In the last 10 days, U.S. President Barack Obama has unveiled three distinct deficit-reduction plans to solve the nation's economic problems.
While all three have their good points, each has its own set of problems, too – including the time-consuming political firestorm we can expect to see as the plans are debated in Congress.
We can make some educated guesses about how this will all play out – and how the final plans will help or hurt the American economy. But the bottom line is that you as an investor can't wait to see how the deficit-reduction saga ends: You need to take action now.
So let's take a look at the proposals, the likely outcomes – and the moves you need to make immediately.
A Trio of Deficit-Reduction Plans
President Obama has unveiled three overhaul plans for the U.S. economy – a "jobs" plan, an "offset" plan and a "deficit-reduction" plan.
Of the three, the "offset plan" that calls for reductions in tax deductions is clearly the best. But there are some good ideas in the other deficit-reduction plans, too – not to mention a couple of real stinkers.
Here's a look at each of the three plans – the good, the bad … and the downright ugly.
The "Jobs" Plan: President Obama's jobs plan is a mix of spending on infrastructure and providing aid to state and local governments, both of which were tried in 2009 and didn't work.
Government infrastructure spending is appallingly expensive in the United States – in fact, it costs more than twice as much here as anywhere else – because of the additional restrictions on its design and labor usage.
However, the Obama jobs plan also included a 3% reduction in employees' Social Security contributions (expanding and extending the current one-year reduction of 2%). Finally, it included a 3% reduction in employers' Social Security contributions, but only for wage bills up to $5 million.
For me, it's the last provision that made most sense and should be extended. Reducing employers' Social Security contributions by 3% reduces the cost of labor – which should expand the demand for it.
Look at it this way: If the "price elasticity" of labor is 50% (estimates for this piece of economic jargon are all over the place, but 50% is about the midpoint), then a full 3% reduction in labor costs should increase demand for labor by 1.5%, or about 2.2 million jobs.
That would reduce the unemployment rate by about 1.2%, taking it from 9.1% to 7.9%. To me, that's well worth doing.
Naturally, the Social Security trust fund can't afford to do this every year, but it should certainly be done for two years, because employer-hiring decisions take time to implement (and because U.S. unemployment still will be higher than we'd like in 2013).
But that's not all. There should be no "Mickey Mouse" restrictions to $5 million payrolls – it's just as important to encourage hiring at McDonald's (NYSE: MCD) or Wal-Mart (NYSE: WMT) as it is to promote hiring at the local corner store.
The cost of this would be about $300 billion, and would be evenly split between 2012 and 2013.
This alone is such a good idea that you could probably abandon the rest of the so-called "stimulus."