If we now look closely at the financial crisis that hit the world, we see the similarities with this story in that the madness began quietly, the people who warned about it were brushed aside and the madness steadily spread till it reached what may be termed a pornographic level. This is when the people in charge of the system were giving themselves and each other hundreds of millions of dollars in salaries, perks and bonuses while their pauper supporters stood on the side watching them and cheering, powered only by the fantasy that they too will someday be rewarded and become the new fat cats on the bloc and in the neighboring alleys.
We conclude from this observation that in the same way that science fiction writers do their thing to reach the desired happy ending, we must include in the solution to the current crisis a way to prevent it from happening again or, if it does, from reaching a disastrous ending. To do this we devise a method that will warn of consequences when we all get mad and fail to realize that someone making hundreds of millions of dollars for doing nothing more than push paper is financial pornography gone beyond what is acceptable. If the warning is ignored, a remedy is automatically administered by a pre-ordained legal order. But how can this be done in practice?
Data is now collected by various organizations to measure how the quintiles in a society do financially in relation to each other. A quintile is a fifth of something. In this case, the population of a country is divided into five equal parts worth 20% each of the total population. At the bottom there is the poorest quintile, at the top the richest one and then there is the other three quintiles situated in the middle and called the middle class.
What the organizations do is get the information from the tax department, crunch the numbers, analyze them and publish the results. But the most that we have been getting so far in terms of reaction from anyone was a sense of mild astonishment that things were getting out of whack. What needs to be done instead is that the same data be brought to the attention of an authority that has the legal power to do something about it.
The authority will sound the alarm to the effect that something is getting out of balance and then identify by name the handful of culprits who are receiving pornographic levels of compensation. But because everyone who gets fabulously wealthy in a short period of time is not necessarily a financial pornographer, the matter must be looked into by regulators who will determine what is going on.
The regulators will need a test they can use to do the determination. Here is one idea. If the wealth is made by someone who is producing something tangible and not by pushing paper, the matter rests here. But if the wealth is given to someone who does no more than participate in the goings on of a financial enterprise, the compensation is declared an act of financial pornography, the money is disgorged and given back to the stakeholders from whom it was taken fraudulently or by navigation through the legal loopholes.
Merry Christmas and Happy New Year everybody. See you then.