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Stimulus Optimization: a model to save the economy

Trickle Up Stimulus Optimization Theory

I’m going to give you what I believe is the best strategy for Stimulus Optimization, and then layout the logic that got me to my conclusion. (Note: since we’re talking about an economy at large, I’ll be doing a lot of generalizing for demographics. I obviously know not ALL people in that demographic are like that).

1. Money should stay circulated in old lower income males, small businesses (but not large corporations), social enterprises and non-profits.
2. Money should be put into industry-creating technologies, but not just for technology development but also the commercialization of the technology. The government should support tons of startup entrepreneurs but pay them just enough for them to survive.
3. Money should be put into essentials of society like Education, Healthcare and Tech Infrastructure.

Some of this may seem unintuitive, or possibly biased/humanitarian, but I do believe that this is most economically efficient. Let me explain why.

Underlying Principles

So my theory is derived from the following principles:

1. The economy is maintained based on money flowing from one person to another.
2. When someone has money, they spend a certain amount and save a certain amount, creating a spend/save ratio for each individual.
3. If everyone is frightened and saves, the economy will become worse because no one spends and no one makes income.
4. As a result, money must go through the people who have the highest spend/save ratios and extend to as many nodes in that group as possible.
5. Technology advancements create new industries and provides thousands of new jobs. More than 20% of the jobs today didn’t exist 20 years ago.
6. For the US to stay strong, it should take the actions of which made poor countries rich.
7. There are some things that MUST be there for a country to function, such as healthcare and education. In this case, it doesn’t matter if it is financially efficient or not. It must be done.

Give money to people who have high spend/save ratios who also buy from other high spending entities

So we know that money NEEDS to stay in the hands of those who have a high spend/save ratio. Once it hits a low spending ratio, it will be saved up and others will lose income. So it is important to identify demographics that tend to spend a lot of what they have:

-Low income families spend most of the money they make because they have to. They are buying essentials for survival and it is very hard for them to save money. On the other hand, the middle class wants to save up due to uncertain times, and they can afford to save money.

-The elderly usually spend more money because their necessities increase, and the value of saving for the future for them decreases. Yes, they are worried and would save too, but I believe it would still be lower than those who are in their 30s.

-White males probably have a tendency to spend more than asian females because of cultural values and because woman on average look for security and are more careful with their money. (Note: someone pointed out that women are shopping machines, but I think that men buy more expensive toys. Women could buy $2500 handbags, but more men than women eye at $120,000 cars just to look successful).

One very important thing to note is that, even if you give money to a person with a high spend ratio, if he spends it on a large corporation, then it becomes less ideal. Yes, corporations spend lots and lots of what they have to operate business. However, they usually pay their employees who are white collar workers (middle class who saves), and the rest go to wealthier shareholders who will hold on to their money very tightly.

However, if this high spend ratio person spends money at small mom & pops businesses, the small businesses would probably still need to spend more money for essentials instead of thinking of their juicy profits. They probably also pay a lot more low income people again who have a high spend ratio. In this sense, putting money into nonprofits and social workers accomplish both goals of flowing through low-income spenders and fulfilling essentials that keeps society functional.

Invest in high potential companies like a Venture Capitalist instead of a Distressed Buyout Firm

Right now the government is bashing a lot of dollars into companies that are struggling. However, given the economy, even healthy companies are losing money and making even grimmer future projections. The chances of these dying companies turning into sustainable profitability is extremely slim. Instead of mending a broken rice bag, the government should focus on knitting a new one to catch the leaked rice.

To save the economy, the government must operate like a Venture Capitalist. It needs to invest in high-growth potential industries. Each dollar needs to go into something that can potentially make thousands of dollars in return (the venture capitalist model: most investments will fail but the ones that succeed will make 100x the investment). These industries can create a lot more jobs that would allow a comeback in the economy.

Like VCs, instead of simply investing in technologies, the government should help them become commercialized and accelerate market adaption as most paradigm shifting technologies take years to become a business. The US should do what caused countries like Taiwan and Japan to achieve their economic miracles via technology a few decades ago.

I therefore suggest that the government subsidizes lots and lots of high-tech startups. They should subsidize just enough for the employees to sustain their lives. That way, startup people will be too poor to save money, and they’re EXTREMELY efficient in driving innovation with very little money. Trust me, A LOT of startup people will continue to do what they love if they didn’t need to worry about basic living (I live frugally on around $1000 a month so my business can be successful). The problem with the US economy is not that we don’t produce. Its that too many people get paid too much without TRULY creating value that is worth that much.

Internet Infrastructure should be among essentials

I don’t need to spend time arguing why the government should help out with essentials. We need sewage systems, healthcare, education and such no matter what. However, I do want to argue that fast internet should be an essential too.

The internet is something extremely cheap (when’s the last time you complained about internet price?), but has the potential to impact millions of lives, rich or poor. Internet infrastructure will simply make everything so much more efficient and faster that the chances of producing $1000 with $1 becomes much more likely. Essentially, any poor boy with the internet could be educated, reputable, and could be potentially running a million dollar business to feed his family.

What the Government is doing today

With this framework in mind, I was pretty happy to see that it is actually what the government is doing today. The government is obviously pouring tons of money into the essentials like healthcare, social enterprises, and internet infrastructure (awesome). The government is also investing in high growth markets like clean energy and sustainable technologies, so that’s good too.

What I would urge the government to do differently is to stop funding those companies who made the mistakes with our taxpayers money. At least make sure every $1 you give them, they are able to produce $10 back, not to give bonuses but to save the country. In 2007, the top 5 financial firms on Wall Street alone paid out $39 Billion worth of bonuses, even though that year the firms’ shareholders collectively lost about $74 billion in stock declines (worst since 2002). Guess how much of that money actually became someone else’s income? And how much of that went to sleep safely in a Swiss bank?

Finally, the government should really focus more on small businesses and start-up entrepreneurs, since it helps with both money circulation and driving new innovation. If the government does all of that, I think there will be hope we can believe in after all.

For a follow-up on this model, read this article: The government should pay entrepreneurs salaries to save the economy

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