Rational Investing: Stimulus plan must jolt job market

Perhaps if we had an economic literacy test that politicians had to pass before running for office, they would not be considering all these ill-conceived actions.

At the very least, they might think about the consequences - some unintended - of their legislation. And maybe, just maybe, it would guide them to setting aside the acrimonious and counterproductive bickering that stands in the way of decisions that produce workable solutions to the country's problems.

One of their first acknowledgements needs to be that the capitalism on which this country is built - and is the envy of most the world - does not produce prosperity in a constant upward direction. To paraphrase the profane, "Recession Happens." It is part of the economic cycle, unwanted but unavoidable. And here's a fact that both Congress and the administration need to understand - a recession can be made worse by bad legislation.

As Congress mulled over President Obama's $900 billion economic stimulus plan, I was thinking that it's possible the final version will make sense. But let's not bank on it. Here's a maxim for them to think about: Nothing happens until someone sells something.

How does that tie into the big picture? Want banks to lend more? Then loan demand has to be created. But by whom, the person buying a home or car or other large-ticket item, or the companies that manufacture them? How likely is that to happen if the person is without work or fretting about his current job?

From former Treasury Secretary Henry Paulson's three-page memo requesting $700 billion to "avoid a financial collapse" to the original House stimulus bill, the root cause of the problem has not been adequately addressed. Politicians preferred a populist lambasting of Wall Street. Although the minions of the concrete canyon were not without fault, as has been written about ad nauseam, little attention was given to the increasing number of unemployed. Bailouts were emphasized over job creation.

Job creation has to be the primary focus of an effective stimulus plan. Good organizations may need funding, good causes may need money, lots of programs may be low on cash, but those must be dealt with separately unless they actually create employment. If the stimulus is not heavily targeted to job creation, if it panders to special interests and popular but civic or social causes that don't produce jobs, it will only prolong this period of economic stress.

Retirement distributions

Not directly related to the recession but reflective of Washington's strange logic in helping retirees who are taking Required Minimum Distributions from their retirement plans, is the one-year lifting of that requirement. Passed in 2008, but effective for 2009, it is a populist move with good intentions. However, the timing is all wrong. It's a case of closing the barn door after the horse has left. Here's why: RMD is based on two factors, age (distributions must begin the year in which one reaches age 70 1/2) and the balance in the retirement account as of Dec. 31 the previous year.

If you had to take a distribution in '08, it was based on your account balance at the end of 2007, an amount that, in light of the substantial market decline this past year, was likely to have been substantially greater than the market value as of year-end '08.

Assume a balance of $100,000 at Dec. 31, '07. The RMD is approximately $3,650. If the portfolio declined in value comparable to the market indices at year-end '08, it was probably down to about $65,000, for which the RMD is $2,453. Had the waiver applied to the '08 RMD, $3,650 could have been retained the in the account, at the same time eliminating its attendant tax liability.

If only the waiver had been available for '08 distributions. Those of us (and I include myself) who had to take an RMD certainly would have been better off. Oh, well.

Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.