$3,000 gift card could have put the economy back on track

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A few months back, MarketWatch's Chief Economist Irwin Kellner --not one given to rash judgments or under-researched ideas -- recommended that the United States consider distributing $3,000 gift cards to every citizen over age 16 as a fiscal stimulus tactic.

At the time I thought the idea was a little bit over the top. Now, I tend to think that the idea could have put the U.S. economy over the top, as in 'on track toward adequate GDP growth.' Here are the arguments against and for the gift cards.

Against:

Critics of the plan would cite the fact that the latest GDP data shows a U.S. recession that appears to have bottomed, with the economy contracting just one percent in the second quarter. Further, recent manufacturing and housing data provide fodder to argue that the worst conditions for those historically GDP-important U.S. sectors are in the rear view mirror.

Second, with more than $150 billion allocated to-date, critics argue that the nation's record $787 billion fiscal stimulus package has both prevented a further cratering of the economy, and added dollars sufficient to spark a rebound in commerce. Critics add that the remaining stimulus will continue to feed dollars into the economy in the quarters ahead, eliminating the need for any additional action. (Some have even suggested a removal of a portion of the unallocated stimulus dollars.)

Third, aided by a weak U.S. dollar, U.S. exports should rebound nicely in the quarters ahead, critics say, further boosting U.S. GDP growth. Emerging market demand for such items as construction and mining equipment, jet engines, and infrastructure materials will be strong, not only creating jobs in the U.S., but possibly eliminating the U.S. trade deficit during the next expansion.

For:

Supporters of the $3,000 gift card plan agree that signs of U.S. economic stabilization are becoming more prevalent, but that doesn't mean Americans should start singing 'Happy Days Are Here Again' just yet.

First, given high, private and corporate debt levels, demand is likely to remain weak during the recovery. The nation will be fortunate to register three to four percent growth in the initial quarters of the recovery - no where near the six percent and higher GDP growth characteristic of typical recoveries.

Second, even assuming a decent-sized recovery, the United States has an enormous jobs problem. The nation has lost more than 6.8 million jobs and has to create roughly 200,000 jobs per month for 5.5 years, just to get back to employment levels before the recession started in December 2007 - a daunting task.

Third, both the era of the 'frugal consumer' and uncertain export sales make the case for additional domestic-based U.S. stimulus. The former, a trend that's seen Americans increase savings and cut unnecessary consumption to rebuild next eggs; the latter, outlining the chancy formula of relying on emerging market demand to achieve U.S. economic health. The millions of new middle class citizens in China, India, Brazil, Russia, and Mexico may develop an affinity for American products, or...they may continue domestic-goods consumption patterns.

Economic Analysis: Given the need to pass universal health care legislation this fall, you won't see either the Obama administration or the Democratic-led Congress advocating a $3,000 federal gift card, but that does not undermine the macroeconomic soundness of economist Kellner's idea.

One of the flaws of the $787 billion stimulus package was that it was not 'front-loaded' enough - i.e. that it didn't spend enough money at the start, within one to three months, which economists say is essential to create the biggest bang for the GDP buck. As a result of the elongated appropriation of current stimulus, GDP will not increase by as much as it would have. Moreover, to effectively create that big bang, part of that initial jolt could have included a $1,500 or $2,000 gift card. Further, if tepid growth ensues, we may end up looking back at Kellner's idea as one that would have really propelled U.S. economic growth. Here's hoping the nation's economic performance in the quarters and years ahead does not provide evidence for that regret.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

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