1.Please list and discuss ten of the proposals to raise the U.S. household's savings rate over the next 25 years.Which three proposals may be the most powerful, in your opinion?Why?

2.Earlier we discussed a proposal to raise the average minimum down payment for a new or used car from, say, $2000 down to, say, $4,000 down.In your opinion, is this idea a good idea?Or a bad idea?Why?

3.In your opinion, are penalties more effective than rewards when it comes to raising the savings rate?Or are rewards more effective than penalties?Why?

Below is the lecture , can you follow

PROPOSALS TO RAISE THE AVERAGE U.S. HOUSEHOLD SAVINGS RATE:Before we launch into a discussion about various proposals to raise the savings rate, let me share with you a few more ideas involving the drop in the savings rate.Buying and owning a home in the U.S. used to be called the 'American Dream"--- and, for many Americans, it still is.Yet, over the past 25 years--- 40 years, really, we have seen a drop in the top FIT rates.As mentioned earlier, the top FIT rate was 50%, and before that, 70%, not that many years ago. Now the top rates are 32, 35 and 37%.Years ago, a person or a family earning very high income levels would be told by financial advisors, relatives, or friends:"Beg, borrow or steal the down payment--- you MUST BUY A HOUSE OR A CONDO!"This was owing to the fact that the mortgage payments as well as the property tax payments were a tax deduction for purposes of declaring income for FIT and SIT purposes.Now, the mortgage deduction is no longer relevant in most cases, and the top rates are lower, thus, there is less of a 'tax incentive' to buy a condo, as opposed to renting that same condo.Obviously, there are still great reasons for a person rich enough to qualify for the loan to buy instead of rent:if she buys a condo, instead of renting, she may never be evicted by a landlord, and 30 years later, she will own the property 'free and clear'.The incentive to save up a down payment and buy a condo has decreased over the last 25 years.Also, we discussed an 'average' inflation rate of 3% per year over the past 25 years....For any one person, the rate of inflation may exceed this average 3% rate if: 1. A person lives in a major metro area---Seattle, Austin, San Diego, the Bay Area---- where housing costs tend to rise 5% per year to 7% per year.2.A person attends college:no product or service has risen in cost faster over the past 30 years than college tuition.When I took this class at UC Berkeley, my tuition was $727 per year.I will never forget writing that check for $212.50 every quarter.Now, tuition is a bit over $15,000 per year.Room and board costs have skyrocketed as well.3.If a person buys BRAND NAME products:Nike shoes, Apple products, Kelloggs cereal.These products that are heavily advertised often rise in price faster than the CPI---the average rate of inflation.If a person does ALL THREE....Well, it is a safe bet that they will experience inflation rates higher than the national average.Finally, in 2019 I will most likely PAY A STRANGER TO PERFORM A TASK FOR ME that I may very well have performed for myself 25 years earlier:landscaping, cooking dinner, tutoring kids, elder care, child care, car maintenance and repair, or tax preparation, where one study has concluded that over half of us pay a stranger to prepare our taxes for us, (or we purchase software prepared by a stranger) owing to the complexity of the task.Much of this has to do with changes in our culture.A child born today may never change the oil in a car.He may never even learn HOW TO DRIVE a car---why bother?If he lives downtown and his parents work in the Google 'village', they may not even OWN a car.They may hire a ride service on those few occasions they need a car.These changes in our culture help drive down the savings rate, as I pay strangers to perform these tasks for me.There is nothing "evil" about these developments---but they do help explain the drop in the savings rate in America.PROPOSALS TO RAISE THE SAVINGS RATE start with the idea that a savings rate of 8% is better than a rate of 4%---in other words, it would be 'better' for the American household if they saved $3,000 per year instead of $1,500 a year (on average).This is true on a 'micro' level---true for any one household.Yet, it is also true on a MACRO level---it is good for our NATIONAL economy as well. Now, one must be pretty arrogant, or confident, to say "a savings rate of 8% is superior to a savings rate of 4%"----but that is what I am saying.I hope to 'prove' it to you later in the course.Obviously, many tens of millions of people save 0% every year, and tens of millions more "dissave' every year.Proposals may be loosely grouped into two categories:REWARDS for people who increase their savings rates, and PENALTIES for people who "overspend".In no particular order of importance, PROPOSAL #1:stop taxing all interest income on all people all of the time:remember that hypothetical older, richer American who had saved $100,000?She deposited it into a bank, which paid her 1% interest, and the $1,000 in yearly interest income was taxed at 22% FIT and 8% SIT.What if there was no tax on the $1,000?Would this increase the national savings rate?And at what cost?One person who would not react to this change would be a person earning $40,000 in net income and spending $40,000 in spending.This guy may already be PASSING UP a 401 k plan at work.If I ask him:"will this proposal cause you to save more money?" he may ask ME:"what is this thing you call 'interest income'?"This guy HAS NO SAVINGS---and thus no interest income to report!THIS PROPOSAL MEANS NOTHING TO HIM!On the other side, our deficit will rise.Last year, our federal government took in about $3,400 billion in taxes, and spent about $4,400 billion in spending, resulting in a yearly deficit of about $1,000 billion for the year.The deficit will increase greatly THIS yearmore on this later.This proposal would increase future deficits by lowering the amount of money coming in on the tax side by, let's say, $100 billion.Thus, in theory, the next year's deficit would be $1,100 billion---and the Debt will rise by that amount, in theory, over the next 12 months.One can argue that this idea does 'more harm than good' as our government will have to borrow MORE money from the loan pool.OUR GOAL is to INCREASE the amount of money in the loan pool by raising the savings rate.This proposal would move us in the opposite direction.A TINY rise in the savings rate would not nearly make up for the rise in new government borrowing.#2:a more modest version of #1:perhaps no FIT and no SIT on any NEWLY SAVED money.This idea would not 'blow a hole' in future deficits.It is a small idea.Perhaps, as a nation, we can do better.#3:SOME SORT OF AD CAMPIGN OR ED CAMPAIGN to try to persuade more Americans to save more money each yearperhaps similar to those old anti-smoking, and now, more recently, anti-vaping PSAs (public service announcements)...in the old days, we were subjected to some hard-hitting ads trying to get us to change our behavior.One featured a woman with a hole in her throat, warning all of us "Don't be like me---don't smoke!"which was bad enough.Then, she took a drag on a cigarette through the hole in her throat.Pretty disturbing.I still remember it.Imagine a similar ad featuring some old person picking through the garbage in an alley, turning to the camera and telling us:"I made $40,000 a year and spent $40,000 a year all my life.DON'T BE LIKE ME!SAVE!!!".Well, this ad would be surrounded by ads---with better production valuestelling us to SPEND---sometimes on items, like a new car, that we do not really need.Any educational campaign in the schools would be worth a try, and many schools are adopting financial literacy courses.Yet, if that student goes home, and mom and dad are arguing over the new car they will buy....Well...teachers can only do so much to change behavior.It is certainly worth a try.PROPOSAL #4:ENFORCE HIGHER DOWN PAYMENTS ON CARS, CONDOS AND HOMES, AND CONSUMER DURABLES:as I have mentioned earlier, the required down payment that a family in the U.S. must put down to qualify for a car loan to buy a new car has dropped significantly in the past 25 years---perhaps too much.I mentioned earlier that even before March 2020, millions of Americans were having trouble paying back their car loansthey were over 90 days late on payments.90 days is kind of a threshold---if a buyer is over 90 days late, she is probably going to lose that car.One of the candidates running for president this last cycle got some 'bad publicity' when it was reported that a bank he took over was making car loans to people at an interest rate of 19.99%---reporters even tracked down some of the people involved.WELL OVER HALF of all cars purchased last year required a car loan.Now, each deal is different, but let's say that many Americans may borrow money to buy a car at, say, 5% interestif they qualify.Let's say a 'value-priced' car sells for $20,000---yes, they are still out there.Why would a firm that makes car loans want a 20% down payment, say, instead of just 10% down?Let's say I buy a new car for $20,000 and I put $4,000 down---20% down.The lender lends me the other $16,000.(Of course, this could also be a used car...sorry...'previously owned'...more used cars are sold each year than new cars)......OK!WORST CASE:I buy a car, but I lose my job the next day, and miss one month's car payment...then two....Then three...at some point, the lender is going to get that car back from me---repo the car.MAYBE---MAYBE if I put $4,000 down, the car loan company can recoup its $16,000 car loan by SELLING the car at a car auction---for $16,000 (I doubt it, but it is possible).If I put only $2,000 down, in theory, the lender is going to lose money on the transaction.Well, over the past 25 years, the savings rate has dropped, yet our desire to buy a new car (well...new to US - it can be four years old, let's say) has never waned.Thus, all across our nation, people started buying cars with 10% down instead of 20% down, thus INCREASING THEIR MONTHLY PAYMENTS, and extending the life of the payments---so, imagine a family putting only 10 % down having to pay, say, $260 a month for 67 months instead of $230 a month for 48 months.This LOWERS THEIR SAVINGS RATE over the same time frame.Because they never saved enough money to start with, at the outset, now they will never save enough money.Multiply this down payment by 20 or so and we can talk about condos and homes.Let's say a home in Grand Rapids, Michigan sells for $300,000.(We would need to double or triple that amount for a condo in San Jose). 30 years ago, a family would have to come up with a 20% down payment to QUALIFY for the loan.As the savings rate dropped, many workers in this sector of the economy that we call "residential construction and sales volume"---and powerful lobbyists----were able to get the required down payment 'relaxed' in some cases to 10% down and even 5% or even 3% down in SOME cases.We will look at this industry in greater detail later.A family that puts only 10% down---- $30,000 down on this deal, instead of 20% or $60,000 down for the same house---must pay higher monthly mortgage payments for three reasons:1.They are borrowing 11% more money:$270,000 instead of $240,0002.They very likely will be charged a HIGHER RATE OF INTEREST on the loan---perhaps 6% instead of 5%, including points and fees3.They very well may have to buy 'mortgage insurance'--- maybe $100 or $200 per month EXTRA.When all the dust settles, this family with only 10% down may pay over 25% higher monthly payments FOR THE SAME HOME OR CONDO.THEIR FUTURE SAVINGS RATE WILL BE LOWER FOREVER.ENTIRE INDUSTRIESsuch as the mortgage insurance industry --- are created OWING TO THE DROP IN THE SAVINGS RATE!If the minimum down payment requirement on new cars and new homes was raised back to levels enforced 30 years ago, the savings rate in this country would rise.Now, we would also see a drop in new car sales volume and new home sales volume as a direct result.The auto industry---all those jobs involved in the production, distribution and sales of new and used cars may argue that it just came out of a downturn during the 2008-2009 recession, when yearly car sales volume dropped from about 15 million new cars per year to about 10 million.There was a similar drop in new home construction and sales volume---the historic average if 1.1 million new housing units built, and about 5 million units sold per yearDROPPED IN HALF.Representatives form these two HUGE sectors of the economy may argue:"what are you trying to achieve here?A rise in the national savings rate?Then why drop a bomb on OUR industry?Why not come up with a 'national' solutionjQuery22408270365447417825_1601057458689?"Now, new home sales volume and new car sales will plummet in 2020 as the recession drags on, causing millions of workers to lose their jobs.Obviously 2020 or 2021 is NOT THE TIME to implement these new requirements---perhaps once the economy rebounds, and perhaps slowly---over 25 years or so.MANY households who need--- or wantto buy a previously owned car or a new car may have $2,000 to put down, but not $4,000.Many families in the Midwest and South who want to buy a new home may have $30,000 to put down, but not $60,000. If these stricter requirements were implemented, it would delay their purchase of the new home and the new car.This could cause a recession on its own:these proposals could stop a rise in Total Spending, turn it around, and cause it to drop.Now, when it comes to a proposal to raise the down payment for consumer durables, the explosion in the use of credit cards in this country over the last 25 years has largely eliminated the need for any down payment a buyer may have to come up with for consumer durables:furnishings for the home, an entertainment system for the home, a smart phone, in some cases.In the old days, a family may buy furniture from a store, but be required to put 20% down in case they could not make the monthly payments.Credit cards have eliminated this to a great extent, and there is no way we will be 'going back' to the old model.PROPOSAL #5:PLACE A STRICTER CAP, OR LIMIT, ON TOTAL CREDIT CARD DEBT:there is a limit in place now.I cannot borrow $4,000 per year, every year, on my credit cards, for 60 years, from age 19 to when I die at age 79 (with a smile on my face), owing $240,000 on my cards (wellit would be a lot MORE than that, with interest!)---society, and our lending system, will cut me off AT SOME POINT.The irony here is that if I am a higher income household, often I will be extended more loan moneyI can 'dig myself a deeper hole' before I declare bankruptcy.Now, it varies from family to family, and it is much more complicated than this, but let's say that the average family can make $40,000 yet spend $44,000, that is, borrow $4000 on credit cards, for, say, ten years, accumulating total credit card debt of about $40,000 before being forced, or pressured, into bankruptcy, where, IN THEORY, they would stop this pattern.If we 'tightened up' the process so that this hypothetical family could for only four years or so--- that is, 'cut them off' at a total credit card debt level of, say, $15,000 instead of, say, $40,000, this would in fact increase the national savings rate by decreasing the national DISsavings rate.This would lead to a drop in sales volume for any seller who is paid in whole or in part by credit card purchases:Amazon, for sure, eBay, Target, Walmart, Best Buy, Macys, many many restaurants (in the old daysthey still do take-out orders, of course).Clearly, any family about to 'bump up' against their 'limit' should be given ADVANCE WARNING before their cards are "taken away'---yet, where does it say in the Constitution that a family has a right to spend more than $15,000 THAT THEY DO NOT HAVE AND MAY NEVER HAVE?I WOULD MAK AN EXCEPTION FOR MEDICAL BILLS.Could we check? A family's credit card purchases are hardly private.Many studies have concluded that a large percentage of bankruptcies are due to medical bills---often incurred by people WHO HAVE HEALTH INSURANCE!(The insurance policy in many cases has high premiums, high copays and gaps in coverage).This is a very complicated issue, obviously. The argument is that we need a new BALANCE between spending and saving.Now, this argument must be put on the 'back burner' for the next few years.I see that.Yet, the problem this is addressing is a 25 year problem---requiring a 25 year solution.PROPOSAL #6:A NEW GOVERNMENT RUN SAVINGS PLAN TO RIVAL EXISTING 401 k PLANS:what if our government offered a 'tax credit' whereby IF the American household were to elect to save $1,000, then our government will 'match' it with another $1,000, and put this $2,000 in to a 7% savings bond that the household could access at ANY time without penalty?Our government could explain to the American people that this $2,000 will double every ten years (compounding at 7% interest per year).A worker, age 25, who participated in this plan would accumulate almost one million dollars by age 65, with no risk.(Now, one million dollars in 2026 will not buy you a TINY condo in San Jose, but we will not tell people that!).This plan could stand alongside a worker's 401 k plan at work.Why would the worker go with the government plan?Maybe she does not like her employer!Or maybe she knows she will not be there in two yearsor five.Under the new government plan, she need not worry about moving the moneyportability.This same government is taxing her on her wage, and 'saving' it for her social security benefits.We could make the contribution automaticthe $1,000 could be taken out of the employee's paycheck and saved for her.We would have to beware of clever people who would simply MOVE AROUND MONEY THET WOULD HAVE SAVED ANYWAY, as, once again, our goal is to persuade MORE people to save MORE money than the year before.PROPOSAL#7:REFORM EXISTING 401 k TYPE PLANS:some of the complaints about 401 k plans are that there is a penalty for taking the money out early, it is tax delayed, not tax free, and many employees do not trust their employer.While the prior proposal addresses all of these complaints, it is possible to 'reform' existing plans so that there is no penalty for early withdrawal, we could make the money tax free forever, and we could pass laws increasing consumer protections against the employer.I believe a 'stand alone' plan run by our government makes more sense.PROPOSAL #8:ADVERTISE FUTURE CUTS IN BENEFITS:our government could do something unpopular: it could inform the people that, indeed, social security benefits have been cut by 20% or so for many of us, that medicare benefits MAY be cut, and that pensions are disappearing from the American landscape.Now, this is all available information, but most Americans see this subject as both boring and depressing and DO NOT WANT TO HEAR ABOUT IT.Our government could 'sell' all this with a 'good news-bad news ' approach:yes, future benefits for YOU have been cut, but we now have this plan --- the SAVEAMERICA PLAN - where if you choose to save $1,000 each year, we, the government, will match it with $1,000.PROPOSAL #9:GET INFLATION DOWN AND KEEP IT DOWN!If the number one force behind the drop in the savings rate is the fact that a 3% pay raise does not keep up with 3% inflation, then why not get inflation down to 1% per year?A 3% pay raise, even after taxes, is still 1 and 1\2%, and it will, in theory, SLIGHTLY outdistance 1% inflation.Possible problems:not all workers earn a 3% pay raise in any yearthis was the average from Feb. 2019 to Feb. 2020, but it CERTAINLY will not be the case for THIS year.This is a great idea, but it is easier said than done,Clearly, low inflation is a top goal for our government.PROPOSAL #10:FORCE ALL EMPLOYERS TO HAVE 401 k PLANS:a terrible idea.Most employers DO have a savings plan at work for their workers---and virtually ALL large firms do.If you show me a small business that does not have one, I'll show you a firm that DOES NOT WANT ONE.We do NOT want to drag small firms, kicking and screaming, into the business of employee savings plans.If the owner of the firm feels this way, she may be very unhappy about having to create, and run, a new plan.She may very poor job at it, thus undercutting the plans in general.Ii believe we would be better served with a government-run plan.PROPOSAL #11:IMPOSE STRICTER PENALTIES FOR BANKRUPTCYlike WHAT?JAIL time?Debtors' prison?I recall the series 'Little Dorritt', where the main character visits her father in debtor's prison, while working 'on the outside' to pay off his debts.England abandoned this terrible practice centuries ago.Perhaps, instead, we could initiate a stronger intervention systemlet's say a family is $15,000 in total credit card debt, and in danger of slipping down that slope of greater debt.Perhaps debt counseling could be made available---or even mandatory. PROPOSAL # 12:A 'sliding scale' tax, or fee, on credit card use (abuse)Now, this idea is not as strong as a true stricter CAP, or LIMIT, on total credit card debt discussed earlier, but it may be more possible:the idea is that as a family slips deeper and deeper into credit card debt, an escalating fee is imposed upon all future purchases.Let's say that I owe over $25,000 on my credit cards---all of them--- and I go out to spend more money --- say, a $100 purchase.The item will cost me $100 plus maybe $9.50 or so in sales tax, PLUS another $50 fee for using the credit card.The argument is that no sane human being would make that purchase---if whe was informed that this $100 item will cost her $159.50----unless...unless she just does not care.IN THAT CASE the credit card issuerthe lender---should freeze the limits on the card.A credit card loan is very profitable---for the lender.I WILL GLADLY LEND YOU $15,000 right now---if you agree to pay me $3000 per year, every year, until I die.Not until YOU diejust until I die.I won't need the money where I'm going.It is a good deal for me, the lender, and a bad one for you, the borrower----unless---unless YOU ARE NOT GOING TO PAY ME BACK.This proposal would shine a very bright light on the buyerwhat if we impose a $90 fee on every $100 credit card purchase?NO ONE IN THEIR RIGHT MIND would make that purchase with a credit cardwould they?They lenders would shut down the transaction, in theory, as it should be clear to the lender that the borrower will not be paying that money backshe will be declaring bankruptcy more likely than not.PROPOSAL #13:MAKE IT MORE DIFFICLUT TO OBTAIN A HOME EQUITY LOAN:I do not think many people will be taking out these loans in the next 12 months, but, long term, we should make sure that families who access the loan pool this way KNOW WHAT THEY ARE DOING.We want and need these families to be aware of the risks, and aware of the fact that they owe this money, and must pay it back.Finally, PROPOSAL #14:FORCED SAVINGS---the ultimate solution?What if our government, out of sheer frustration, simply takes $1,000 each year from our paycheck and "saves" it for us?If it contributed a $1,000 "match:, I do not see people rioting in the streets over this.Clearly, any one family could subvert this by simply spending $1,000 more on their credit cards over the same time periodone year, let's say.Yet, many families 'stay within their budget'they spend only the amount of money they "see" in their paycheck.Simply form a lack of information, our government may "trick" some people into saving more money each year.We will study later the idea of our government intervening the next time we earn that $1,000 pay raise and "saving' half of it for us.We would not see a drop in our net pay--- it would simply rise by less.Simply our of distraction, or inattention, we may be 'tricked' into saving more money.It may be worth a try.Our country cannot continue down this path, where the lower 80% of all income earners save little, or no, money every year.