James Pethokoukis

Politics and policy from inside Washington

5 stimulus plans better than Obama’s first one

July 7, 2009

Vice President Joe Biden now admits the Obama administration “misread” just how bad the economy really was back in January. No apologies necessary. The Federal Reserve and most of Wall Street also blew it. But what Team Obama might want to apologize for is pushing an $800 billion stimulus/recovery/reinvestment/spending package that will do little to either boost the economy in the short run (quite obvious now) or improve America’s long-term global competitiveness (obvious later). Now with unemployment soaring toward double digits (even though the White House said the stimulus plan would keep it under 8 percent), there is talk of a second stimulus plan. More union-friendly infrastructure spending that will take months to implement? A massive aid package that would reward fiscally irresponsible states and cities? Ugh. Here are five intriguing ideas Obama passed on that he might want to reconsider for a second stimulus:

[See why Obama’s big economic gamble Is failing.]

1) An investment stimulus plan. Economists say America needs to consume less and build more. So why not cut capital gains and corporate income taxes? Mark Bloomfield, president of the American Council for Capital Formation suggests a sliding tax rate. The longer an asset is held, the lower the tax rate — with a zero rate for assets held more than five years. This would encourage investors to move from cash back into stocks. A stronger stock market would be a huge boost to business and consumer confidence, as well as to long-term entrepreneurial activity. Corporate taxes are just as harmful. Their existence means earnings are taxed twice, as profit and as dividend income. Moreover, 70 percent of the corporate tax burden is suffered by workers in the form of lower wages. And since the U.S. rate is higher than every other major economy other than Japan, America is at a competitive disadvantage, made worse by the Obama administration’s aim to make foreign profits by American companies get taxed at high U.S. rates.

2) A worker stimulus plan. For the same amount of money as Obama’s original plan, workers could have received a massive tax cut. For $800 billion, combined Social Security and Medicare taxes could have been slashed by 6 percentage points, or 40 percent. That would have put $1,500 in the paycheck of a worker making $50,000 and, according to a study by former White House economist Lawrence Lindsey, increased employment by 4 million jobs in 2009. If you want more of something, tax it less. This plan would lower the taxation of labor, so America would get more of it.

3) A housing stimulus plan. Home prices are still falling and defaults still rising, with rising unemployment creating a vicious negative feedback loop. Since the downturn started with housing, maybe that is where it should end. Glenn Hubbard, dean of the Columbia Business School, and Columbia economics professor Christoper Mayer have suggested that the White House and Congress allow all mortgages on primary residences to be refinanced into 30-year, fixed-rate mortgages at 5.25 percent. In another version, investment strategist Ed Yardeni and Carl Goldsmith of Delta Asset Management have proposed fully nationalizing Fannie Mae and Freddie Mac. Once that is done, the two entities could borrow at the same low rates as the U.S. Treasury. Then, Fannie and Freddie could offer 30-year, fixed-rate mortgages at 4 percent to all qualified borrowers to buy a new or existing home.

4) A deficit hawk stimulus plan. Want to restore investor confidence in America? One way would be to get entitlements under control so bond investors wouldn’t fret about Uncle Sam inflating its way out of its debt woes or even defaulting. In theory, this would bring down real long-term interest rates and boost economic growth. The simplest move would be to do something about Social Security. An analysis run by Andrew Biggs of the American Enterprise Institute found that if a) Social Security benefits were linked to inflation rather than wages as of 2012 and b) the currently legislated retirement age was increased to 67, then allowed to keep increasing to 70 by the 2040s, the program’s long-term, present-value deficit of $5.7 trillion would turn into a $4.3 trillion surplus. That is a $10 trillion swing. Investors would be much impressed both by the move toward fiscal soundness and the evidence that America will not let itself turn into California.

5) A do-nothing stimulus plan. No $500 billion pricey second stimulus/recovery/reinvestment/spending plan. No $1.3 trillion healthcare plan. No competitiveness-killing cap-and-trade plan. No tax hikes at the end of 2010. Economy heal thyself (with some help from the Fed). And no spending the other 90 percent of the $800 billion first stimulus package. Hey, you’ve got to admire its simplicity. It would also show stock/debt/currency investors that Americans aren’t going to totally freak out over a recession by putting in place spending programs and patterns that will be hard to remove.

[See Pelosi is a vision in white — but not green.]

As for me, I would prefer doing both #1 and #4. They would help the economy’s long-term competitiveness and growth potential while restoring confidence today. That is a winning formula Team Obama might want to take a look at it.

Comments

I would vote for a modified plan number 5. I would opt to not only do nothing, but actually do a lot less. By slashing government spending and programs we can not only cut the deficit, but hopefully give real tax relief, thus creating a long term, sustainable recovery. I know, I know, I can hear you now — “Get out of your ivory tower and quit dreaming, Professor.” But, look how much of their agenda the socialist got done in only six months by dreaming big plans and then getting the right people in office. It could happen…..

 

I find 3,4,5 to be the most effective. While I like 1, and have promoted the advantages, I think its too late in the year, maybe even the recession to implement corporate tax reduction. However, the administration should be very careful about increasing the corporate tax burden, efforts should certainly be made to reduce it in long term.

Definitely not 2, we have already seen the pointlessness of tax rebate stimulus, despite my personal appreciation of a check in the mail.

3 & 4 are good long term strategies, although I am a little hesitant about artificially propping up the housing market, we have seen the effects of that already. While housing may have started the crisis, it is not necessary to end the crisis, all it needs to do is stabilize, which it appears to be doing.

5 Is an excellent choice at this juncture. Its late in this recession, and throwing additional money at the problem will likely not help much. The only area which needs to be addressed, recession or not, is infrastructure. There are still plenty of torn up roads here in NJ, and we are supposedly a wealthy state. However, infrastructure spending should be tightly controlled, and should not be considered a jobs stimulus, but something that needed fixing.

Posted by Greg | Report as abusive
 

1, 4, and 5 are far better than the other two options. Add deregulation and kill Waxman-Markey in the Senate, and we might actually get out of this recession in our lifetimes. We’d certainly save the economy from the guaranteed destruction we’re going to see by continuing on our current course. (See Atlas Shrugged for a picture of what to expect.)

Posted by Dana H. | Report as abusive
 

BHO could use the continued deterioration of the economy as an excuse to back away from his Big Plans, and ask Congress to do 1 through 4. The beauty of doing all four is that he would still be offering up the promise of bazillions of pages of legislation in which our esteemed public servants could park the payoffs to their contributors.

Not in the cards, though. Invest in commodities. The next 24 months are going to be ugly.

Posted by Bryan | Report as abusive
 

6. Replace the current health care initiatives with a plan to provide government REINSURANCE to private health insurance plans. Pick an upper limit that private carriers must cover per patient for each one year period, (e.g., $20,000). After an insurer pays out $20,000 for a single insured in a one year time period, the government covers that individual for the rest of the year. It depresses cost of coverage; maintains provider choice and incentives for innovation; promotes personal responsibility, employer-provided coverage and people working to get it; and does not drive those presently on private ins onto the federal dole. The program is flexible in cost. The benefit go on and on.

Posted by Jason | Report as abusive
 

Also more fairly distributes the risk of catastrophic levels of care to entire population, while requiring people to take responsibility for their routine care.

Posted by Jason | Report as abusive
 

Since the “stimulus” was clearly never actually intended to “stimulate the economy”, I don’t see how these plans would do a better job.

Unless we are now talking about actually stimulating the economy, rather than engaging in $800B worth of political backscratching….

Posted by DaveS | Report as abusive
 

I’m sorry James, but you are under the mistaken impression that Obama wants to fix the economy. The longer/deeper the recession gets, the more he gets to manipulate the economy. The stimulus was never intended to fix the economy, it was a political payoff to Obama’s supporters pure and simple. If he were truly interested in fixing the economy, he wouldn’t be pushing cap-and-trade or healthcare reform so hard. He knows that will make things worse. That is what he wants.

Definitely, 1, 2, 4 and 5 would have the best long-term effects. Nationalizing the mortgage market (3) would be disastrous. The mortgage mess was created by political manipulation of the housing market, so let’s do it again even harder!

How long would it be before the politicians insist that the interest rate on mortgages be reduced? How long before the politicians insist on subsidies for marginal borrowers? How long before the politicians insist on income-based repayment plans? How long before politicians insist on special treatment for “blighted” areas (i.e., congressional districts)? Etc. Etc. Etc.

The only plans which will have positive long-term effects will be those involving lower spending, reduced taxation and reduced regulation. I don’t see Obama doing anything even remotely like that.

Posted by Scott Eudaley | Report as abusive
 

1,2,3,4,5? YES WE CAN!

Posted by Dave | Report as abusive
 

Immediately and permanently lower both the capital gains tax and corporate income tax to 5%. Trillions of dollars would be flowing into the American economy if these two simple ideas were enacted….

Although, I do like the do nothing option…

Posted by Matt | Report as abusive
 

Whatever is done, it’d be nice if all congress-criters were actually required to read the legislation and debate it instead of the farce we got last time – it is of vital national importance, we must pass this bill without reading it or the economy will crater!

Posted by Scott | Report as abusive
 

Of course, this whole argumement is prefaced on the assumption that the “stimulus” was just that, instead of the pork-laden payoff for political backers that it actually was.

Posted by Jeff C | Report as abusive
 

Tax cuts, Tax cuts, loaning money, benefit cuts, and more tax cuts.

James, did you miss the lessons of the last 16 years?

Clinton’s tax policy did not tank the economy. On the contrary, the longest expansion of the American economy on record. And the deficit disappeared. Bush’s tax cuts, on the other hand, did little to stimulate the economy. Jobless recovery. Stagnant wages.

Posted by OwnedByTwoCats | Report as abusive
 

No. You people don’t get to lie any more without being called on it.

Clinton inherited an economy that was emerging from the long night of the Cold War. He was also disciplined to a significant degree, and for most of his term, by an opposition party in control of Congress. He did not have the latitude to author fiscal and monetary policy for most of the time he was in offce, and deserves no credit for the economy during his term. Recall that he was the first to use the “worst economy since the Great Depression” formulation, describing an economy that had been recovering since late 1991. Not his worst lie by far, and he does not hold a candle to what the Chicago crowd does every day now, but it was the one that got him into office.

Posted by Bryan | Report as abusive
 

PLAN 0 = Eliminate communists and communism in the USA. Government is destroying America. Now that Palin is free from her harassers, expect her to hammer this home. PALIN 2012! (Or sooner if courts throw the usurper with no birth certificate out!)

Posted by Jim | Report as abusive
 

Dear Mr. Pethokoukis:

Your neoliberalism is showing.

Restating in laguage without euphemisms, your options are:

1. Reduce government revenue (most likely necessitating cuts in aid to the poor) to give money to those who already have plenty.

2. Ruin the balances of our entitlement programs in exchange for handing employees a little bit of cash apiece and letting employers clean up hand over fist.

3. Save (admittedly sometimes irresponsible) borrowers from the depredations of unscrupulous lenders.

4. Social security benefits are already not nearly enough to survive on, so let’s shrink them some more for the benefit of affluent bond investors.

5. Who cares about human-caused global warming or the millions of Americans who can’t afford to go to the doctor? Lets not spend anything on them so that the economic climate is better for (already affluent) investors whose machinations caused the very crisis they now complain about…

The only remotely sensible idea is #3. Where were you for past two decades when everyone with more than seven brain cells realized that making the investor class more wealthy neither “trickles down” to everyone else nor improves the economy as a whole? The US tax burden is not too high, it is too low to provide the services citizens need, and it is poorly distributed. Take these other miserable ideas and take a long walk off a short pier.

And all the commenters complaining about a pork-based stimulus, two rebuttals:

1. The main problem with the stimulus was actually its small size, compounded by the pointless $250 billion or so of tax breaks, which meant that the actual pump-priming spending was lessened to the point of only being a drop in the bucket of our economy.

2. During the pointless giveaways of hundreds of billions of dollars throughout the previous administration, where were you? When we spent millions on abstinence-only sex ed (an approach shown to be totally ineffectual) or boondoggle military contracts to KBR and Blackwater (so that their contractors could rape service-women with impunity: http://www.cato.org/pub_display.php?pub_ id=9342 or http://abcnews.go.com/Blotter/story?id=3 977702&page=1) I didn’t hear a peep from you all, so our current whining strikes me as motivated more by politics than a deep and heartfelt concern for the tenants of democracy…

Posted by Joeph | Report as abusive
 

A mostly reasonable article from James, but only if you operate in a theoretical world.
1. does nothing to stimulate the economy since 75% of our econmomy is based on consumer spending. Corporations and rich people had their chance to protect the economy and they failed miserably.
2. So we should give a tax cut by slashing contributions to Social Security and Medicare taxes? Hmm. Woohoo! Money now, no security later… and then #4 makes so much less sense.
3. Amen to this, you commie-liberal nationalizer! Good luck getting that through even a Democrat-controlled congress.
4. You put this idea under “stimulus” for the economy, you mean stimulus for the Republican party who could pick up the pieces when this action turns what is left of our economy to crap.
5. So you are say don’t spend the 90% of the Stimulus Package that has not been spent, yet you say the Stimulus Package has failed. Has it succeeded at 10% of your expectations?

Posted by Scooter G | Report as abusive
 

We need more government involvement in our economic affairs. It has done such a good job.

Posted by Schvenzlerman | Report as abusive
 

Who is this James Pethokoukis guy anyway? He has NO BUSINESS BACKGROUND. He’s a talking head. He might as well be writing for Reader’s Digest.

Posted by Schvenzlerman | Report as abusive
 

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