Cincinnatus BLOG *** Political Commentary - Social Commentary

Ideology to the left of us, ideology to the right of us — boldly they rode into the jaws of the unknown, into the mouth of financial hell — rode the five hundred and thirty five. Theirs is not to reason why; theirs is but vote and whine…

For the political class who see the current recession as harbinger of depression, embracing an incomprehensible stimulus plan provides the irrational exuberance of hope. Better to have relied on reason than a potpourri of repackaged old and tired ideas.

To argue with either side is a waste of time, as each will abandon reason at the first challenge. As John Locke succinctly put it: “Every sect, as far as reason will help them, gladly use it; when it fails them, they cry out it is a matter of faith, and above reason”.

A non-political sober assessment is in order:

1.     I know that accepting the inevitability of inflation in 2011 and 2012 is difficult during a recession when unemployment is rising dramatically. Unfortunately, we must, because Congress does not have the power to repeal the laws that govern economic cycles. The principles of inertia also apply to economics: For every action there will be an equal and opposite reaction in the future. In this case unproductive deficit spending will inevitably lead to inflation and devaluation of the dollar. The feel-good political expediency of the moment must be balanced against longer-term consequences. Spend we must, but only on those programs that will truly expand the economy and create permanent jobs.

2.     Did the Bush tax rebate forestall the current recession? If the answer is no, then why would we expect a $400 or $800 reduction in payroll taxes later this year to fare any better? “Change” is not doing essentially the same thing as Bush and expecting a better outcome. This small infusion of cash each month will increase the nation’s GDP for one or two quarters but is otherwise useless in a stimulus package. It will create no permanent jobs.

3.     Cutting Marginal Tax Rates won’t work - Such cuts should not be included because they would probably not be as helpful as they have been in the past. When President Ragan did it, marginal rates where high, 70% and there was a clear benefit to reducing them. Returning to the physics analogy a 70% marginal tax rate created massive economic potential energy, which was converted to economic kinetic energy by dropping the rate to 28%. Today, marginal rates are not high enough to store potential energy, and cutting them will generate little kinetic effect. But we can revisit this when the current tax cuts expire at the end of 2010. Rates will then be high enough that cutting them may make a difference. The one exception may be for the lowest tax bracket where a permanent reduction would stimulate some incremental spending. More importantly, since it is permanent, the effects will be felt in the economy month after month not for just one quarter.

4.     Public Projects - Fixing roads and bridges will give a short-term boost to the economy, especially on a local level, but these are not by any stretch of the imagination permanent jobs. When the project is completed workers must find a new job. Moreover, the relatively small incremental amount of money that is included in the stimulus package is unlikely to make a significant dent in the rate of unemployment of construction workers. If these new projects weren’t included in the much larger annual pork-laden congressional allocation, it is reasonable to assume they probably have little merit.

5.     Infrastructure - Projects that improve our fundamental infrastructure, such as a 21^st century electricity grid, will pay back for generations. Realistically, the stimulus bill can only be a small down payment on what will be a 20-year $2 trillion projects.  The danger in this provision is that clean energy project selection will be politically rather than economically driven. For example, it is easy to justify outlays for current wind technology which produce electricity at a competitive $.04 -.06 a kilowatt-hour.  But much of solar technology is still in the development phase, and electricity generated from a current state-of-the-art solar plant may well cost consumers $.25-.50 per kilowatt-hour. The only large-scale source of cheap clean energy, nuclear, will probably not even be considered.

6.     Social Programs - Programs that fund food stamps and increased unemployment benefits are necessary in a recession, but let’s not delude ourselves and count on this to create permanent jobs.

7.     Education - Over the long term we must improve our performance because we are falling behind other sophisticated OECD countries, particularly in mathematics and science, and that does not augur well for the future. We are the nation of ideas and innovation, we will never be able to go backward and compete for unskilled jobs in a global economy. Our children are our future — but only if we educate them.

What might we have done and what can we still do to provide real economic stimulus and create permanent jobs?  I present the following for your consideration:

1.     1. Entrepreneurial Incentives - As the world’s most inventive country we have the unique opportunity to patent our way out of the current recession and thieve in the 21^st century global economy. What should we export to create high paying permanent jobs and redress our balance of payments? Ideas.  It’s what we do better than any other country. In the short run we should help finance innovative ideas in all areas, including green technology, telecommunications, biotechnology, nanotechnology and all other embryonic inventions that will improve our lives. Since so much capital is sitting on the sidelines in Treasury Bills, let’s suspend future capital gains tax on any investment that is made in new technology between February 15^th and October 30^th 2009. We have absolutely nothing to lose. If capital stays on the sidelines we will create no jobs and collect no additional taxes. If, however, the money is invested, we could create hundreds of thousands of permanent jobs and collect income taxes from every employee rather than paying them unemployment benefits. Yes, we can create jobs without spending the taxpayer’s money and simultaneously help all those budding entrepreneurs currently starving for capital.

2.     Accelerated Depreciation - If we allow businesses to fully depreciate their capital expenditures in the first year of a stimulus plan, it will go a long way to stimulate our manufacturing base and maintain and possibly increase employment in 2009. Although not necessarily equal, there is an offset between the loss of revenue from business and the increase in revenue from greater employment.

3.     Cut Corporate Tax on the Profit from Foreign Sales - This offers incentive to create jobs in the U.S. and discourage a shift of manufacturing to foreign subsidiaries where the tax burden in lower. If such a proposal should run afoul of WTO rules we should consider cutting corporate tax rates, since we have the second highest rate in the world, arguably making us less competitive in a global economy.

4.     A little creative thinking would also help. Let me make one suggestion. Issue 1 million “green cards” in the next 6 months to well-educated immigrants who have the resources and will commit to start small businesses, the engine of job creation in the U.S. Priority should be given to those who want to create export companies. We will create millions of jobs, reduce our housing inventory by 1 million units, and reduce our balance of trade and at no expense to the U.S. taxpayer.

I’m sure there are many other creative ways of helping to resolve our problems, but don’t expect to hear any from congress.