The stimulus bill approved by Congress last week - and due to be signed into law by President Obama [today] - is a very good first step toward slowing the economy's decline, but it clearly is not large enough to accomplish the job. The US economy will be seeing a loss of close to $2.6 trillion in demand over this year and next due to the collapse of housing and commercial property bubbles.
To counteract this collapse, Congress gave President Obama just over $700bn in real stimulus. President Obama will have to make further requests from Congress to close the gap between what the economy needs and the stimulus package approved last week.
However, there is one step that President Obama can take to boost the economy without going through Congress: he can reaffirm his support for social security, and assure the baby boomers nearing retirement that he will not allow their benefits to be cut. If this huge cohort - now in their late 40s, 50s and early 60s - know that they can count on getting their promised benefits, they will feel more comfortable spending and supporting the economy at a time when it badly needs a boost.
The impact of social security on boosting consumption has long been touted by economists, most importantly Harvard economics professor Martin Feldstein, who had been Ronald Reagan's chief economist and is now an advisor to President Obama. (We will ignore the fact that his early results on this topic were driven by a programming error and that his later results disappeared with government data revisions.)
Feldstein claimed that workers spent more money during their working years than they would have otherwise because they expected to receive social security benefits when they retired. Therefore they had less need to save for retirement.
However, many workers may not be expecting to receive their social security benefits because there has been a concerted effort over the last quarter of a century to undermine confidence in the programme and to cut the level of benefits. If workers question whether they will get the social security benefits they have paid for, they will feel more need to save rather than spend.
Workers are likely to be especially fearful about the prospects of getting their social security benefits now due to an all out assault on the program financed by billionaire banker Peter Peterson. Peterson has spent much of the last two decades trying to cut social security, Medicare and other benefits for the elderly. He recently contributed a billion dollars to a foundation bearing his name that is primarily committed to this goal.
Peterson's investment has paid off both in exposure from the media and more importantly attention from many members of Congress and their staffers. There are now dozens of senators, congress people and their staff running around Capitol Hill crafting creative new ways to cut social security. Baby boomers are right to fear that Peterson and his crew will take away their benefits.
While the idea of taking away benefits for which workers had already paid was always outrageous, it especially outrageous at a time when these workers have just seen much of the wealth in their homes and their retirement savings disappear in the housing crash and the collapse of the stock market. Making matters even worse is that fact that Peterson's friends in the financial industry, along with many of the economists who would like to cut Social Security, were the primary culprits in this disaster story.
But, President Obama can quickly get us beyond this attempted heist to the benefit of both older workers and the economy. He can simply assure the baby boomers that he will not allow the Peter Petersons of the world attack their benefits.
In fact, he should assure the baby boom cohorts that their social security benefits are safer than having money in the banks (even the government insured ones) and that they can plan accordingly. This may not lead to a huge burst of new spending, but baby boomers will spend more confidently through time knowing that they can count on getting the benefits they have earned.
President Obama will clearly have to take other steps to get the economy fully back on its feet, but a simple speech assuring baby boomers that social security is safe will be an important step in the right direction. This speech also has the additional advantage that, unlike other forms of stimulus, it doesn't cost anything. As we all know, talk is cheap.