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President Obama and his economic advisers are tasked with reviving the world’s largest economy. The task is being tagged as Herculean by policy makers and our ever obstreperous media. I agree the stakes are high and the task is monumental. The difficult task ahead is not in the generation of substantive policy ideas but rather in selling the idea to the competing special interests and narrow constituencies that infest our nation’s capital. Further, there will be significant implementation risk to any plan.

Like all reasonable economic liberals (aka free market thinkers), I sincerely wish success to President Obama and his team. I am predisposed to believe they are honest and capable men and women. In contrast to President Bush’s team, they also have the luxury of the support of the electorate.

There are a few components that would make the new President’s plan wildly successful in a relatively short period of time. My biggest concern is President Obama being swayed by political interests. Suspending my political concerns for the moment:

Incentivize capital formation: The economic plan must compel cash hoarders to invest in the US financial system. It must make capital formation a “no brainer”. Similarly the plan must dissuade “piling on” by those who are profiting from the crisis.

  • Exempt from capital gains tax the profit from the sale of shares purchased in financial companies inclusive of REITs, banks, and broker dealers in 2009.
  • Install a punitive tax on short sale profits (and profits from surrogate short vehicles) of 50%.
  • Exempt from taxation the interest and dividends earned on investments in bank debt, preferred stock, and common stock for five years.
  • Lower the capital gains tax on other investments to 10% for assets acquired in 2009 and 2010.

Explicitly this would save the government hundreds of billions of dollars in TARP or TARP 2 assets while costing little in the way of foregone tax on interest and dividends.

Incentivize Real Estate purchases: Currently, investors earning over $150k are forced to suspend losses on rental real estate. Exempting any investment property acquired by individuals in 2009 from this limitation would cause a flurry of buying activity. Just to be sure we need to add in generous, accelerated depreciation rules. Make the $7,500 tax credit on home purchases a 3% tax credit on purchases of homes up to $500,000. Make the credit non-recourse.

Set up a “Bad Bank” now: The government needs to set up a bad bank funded by sales of low cost US Treasury debt. The bad bank needs to buy massive amounts of “toxic debt” from struggling institutions, likely $1 trillion. The portfolio needs to be managed to maturity or profitable sale. Losses, if they materialize at maturity, should revert back to the selling institution beginning in 2019. Loss payback could be financed by the bad bank at a cost nominally above the Treasury cost of capital. If gains materialize, they should be used exclusively to pay down government debt.

Suspend mark to market accounting: Mark to market must be suspended and companies planning to hold assets to maturity must be allowed to use more subjective rules in valuing these hard to value assets. Alternatively, companies should be allowed to amortize mark to market hits over the remaining time to maturity of the asset.

Eliminate tax and penalties on IRA withdrawals used to make direct mortgage payments. Congressman John Shadegg proposed this early in 2008 with HR5776 and candidate Obama has danced around this idea.

Expedite public works projects: Legitimate public works projects need to be granted expedited environmental approvals. In the interest of full employment, new projects must be exempted from Davis-Bacon and Related Acts.

Incentivize foreign entities to locate and hire here: Provide tax incentive to foreign corporations establishing new operations in the United States. Offer similar incentives to corporations currently operating who expand headcount. Benefits should be phased in and cumulative. The idea is that a 20% workforce increase provides more than twice the benefit of a 10% workforce increase.

Reform entitlement programs: This traditionally republican value could actually be attacked by an economically centrist Obama. Reform in this area would send positive signals about the long term credit worthiness of the US government and encourage domestic investment.

In addition there are more than a few caustic components the President must stand up to in crafting this rescue. I think most would agree this President has more political capital to keep his own party in line and effectively work with the opposing party than any president in modern history.

Absolutely no earmarks: If President Obama backs up his recent statements we could see the beginning of the end of this corrupting influence. While he is at it, the President needs to pull in support from a congressman like Jeff Flake who stands alone in his fight against wasteful government spending.

Don’t pin our hopes on spending programs: Necessary and valuable deficit financed infrastructure projects can add significantly to the national asset base. Legitimate arguments can be made for expediting these investments in periods of waning aggregate demand. Blind faith in the ability of deficit financed government spending that lacks legitimacy to prime the carburetor of our economic engine will not instill confidence in markets.

Speaking of confidence, the Obama plan must instill mountains of it. It must be properly and confidently articulated by the administration and it must win the hearts of business leaders, academic leaders and ordinary citizens. I wish you Godspeed, Mr. President.

Source: 10 Things That Will Make Obama's Economic Plan Successful