The Long Run Blog

Critical Thinking on Money, Finance, and Economics

How to fix the economy

Snopes had a recent expose of this hair brained idea:

For a total cost of 40 Billion you could solve our financial problems. There’s about 40 million people over 50 in the work force. Pay them $1 million apiece severance with the following stipulations.

1) They leave their jobs. Forty million job openings
– Unemployment fixed.

2) They buy NEW American cars. Forty million cars ordered
– Auto Industry fixed.

3) They either buy a house or pay off their mortgage
– Housing Crisis fixed.

A coworker said someone on a call-in radio show offered the above solution and my coworker seemed to think it was a pretty workable idea. (I would imagine the caller was just repeating what he read in a forwarded email and by not attributing the “brilliant” idea to the forwarded email he got he was trying to take credit. Tricky.)

Snopes didn’t delve too much into the problems with this plan other than the stupid math. 40,000,000 given 1,000,000 each means we tack on those 6 zeros in the million to the end of 40 million figure to get the cost. 40,000,000,000,000. It’s pretty easy to see the amount is 40 trillion, not 40 billion.

Assuming the USA is willing to print up $40 trillion, the first glaring problem with this plan is retailers know an awful lot of people in their community have a lot of money suddenly they didn’t earn and are now probably willing to spend with abandon. Assuming the labor stats are right that there are 40 million workers over age 50, that represents about 30% of the working population (there are about 135 million people in the USA workforce). So if you’re a retailer and you know every third or fourth person walking through your door now has $1 million magically added into his/her bank account, are you going to keep prices the same? McDonald’s will surely eliminate the senior coffee price, for starters.

Now the plan calls for people to pay off their mortgages and buy a new car. Let’s say everyone owes $100,000 on their home and buys a $30,000 car (about the average price of a North American car). They have $870,000 left. The other part of their plan is they’re to quit, live on the $870,000, and let us younger workers all move up. This assumes, of course, companies won’t take it as a great way to just eliminate those jobs totally. A government paid attrition plan.

Let’s assume you put that $870K into a safe term deposit that pays a conservative 3% annual interest. And let’s say you draw $50,000 a year and draw a bit more each year adjusting for a 2% inflation rate (so 50,000 in year 1, $51,000 in year 2, $52020 in year 3 etc.) By my calculations you’ll make it to age 68. You’re somewhat short of the average life expectancy (77.8 years). If you wanted to draw $75K a year, you’d only make it to age 62. Although I don’t assume I’m going to live until 80, if I ever had a big windfall, I would portion out my money assuming I’ll make it to age 80. To make it to age 80, you’ll have to be content with living on $32K a year.

Hope that car you bought at age 50 lasts you!

— Karl Mamer

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April 14, 2009 - Posted by | Retirement

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