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Obama's Old Solutions for a New Economy



Last week, President-elect Barack Obama's "Yes We Can" slogan became, "Maybe We Can," when it comes to fixing the economy. That seed of doubt should force the incoming president to re-evaluate his economic stimulus package before pushing it through Congress.

The Obama stimulus package reads like a political compromise giving Republicans and Democrats the two things each holds most dear: tax cuts and spending increases. The rest looks like a retread of campaign policy papers repackaged as a boost to the economy. After all, anything the government does will be good for the economy, some believe.

But will the economic stimulus do anything for the economy? I am afraid that perhaps it can't. Even if the United States Government spends upwards of a trillion dollars (that it doesn't have) to get the economy moving, if it isn't directed to the right places, people may end up saying, "Maybe We Couldn't".

The economy's two largest enemies today are the lack of liquidity in the markets and the lack of consumer credit - both created by debt. Even though equities are cheap, people have no money to invest. Even though retailers are slashing prices, nobody has the disposable income to buy anything. Obama's economic stimulus should focus on these two obstacles to recovery, and avoid anything which might hinder their repair.

Already the first bullet point, "Immediate Action to Create Good Jobs in America," is unraveling, as Obama has withdrawn his proposal to create a $3,000 per employee tax credit for small businesses to create new jobs or save existing ones. That leaves increased expensing and the elimination of capital gains taxes for small businesses. These are hardly measured that will get people off the unemployment lines and more government spending.

On the demand side of the equation, the tax breaks given to individuals will only put a dent in people's economic woes but they'll break the bank in Washington.

The centerpiece of the Obama plan to help "struggling families" is a permanent payroll tax cut of $500 per person. That's nice if you have a job, but people going on unemployment won't benefit, nor will entrepreneurs who are off the payroll tax grid altogether.

What's more, by reducing payroll taxes instead of income taxes, the plan only expedites the insolvency of the Social Security and Medicare systems, which could be the impetus for our next major financial crisis in America.

All of this and, still, the average benefit to the American worker will be less than ten dollars a week. That's enough to buy two shares of Citi!

The current economic crisis came about as a result of the burst of the housing bubble. Wall Street bankers assumed - like many homeowners - that housing (like the Internet before it) was different from other markets and that it would always appreciate in value. Wall Street and Washington turned a blind eye as an industry of crooks and liars placed bets on housing. Then they doubled down on their bets and now we are all paying for their losses.

While Obama proposes several measures to help homeowners - putting a temporary band-aid on potential foreclosures and helping people readjust their mortgages - his plan does little to address the symptoms that turned the housing bubble's burst into a global financial meltdown.

In two years, the reductions in Capital Gains Tax rates passed in 2001 are set to expire. Obama has already said he wants to raise the capital gains rate when he gets a chance, and Congress will surely oblige. That's a problem for the stock market, however, since it raises the cost of investing. We know that a lot of people lost a lot of money in the stock market in 2008. These are also people who are inclined to invest in the markets - if they had the funds.

So why not accelerate the rate at which investors can deduct capital losses - raising the maximum from $3,000 to $30,000 or $300,000 - and put money into investors pockets immediately? That would inject cash into the stock markets and provide an immediate economic stimulus. What's more, because marginal tax rates are set to go up in a few years, this scheme would be revenue-positive since today's losses would be offset against higher tax rates after the Bush tax cuts expire in 2011.

On the consumer side, Washington should consider ways to free up credit for consumers, rather than constrict it. The Obama plan has new regulations on credit card companies and payday lenders which would actually reduce the availability of credit, even if it is done in the name of protecting the consumer.

If Washington wants to help the consumer - and thereby get the retail sector moving again - then it should help the consumer by making interest on consumer credit tax deductible just like mortgage interest, if only in the short term. This would help people pay down their credit card debt and make purchasing a car easier, a measure that would directly benefiting Detroit in a way that other bailouts will not. If Washington is concerned that people won't put their tax savings to these uses, then administer the tax credits using TARP funds and the banks. Any of these proposals will go much further towards stimulating the economy than a measly $10 a week.

The good news about economies is that they are always cyclical. What goes down will eventually go up, and America will be able to proudly say, "Yes We Did" - whether the government helped or not.

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