January 2012

As soon as the elections are over, Congressional leaders are planning to have a “break the bank” party. On top of the $700 billion bailout that unfortunately both Republicans and Democrats supported, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid plan to call Congress back into a “lame duck” session in mid-November to pass a $300 billion “stimulus” package. The attitude seems to be, what’s $300 billion for “Main Street” after we just approved $700 billion for Wall Street fat cats?

But all the package is really likely to do is add $300 billion to Main Street’s public debt without spurring economic growth. There is no reason to believe that the hodgepodge of programs Pelosi and Reid want the stimulus to fund — from food stamps to unemployment benefits to infrastructire — will be any more successful at jumpstarting the economy than the hundreds of billions spent earlier this year for the first “stimulus” earlier this year.

This is because of the economic forces spelled out in the late Nobel Laureate Milton Friedman’s “permanent income hypothesis.” Friedman and other economists found that most individuals and businesses do not change their spending habits based on short-term changes in income. Unless they believe their raise in income is long-term, they will save rather than spend any bonus in the short term. Saving would normally be a good thing, but in this case since the government is spending, it will negate the effect and simply add to the national debt. In the case of infrastructure, there is also a time lag of several months before the money appropriated gets in the economy as payment for roads, bridges etc.

Fortunately, there is an economic recovery proposal being offered that will affect long-term expectations. This is the “Rapid Recovery” plan unveiled this week from House Minority Leader John Boehner. This would cut tax rates on business and individual investment and remove burdensome regulations to energy exploration.

The Boehner plan would cut the U.S. corporate tax rate, among the highest in the world, to 25 percent from 35 percent. It would eliminate some capital gains taxes. This is important because, in addition to economic turmoil, a significant part of the stock market decline this year has been due to expected higher tax rates on dividends and capital gains. Folks are selling now to pocket their gains before rates go up next year. This was the conclusion of a recent New York Post op-ed by CNBC reporter Charles Gasparino, who wrote that Obama’s “plan includes some of the most lethal tax increases imaginable, including a jump in the capital-gains rate … This is clearly the wrong way to go in the wake of an economic meltdown.”

The plan has another provision costless to taxpayers that would be very important for economic stability. It would get rid of burdensome regulations that curtail oil exploration in the shale and offshore. This is crucial in helping to prevent a sudden oil spike from crimping an economic recovery

I would suggest adding another costless provision that would do wonders for growth: require the SEC and the bank regulators to suspend mark-to-market accounting for illiquid assets. These accounting mandates, as I have written in the Wall Street Journal, force healthy banks to take huge paper losses based on a troubled bank’s fire sale. These losses — most of the time on paper as the bank is still holding to maturity a performing mortgage or other loan — drastically reduce a bank’s “regulatory captial” to lend with.

Overall, Boehner’s plan deserves kudos for recognizing that a “rapid recovery” can only be spurred by the right long-term policy incentives.