Dear John: I’m a constant reader of your column.
Several times you’ve referenced the spending of IRA monies as a way of stimulating our sorry Obama economy.
Is there a Crudele article or pamphlet that explains exactly how the process is supposed to work? If there is, how do I obtain the information?
Please let me know. S.B.
Dear S.B.: An economist named Walter J. Williams and I first proposed this in April 2004 in a Milken Review article entitled “Retail Therapy: Using Retirement Savings as a Fiscal Tool.”
Back then, of course, the economy was doing just fine, and nobody figured the available monetary and fiscal tools wouldn’t be enough to get us through our difficulties.
But Williams and I did see trouble coming.
So we made a suggestion that was as radical then as it is now: Eventually the government would exhaust its ability to spend money, and the Federal Reserve wouldn’t be able to drop interest rates any lower. We called this an unsteady two-legged stool that needed a third leg.
That third leg would be retirement funds — or, more precisely, the ability to change the rules on retirement funds so that people would have quicker access to their money when Washington needed more spending to assist the economy.
Our suggestions, which I’ve repeated and modified over the years, were modest. The main one was to allow people to withdraw some percentage of their money at some reasonable tax rate in order to purchase a home.
This would help a struggling housing market recover and aid all the industries — furnishings, appliances, lumber — that depend on housing.
Again, housing was doing just fine in ’04, but we proposed this anyway.
Of course, a house has always been viewed as an investment. So allowing a retirement fund to be invested in real estate instead of just stocks and bonds seemed pretty tame.
And Washington would benefit too, because this withdrawn retirement money would be taxed at some rate, and this would generate revenue for the US Treasury.
Allowing people to remove money from retirement funds for perishable goods — a car, refrigerator, new computer, etc. — is a lot more controversial. But — in theory, anyway — it’s doable.
Pick an industry that’s struggling — like the Detroit auto business was at the height of the financial crisis — and it could be aided by this sort of retail therapy.
For instance, people with at least $100,000 in retirement savings would be able to take 5 percent of that money out of their accounts to buy a car, or a fuel-efficient car, or an electric car. And they’d pay just, say, 10 percent tax on that money instead of their usual rate.
And, of course, there would be no early-withdrawal penalty.
Retail therapy could be thrown into reverse during good times. Instead of the Federal Reserve raising interest rates — which everyone knows is a blunt tool — to slow down the economy, the government could allow taxpayers to add more money than would normally be allowed into retirement plans.
This will prevent people from spending that money during good times.
You want more details? I don’t have them.
A lot of research will need to be done on this. Some of the questions I have are: What effect would the depletion of retirement assets under retail therapy have on the stock and bond markets, where much of this money is invested? What tax rate is ideal for these withdrawals? Should people ever be allowed to take money out of retirement accounts completely tax-free?
A lot of computer work needs to go into this idea. But if we’ve come to a time in this country’s life when the best our economy can do is 2 percent to 3 percent annual growth, then someone had better come up with some new ideas.
Retail therapy is one.