Obama's "middle-class rescue plan"

Posted by wpcomimportuser1 Monday, October 13, 2008 at 5:19 pm

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I've been reading the speech Barack Obama made on the economy this afternoon, plus his new Rescue Plan for the Middle Class. The speech ends with an eloquent farewell to the age of easy money:

We've lived through an era of easy money, in which we were allowed and even encouraged to spend without limits; to borrow instead of save.

Now, I know that in an age of declining wages and skyrocketing costs, for many folks this was not a choice but a necessity. People have been forced to turn to credit cards and home equity loans to keep up, just like our government has borrowed from China and other creditors to help pay its bills.

But we now know how dangerous that can be. Once we get past the present emergency, which requires immediate new investments, we have to break that cycle of debt. Our long-term future requires that we do what's necessary to scale down our deficits, grow wages and encourage personal savings again.

Well said. If President Bush had said something like that in September 2001, instead of telling Americans that it was our patriotic duty to go to Disney World, we'd probably be in far less economic trouble right now.

The new proposals Obama outlined today, though, are at best only tangentially related to these long-term priorities. They are:

1. A temporary tax credit for firms that create new jobs in the United States over the next two years.

2. New legislation to allow families to withdraw 15% of their retirement savings – up to a maximum of $10,000 – without facing a tax-penalty this year (including retroactively) and next year.

3. A 90-day foreclosure moratorium for homeowners that are acting in good faith.

4. A Federal Reserve/Treasury facility to lend to state and municipal governments, similar to the Fed's new commercial paper lending facility.

Now economic crisis-fighting should probably take priority over long-run belt-tightening right now. I'm personally underwhelmed by these four new ideas, but I tend to be underwhelmed by nearly all presidential-candidate economic proposals. Nos. 1 and 4 seem reasonable enough. As for the foreclosure moratorium, I guess it could pressure banks to do more workouts of troubled mortgages--but make no mistake, most of those are going to end up in foreclosure anyway. No. 2, the no-penalty IRA/401(k) withdrawals, is the idea I like least.

Yeah, letting people below retirement age take money out of their retirement accounts without penalty would free up some cash. It also would incent people below retirement age to take money out of their retirement accounts and never replace it.

This is, by the way, more or less the opposite of John McCain's proposal to let people 70 1/2 and older choose not to withdraw money from their requirement accounts if they don't want to. Obama endorses that idea in his rescue plan too, although he points out that there's no need for a new law to make it happen. The idea here is to keep people from being forced to sell their shares into a bear market. But as commenter jstnorv pointed out when I wrote about McCain's plan, you can take in-kind distributions out of your retirement account. That is, you can just withdraw the shares without selling them, although it's a bit more complicated than taking cash.

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