How an 8X Stimulus Can Occur
The following is how the proposal in the preceding post could be a stimulus for true economic recovery and generate enough tax revenue to offset the costs of the allocated unemployment benefits.
We are nearing completion of plans for a project to build a home that has a budget of $237,500 and which needs financing of $220,000. There is a cabin to be torn down so the utilities and septic are in place. If the bank requires the loan not exceed 70% of the appraised value of the completed project, that appraisal must be at least $315,000.
With a half acre of land on a county road just of #101 and 4 miles from town that should not be a problem except for the possibility that current sales may include foreclosures in the comps and the alleged market value will be less than the value needed.
What follows is a hypothetical situation.
If the appraisal came in $40,000 lower @ $275,000, then the maximum loan amount would be $192,000, a shortfall of $28,000, and the project would not be built.
I estimate the approximate labor costs for all the contracting cycles in building a one of a kind home at this budget at $40,000 for in house labor, $20,000 on site labor for subs and $30,000 at various shops and factories.
Now if every sub and off site producer had a third worker subsidized by this plan (assuming here that employers will be paying 50% more than the employee’s benefit) their labor costs would be reduced by 20% which is $10,000 that could be taken off the bids and prices. Our in house work would have new hires at a two to one ratio. That would have $27,000 of our labor costs reduced by $18,000. Costs are now down by the amount of the shortfall and the contract can be reduced accordingly.
The subsidy of $28,000 of UI benefit money, which would have been paid to those workers whether or not the project was built, would now enable $237,500 of economic activity to take place..
This is an 8.4X multiplier of the allocated subsidy followed by the economic expansion of the continuing spending by all the recipients of the project’s earnings, product sales and then the ongoing effects of their spending.
The additional taxes generated on the wages and incomes of the workers and businesses on the initial $172,000 activity would probably generate the 16% in taxes needed to offset the $28,000 benefit expenditure. After that, as the ongoing monetary velocity wave continued, it would be revenue positive.
This phenomenal economic growth leverage is created by using the stimulus funds to enable a prudently, 30% down, financed project to take place. It should be noted that the lent funds are at affordable bank interest, not 15% to 30% consumer credit and that the product far outlasts the term of the loan.
This is how true economic stimulus works. By financial liquidity permitting real product to be created by real people who than use their earnings to patronize more of the same.
© Peter Asher, 3 March, 2010
