There is something ironic about having Congress — which is holding hearings on steroid use in baseball — trying to solve our current economic challenges with the economic equivalent of fiscal steroids.
The maneuvering and posturing in Washington has assumed all of its normal pre-failure patterns.
The fact is, there could be no greater contrast between the approach I outlined in my new book, Real Change, and the traditional insider politics of Washington.
A Washington Insider Economic Package That Is Too Small and Too Temporary
Republican staff advisers are developing an economic package within the timid boundaries allowed by the Washington establishment. The package they are working on is too small, too temporary and clearly inadequate for the scale of the economic problems we face.
To make matters worse, the Democrats who control Congress will begin demanding even less-useful and more-destructive economic proposals that will spend a lot more money with even less hope of helping the economy.
The Federal Reserve chairman will forget that his primary job is protecting the stability and strength of the dollar and will become a complicit political player in trying to develop an insider package that will only weaken the dollar still further. We saw evidence of this yesterday, when Chairman Bernanke and his colleagues reduced the Federal Reserve’s federal funds rate three-quarters of a percentage point. As a result, the dollar dropped in global markets almost immediately.
In short, the normal patterns of Washington, D.C., are likely to lead to temporary, marginal tinkering when what America really needs is long-term, fundamental reform to protect the dollar, increase productivity and create jobs.
A Familiar Pattern of Failure
We are witnessing the same destructive pattern that led to "stagflation" in the 1970s — the economic disaster that ultimately led Gov. Ronald Reagan to win the presidency on the dual pledges of anti-inflationary monetary policy and a fiscal policy of cuts in non-defense spending, regulation and taxes in order to revive the economy.
This same destructive pattern led the first Bush Administration to break its "no new taxes pledge," which set the stage for the Democratic victory of 1992.
And it was this same pattern that led the Clinton Administration to adopt the largest tax increase in history in 1993 and set the stage for the Contract with America and the first Republican House majority in 40 years.
Why a Washington Insider Stimulus Package Is Doomed to Fail Politically
This pattern of Washington insider negotiating and posturing is doomed to fail politically because of the power of the world financial news system and because this gimmicky approach goes against the fundamental desires of the American people.
Just open the financial pages from yesterday: The world markets have already condemned the initial administration proposals.
If the stimulus package was designed to be a confidence builder, it is clearly failing.
On Monday, London fell 5.48%, Germany 7.16%, China 5.14%, Hong Kong 5.49% and India 7.41%. This was the world’s investors’ way of making clear they were not reassured.
Furthermore, to make the situation even more intense, the power of the markets is amplified by the global financial news system. Market reactions are transmitted instantly, 24 hours a day, by cable news and other news outlets.
I was on the new Fox Business Channel as a guest on Neil Cavuto’s show Monday evening (read a transcript here). By then, it was clear that the on-air analysts were joining the investors in condemning the stimulus package as inadequate and ineffective.
Americans Want Long-Term Solutions
The American people will ultimately reject the stimulus package, because it violates one of their deepest beliefs. Americans believe in long-term solutions, not short-term fixes. This Washington insider maneuvering is politics as usual at a time when the American people are crying out for a change of course.
In our American Solutions polling last summer, the American people told us by a margin of 92% to 5% that our goal should be to provide long-term solutions instead of short-term fixes. You can find this and other economic data in the Platform of the American People in Real Change and at AmericanSolutions.com.
Overwhelmingly, the American people told us that they are prepared to be told the truth and for large, fundamental changes.
Short-term fixes are going to be rejected by the American people, and the politicians who endorse them are going to find their reputations suffering as a result.
Why a Washington Insider Stimulus Package Will Fail Economically
The stimulus packages being discussed won’t just fail politically, they’ll also fail economically. The size of the challenge is much bigger than the size of the current solutions being offered by Washington.
Consider these economic indicators:
- Gold has been hitting record highs ($914.30 an ounce a week ago). Gold was up 32% in 2007.
- U.S. Treasury notes, historically the best store of currency value, have lost 20% compared to gold since August 2007.
- Silver has hit a 24-year high ($16.60 an ounce last week).
- Platinum has skyrocketed to $1,592 an ounce (and if platinum is a primary metal in the next generation of cars, the world’s supply will run out in 15 years, according to some estimates).
- Oil hit $100 a barrel but has slid to about $90 a barrel on recession news. (A weak economy means declining oil prices, a strong economy means rising oil prices.)
Harbingers of Inflation
High commodity prices like these are usually harbingers of inflation.
The declining dollar has been a similar indicator of inflationary pressures coming.
- The producer price index was up 7.7% through November 2007. That is the biggest jump in 34 years.
- The consumer price index was up 4.2% through November 2007. That is the biggest jump in 17 years.
The Role of the Federal Reserve: To Protect the Value of the Dollar
In this setting, it is important for Chairman Ben Bernanke and the Fed to remember their primary mission: protecting the value of the dollar.
People want their government to keep the value of its currency. We won’t save and invest if we think politicians are going to steal our earnings and savings by inflating the currency.
The Fed should focus its eye firmly on strengthening the dollar and driving inflation down to 2%.
If the world came to believe the Fed was serious about protecting the dollar, the price of oil would decline substantially, the price of gold would decline substantially, the world’s capital flows would return to the United States and the economy would be inherently healthier.
Creating Jobs and Productivity While Stabilizing the Dollar
If the Federal Reserve should focus on creating a stable dollar, the President and Congress should focus on increasing productivity and creating jobs.
Our political leaders should concentrate on making the American worker more successful in competing with China, India, Japan and Europe. They should also ensure that long-term productivity gains in the United States result in real prosperity that would enable Americans to pay off their debts and increase their savings for their retirement years.
Recognizing the Reality of Democratic Control of Congress
Any economic plan has to start with the recognition that Democrats control Congress. That means they get to have a large say in a successful package.
The difficulty here is compounded by the fact that the Democrats have a lot less to lose by allowing nothing to happen, because they will blame any economic problems on President Bush and the Republicans.
The key is to give the Democrats substantial influence over half the economic growth package — the half aimed at increasing consumer spending — but insist that the President and Republicans control the other half of the package aimed at increasing productivity and creating jobs.
Give Democrats Control Over Half the Stimulus Package. . .
If Republicans were proposing consumer stimulus plans, an ideal change would be to offset the payroll tax for both individuals and employers. Almost nothing would increase take-home pay for working Americans as fast or enable businesses to hire more people.
A second good option would be a significant increase in the tax allowance for children. This would help working families and single working mothers and could have a very positive impact.
For their part, the Democrats will almost certainly want some kind of direct giveaway program of rebates or some other payment.
As long as the amount is capped at half of a very robust package (say $150 billion of a $300 billion package), it should be the price Republicans pay to get a productivity-increasing bill through a Democratic Congress.
Here’s the bottom line trade-off: Republicans should offer relative freedom to the Democrats to design the consumer stimulus part of the bill but then insist on similar freedom to design the productivity increasing portions of the bill.
. . .With a Big ‘If’
There is a big "if" involved in this approach.
The Republicans have to be prepared to play hardball. They have to stand firm for a powerful productivity- and growth-oriented component or be prepared to accept the failure of the package.
The Democrats will attempt to panic the Republicans into giving up all their principles just to get "something" passed quickly.
It is very important for the President and House and Senate Republicans to stand firm for a sophisticated package that would actually increase productivity.
The first key to productivity improvements is that they have to be permanent so people can rely on them.
A Bold Plan for Economic Growth
What America needs is deep, fundamental reform to make American businesses more competitive so American workers have better paying jobs with greater job security.
The change from the current situation to a powerfully competitive American future is a much bigger change than anyone in Washington is contemplating.
Here are a few proposals that would begin to move us in the right direction:
1. Adopt the Rangel proposal for a corporate income tax cut.
When even liberal Democrats such as Ways and Means Chairman Charlie Rangel (D-N.Y.) recognize that the United States is killing jobs at home by having the second-highest corporate income tax in the world, there is a possibility of getting something done. In Rangel’s generally bad bill of massive tax increases there is a provision for a corporate income tax rate cut. Republicans should simply lift that section from his bill and propose it in his name.
2. Abolish or index the capital gains tax.
A plurality of Americans favor abolishing the capital gains tax (American Solutions polling found a margin of 49% to 41%). This number will go up as Americans look at the disastrous impact of the financial meltdown on their planned retirement funds and their children’s college education funds.
Abolishing the capital gains tax would lead to an immediate jump in the value of the stock market, leading to an immediate jump in the value of every retiree’s 401(k). More importantly, it would lead to a burst of new investments in the United States, creating a foundation for long-term economic growth.
If abolishing capital gains is politically impossible for Democrats (who tend to be anti-capital in between high-dollar fundraisers) to accept, then the fallback position should be to index the capital gains tax so inflation does not erode capital gains. As Richard Rahn has pointed out, this would have a big effect on increasing investment in America.
3. Allow 100% expensing of all investments in new equipment.
If American businesses could write off 100% of their new equipment within one year of its purchase, there would be a boom in equipping American workers with the best and most modern equipment so they can compete with any economy in the world.
These kinds of real, permanent changes would begin to make America more competitive and more productive. They will allow the dollar to increase in value as investors start to buy up dollars to invest in the low-tax U.S. economy. In turn, this will give the Fed more room to keep interest rates low. These changes would be a step toward permanent, long-term, improved economic health.
And Don’t Forget About Scoring
It is essential to remember that anything good for the American economy will be scored badly by the bureaucrats at the Joint Tax Committee and the Office of Management and Budget. Both bureaucracies have a history of being anti-capitalist, anti-market and anti-growth in predicting how economic policy changes will effect economic growth and government revenue.
The answer, however, is simple.
Establish a margin of error equal to how wrong they were in scoring revenue from the last cycle of tax cuts. Then declare that anything within that margin of error is scored as acceptable.
The fact is that it is impossible to establish sound policy for economic growth with Socialist scoring. However, in the short run, it is impossible to change these two entrenched bureaucracies.
Therefore, the answer is simply to publish the degree to which the bureaucrats were wrong in the last two or three tax-cutting cycles and write the bill within that margin of historically provable inaccuracy.
Good News From Innovative Governors: Sanford Proposes an Optional Flat Tax
In the Platform of the American People, there is overwhelming support for an optional flat tax with a one page tax form. South Carolina Gov. Mark Sanford (R) has picked up on this overwhelming desire for real change in how we pay taxes.
Here’s what Gov. Sanford had to say about the optional flat tax in his State of the State address:
"A flat tax alternative that would allow someone the option of forgoing exemptions and instead pay a 3.4% flat tax in this state. We continue to believe finding ways to lower the marginal tax rate is vital to our economy, vital to competitiveness and in this case vital to the taxpayer’s pocket. It is worth noting that a recent report from the Federal Reserve documented the connection between lower income tax rates and higher economic and employment growth. This is something we can do to better the economy of our state, and I’d thank Rep. Merrill for introducing a bill toward this end."
Louisiana’s Jindal Starts With Accountability and Transparency
Newly elected Louisiana Gov. Bobby Jindal (R), one of the brightest and most creative people in public life, began his governorship with an executive order making state spending transparent and ordering it to be posted on the Internet so every citizen could see how their tax money is being spent.
For a Louisiana governor, this was an enormous step toward reform.
Transparency in government spending is a growing movement among the states and, like so much of the innovation on the state level in America, it’s an idea the President would do well to make his own.
Publishing all non-classified federal spending on the Internet would put the power to unearth fraud and abuse in the hands of the American people.
It would be a step toward real accountability in government.
In other words, it would be real change, just what we need in Washington right now.
P.S. — There is a documentary opening next Friday in selected cities across the country that I’d like to draw your attention to. It’s titled Shoot Down, and it reveals new details about the 1996 downing of two American civilian aircraft in the Florida straits by Cuban fighter jets. The director of Shoot Down is the niece of one of the four Americans who lost their lives that day while attempting to help Cuban refugees reach freedom in America. It’s a riveting, controversial and important story. Go to TheShootDown.com to find out when Shoot Down will be playing in your area.
P.P.S. — Long-time readers of this newsletter will recall I have proposed that we experiment with offering children in poor neighborhoods cash incentives for learning math and science. The Learning Makes a Difference Foundation, in cooperation with the Fulton County Schools in Georgia, is about to embark on a pilot program to do just that. You can read about it in today’s Atlanta Journal Constitution. I am particularly proud of my daughter, Jackie Cushman, who helped organize this project.
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