Barack Obama gave a big speech in Toledo today, in which he announced a series of sensible steps designed to stimulate job creation and keep people in their homes. Here are the basics:
In an address here, Mr. Obama, the Democratic presidential nominee, proposed giving employers a $3,000 tax credit for each new hire to encourage job creation. He said he would seek to allow Americans of all ages to borrow from retirement savings without a tax penalty; to eliminate income taxes on unemployment benefits; and to double, to $50 billion, the government’s loan guarantees for automakers.
Mr. Obama also called on the Treasury and the Federal Reserve to create a mechanism to lend money to cities and states with fiscal problems, and to expand the government guarantees for financial institutions to encourage a return to more normal lending. He also proposed a 90-day moratorium on most home foreclosures; it would require financial institutions that take government help to agree not to act against homeowners who are trying to make payments, even if not the full amounts.
All excellent ideas — including the retirement account idea, which Obama appropriately credits to McCain:
Mr. McCain last week proposed waiving federal rules that require older Americans to begin withdrawing funds as soon as they reach age 70 ½. On Monday, Mr. Obama praised Mr. McCain’s proposal, telling the Ohioans, “I want to give credit where credit is due.”
Obama continues to run a decent and honorable campaign. Let’s see if McCain, who will reportedly announce his own economic plan tomorrow, can muster a similar degree of class.
We’ll need a lot more — especially for publics works projects to create jobs (infrastructure investment for public transit and renewable energy). $200 billion over 3 years sounds about right.
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p>Beware, at this moment, the deficit hawks. Deficit spending can be a good investment during a recession. When conservatives are spending on war or tax breaks for the wealthy, they never talk about deficit spending. But if Obama wins, every conservative in DC will suddenly be a deficit hawk, taking about the need to cut, freeze, and prioritize. And a gullible media will go with them.
You gets the cards you are dealt, and the cards you are dealt include eight years of outrageous deficit spending on war, security, protectionist subsidies and medicaid benefits.
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p>This will necessarily rein in some liberal ambitions, even if the Dems get to 60 in the Senate.
While Barack Obama is demonstrating that he has a thorough understanding of economics, George W. Bush and John McCain keep proposing Ponzi schemes that will ultimately lead to collapse. The voters should be cautious of Republicans bearing gifts, especially at election time.
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p>The GOP’s desperate ploys should be transparent. They also should be roundly rejected.
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p>John McCain, former chairman of the Senate Commerce Committee, doesn’t know anything about economics or the economy!?! Unbelievable!
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p>If the economy is so sound, why is there a need for a bailout or rescue?
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p>Ponzi schemes can’t go on forever. Ultimately, someone has to pay!
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It sounds like the Obama team has put a lot of thought into this plan. So the folly of the early 401K withdrawal proposal comes as a huge surprise. Encouraging people to withdraw money from their 401Ks — especially in a down market — is bad policy. If a financial advisor encouraged their clients to do that, they would risk losing their license.
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p>Obama proposes eliminating the tax penalty (although not the income tax) on 401K withdrawals. As a society, we are not saving enough as it is. Using funds set aside for retirement to pay for current bills should be a last resort (that’s why we have the penalty in the first place). It most certainly should not be a route touted as advantageous, wise, or least of all generous.
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p>But what about the people who need the cash? A smarter way to address that need is to reduce or eliminate contributions to a 401K until the person has dug themselves out.
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p>Additionally, exemptions from tax penalties already exist. Among them, the 5-year rule and other circumstantial exemptions:
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p>- You become totally disabled.
– You are in debt for medical expenses that exceed 7.5 percent of your adjusted gross income.
– You are required by court order to give the money to your divorced spouse, a child, or a dependent.
– You are separated from service (through permanent layoff, termination, quitting or taking early retirement) in the year you turn 55, or later.
– You are separated from service and you have set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy. (Once you begin taking this kind of distribution you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
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p>There’s a common thread of encouraging debt / discouraging savings in Obama’s plan. When I have time, I’ll comment on Obama’s plan to offer loans to states. Here’s a preview: state indebtedness has quadrupeled in the last 10 years. The federal government (that has debt problems of its own) should not be encouraging states to dig themselves any deeper.
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Just because you can do something doesn’t mean you should. One trend in the 401k industry recently has been the “debit card” approach to loans. Not necessarily sure that encouraging the dilution of retirement savings is in the national interest.
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p>Not quite sure what “He said he would seek to allow Americans of all ages to borrow from retirement savings without a tax penalty” means. You currently can borrow from qualified plans (if the plan permits loans) without tax penalty. If you default on the loan, then the transaction is deemed a distribution and subjects you to ordinary income tax and the 10% early withdrawal tax if you’re under 59 1/2. Is he meaning that he would extend the allowance of loans to IRAs (which currently do not provide for loans)?
I’m not fluent in matters of 401(k). But the language used above says people would be able to “borrow” from retirement savings, indicating that the must pay it back. You say “withdraw”, which means that there is no obligation to replace the retirement funds.
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p>Now, in practice it may be a withdrawal despite being designed as a loan – again, I don’t know enough to comment. How would it work and is it fair to characterize it as a withdrawal? I think you make sense, especially when you talk about taking money from a 401(k) in a down market.
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p>But I wonder out loud if the risk/benefit of borrowing from oneself is better, in this economy at least, than borrowing from BOA or other traditional lenders?
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p>On the other hand, I’ve heard more than one financial advisor say it’s better to allow foreclosure on your home than to raid retirement funds (the logic being you may loose your house even after raiding your retirement, thus loosing both the asset of your house and your retirement funds).
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p>For argument’s sake, if this advice is to be trusted, would it be more responsible for the government to discourage and prevent the use of 401(k) borrowing/withdrawal, or would it be best for the government to remove regulation and restrictions and allow people the freedom to choose to raid or not raid their retirement funds? Personally, I’m in favor of government nudging people into doing the correct and prudent thing. But it seems that Republican philosophy would say that we should allow people the freedom to do with their money what they want to do, irrespective of prudence.
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p>I’m also a pragmatist. Initially, it does seem to me that dweir is correct in thinking that the 401(k) idea is a bad policy. However, I’m for whatever works and would be willing to change my mind.
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p>I also wonder if McCain and Obama think that raiding the 401(k) is a bad long-term idea, but are worried about the political backlash if they don’t do something to help people get immediate financial to save homes and put out short-term financial fires? For example, people that save their homes (even temporarily) through the 401(k) – or lose homes that might have been saved with looser 401(k) regulation – will remember who was president when they saved/lost their home come 2012. But when they retire, neither Obama or McCain will be on the ballot and neither will need these people’s votes.
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p>If my argument is correct (and I admit I could be way off base), I wonder what people prefer? Do people prefer the guiding hand of government, a hand that might make things financially difficult in the short term, but in the model above makes things financially better for individuals and the country in the long run? Or do people prefer the government allow people to make the decisions for themselves, even if it means that it may cause more long term damage than the short term relief that it would provide?
Our entire economy has been based on discouraging savings for the last 15 years or more. Households in the US save an average of 0.8% (at least they did in 2004 and I doubt that number’s changed much) of their disposable income, which is both a historical low and a low among industrialized nations.
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p>A higher savings rate will discourage spending and will slow the economy.
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p>I’m not saying this to necessarily defend Obama’s plan (or, more accurately, your interpretation of Obama’s plan) – I’d like to see more encouragement to savings. After all, among other things, a higher savings rate would mean that folks who fall on hard times could be more self-sufficient, which means that the government programs in place to help such people would cost less to run.
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p>Rather, I’m saying this to state the obvious – if Obama encouraged savings right now, with the economy on the brink of… something or other (not sure what, exactly, but it looks bad), it could have the effect of nudging us over that brink.
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p>I agree with you that in general we should encourage more savings, but like Obama I don’t think right this minute is the time.
Allowing people to withdraw money without penalty from their 401k is a terrible idea and I hope that congress has enough sense to stop it. Most 401k’s have lost 20% or more of their value.
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p>If you invested one hundred dollars that grew by 30% over a number of years (now worth $130) but then it lost 20% of its value in the last few weeks (now it’s worth $104) and you withdraw it and pay 25% income tax, you wind up taking home $78. If you keep that $104 in your 401k for ten years at 3% annual returns, you wind up with $140. Sure it’s only a $10 increase over where you were in August, but it’s 180% more than you’d bring home if you follow Obama’s lead. The value of 401k’s is there are huge disadvantages to making withdrawals, so people don’t foolishly lock in losses.
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p>I get that people need money, so instead of proposing ways to increase future poverty, Obama and the dems should propose ways to increase wages and reduce poverty – raise the minimum wage to $11, have it go into effect Jan 1, 2009, link it to inflation; enact universal healthcare; pass the employee free choice act; enact free universal child care (and pay the workers a living wage); hell, get rid of 401k’s altogether and enact a real national pension plan.
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p>If you think this is crazy, I’ve got some preferred stock that a Republican President forced a bank to sell to the US government that says it’s exactly the right time to pass some crazy ideas that actually benefit the poor.
in 401(k) and other qualified plans. Not sure from the original description what he is proposing, but many of the significant concerns are already covered in the law (see IRC 71(t)). Making it even easier to take out funds prior to retirement isn’t a “societal good”.
Back in 1990 the GOVERNMENT sized the Mustang Ranch brothel
in Nevda for tax evasion, and is reuired by law, attempted to keep it running. They failed and it closed. Now we are trusting the economy, multiple large corporations and a new federal beaurocracy to a pack of nit wits who couldn’t make money running a whore house and selling cheap booze!
How do you think we got in this mess in the first place?
…it would have…what?
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p>Maybe they can put Vitter and Mahoney in charge.
we’d probably be charged for $20 condoms.
rally have any effect? i suppose this amount is meant to offset the cost of recruiting new hires, which can be quite expensive. but that’s not the major expense of an employee. often, health care and other benefits are (or so i’m told – correct me if i’m wrong).
Every economic change has some impact at the margins.
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p>But it sounds like a bit of a gimmick to me.
to turn on a dime and craft new ideas out of thin air in times of need (such as when trailing in the polls) remains formidable.
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p>I don’t think either McCain or Obama have a lot of ideas to add to avoiding financial armageddon. I think Obama, at least, has the ability to pause and think and to reflect that the President’s job on these matters is often to say something like, the only thing we have to fear is fear itself, something lacking from our current occupant at the White House, who cannot do anything without making it a national emergency.
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p>For both Obama and McCain, as compared with the current occupant, it appears they are willing to settle for run of the mill proposals with dollar figures more in line with the long tradition of economic relief plans. Obama and McCain, plus or minus $10 Billion, a rather mundane figure in an era when the national debt clock just added another digit and the Federal Reserve and Treasury are moving around $Trillions every couple days.
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p>I think there is some hope that the financial world may not really be coming to an end when there is concensus among the Presidential candidate’s emergency relief proposals on a mundane dollar figure to deal with the problem.
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p>On the other hand, I think progressives really ought to note that this financial emergency has drawn such jaw-dropping flows of cash out of a federal government notably stingy when it comes to relief for the average joe. So perhaps, if we find ourselves with unemployment around double digits, and housing prices continue to fall, a year from now, a rallying cry from progressives might be that the bar has been raised on the level of intervention that might be contemplated.
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p>And hope that they don’t just ask for a $trillion bucks worth of old-fashioned road projects, in an era when $trillions ought to be reserved for energy 2.0 projects.
If we’d spent a month’s worth of Iraq Occupation funds* on renewable energy research and installation subsidies five years ago, we might not need that oil at all.
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p>*That’s ‘only’ $5B, folks.
The occupation of Iraq and Afghanistan now costs $16B per month.