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.