10 Things That Will Make Obama's Economic Plan Successful

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.

Comments

[Steven Hansen:]

We should not be in favor of re-tilting the tax laws which got us here in the first place. It creates economic distortions.

we do not need foreign companies to come here. we need to create an environment for creation of small business.

Jan 23 04:47 AM

[CautiousInv...:]

Very little of what you mention is included in the actual stimulus plan.

Suspension of mark to market accounting simply will delay resumption of lending and is at odds with the formation of a bad asset bank.

Your proposal to steer money into the market and real estate is at odds with the need for the market to price assets and allocate capital.

The real challenge is how do we stabilize the financial system and go about restructuring an economy built upon consumer spending funded through assumption of debt.

As the current crisis illustrates, our economic model is unsustainable.

Jan 23 07:00 AM

[jamesa40:]

How about we just let free market principles work and let the market sort itself out? Sounds simple I know, but sometimes the simple way is the hard way.

Jan 23 08:22 AM

[LilBob:]

The real problem with the economy was that outsourcing compromised the cash cycle in the US economy. The REIT crisis happened because of consumer pressure from investors who benefitted from a retail based economy that was top-heavy with capital because of a windfall that occurred from being able to sell to American consumers without having to pay American wage rates. No economic revival can be successful in the long term without restoring the economic cash cycle. The wages paid to bottom-rung employees are analogous to the fertilizer that a farmer puts on his crops. So long as real wages remain stagnant and outsourcing of productive capacity continues we will sink deeper into the same hole we are already in. What you mentioned about incentivizing capital formation was almost correct, and what you mentioned about public works projects (so long as they are held to account in regards to prevailing wage laws) is also correct.

The consumer based economy is dead. We cannot expect to continue in the same mold that we've been in for the last ten to fifteen years. We need an economy that is focused on domestic productive capacity in both the service and manufacturing sectors. Any future economic schemes that are based primarily on investor trust and retail growth are doomed to failure.

Jan 23 08:30 AM

[FannyBuckin...:]

What a lot of terrible ideas! This is just what got us here%

Jan 23 09:06 AM

[Carlos Lam:]

This author just spouts more statist ideas that will prolong our problems. How about this instead:

* Let sick banks fail so that healthy banks can pick up their depositors

* Let sick companies (including automakers) fail so that healthy companies can pick up their capital and employees

* Encourage family thrift & saving by using the bully pulpit

* Cut as much federal spending as possible (entitlements, defense) as quickly as possible in order to free up capital for private enterprise

Jan 23 11:27 AM

[Smarty_Pants:]

For someone who claims to be a "reasonable economic liberal (aka free market thinker)" I find it somewhat amusing that the vast majority of his proposals involve further government intervention in the market.

I suppose as long as they're the "right" interventions, then the free market will get better.

Note to the author:

When you state that you are fixing the free market and step #1 involves the use of the word "compel", you don't have a free market any more.

There is a reason why you would need to "compel" people into these actions. Generally they won't undertake them volunarily because the actions are seen as not being profitable.

If there's no profit, there's no reason to undertake the operation because the costs of implementing it outweigh the benefit to be gained. If the benefits were worth more than the cost of implementing the idea, then someone would already be in that business earning a profit.

Most of what you propose is to force people to prop up failing business ventures. That's hardly a model for future success. Reference the former Soviet Union as an example.

Jan 23 12:08 PM

[Glen L.:]

You're a "free market thinker", Mr. Morgan? Thanks for the smile and chuckle.

I wish I had time to address every error in your "10 things". Let me just reply to the first, "incentivize capital formation". Rather than tinker and try to micromanage the economy, why not just abolish all capital gains taxes? Can you not see what a huge stimulus that would have to desparately needed capital formation?

Time to learn some sound economic theory. Go to mises.org and start reading.

Jan 23 01:03 PM

[Conan the B...:]

Mr. Morgan: "Exempt from taxation interest and dividends paid...etc."

I do not think you have attempted to think this particular proposal through to its conclusion. Why bother buying Tax exempt Municipal Obligations if the same status is awarded all investments?

Are you asking the Federal Government to step in to fund all of the State and City projects for the next 5 years, if Municipal yields have to compete against corporate yields?

IMO

Jan 23 01:34 PM

[Socialism c...:]

Alternative plan:

1) Let those who made bad decisions take the consequences...not the rest of us. This means let bad banks & companies fail. And let mortgages fail that shouldn't have been made to begin with -- it is utterly unjust that I should help pay for someone's home, who couldn't afford it to begin with!

2) Complete overhaul of tax policy at all levels. The confiscatory modes of taxation are unjust and un-Constitutional to begin with (go read what the Founders said about taxation) -- but it goes beyond that -- we have created a tax code that is so vast and complex that it is now a dead-weight around the ankles of this economy -- it is a huge burden to the working class, full of loopholes, and plain inefficient (care to calculate how many hours we all spend working through our taxes...where else we could put the brainpower of all the tax accountants...and the expense of having an IRS???). Time to end it. Move to consumptive taxation.

3) Cut government, not grow it -- the entitlements are bad enough; the notion that a Keynesian solution of government spending during a time when we are already running huge deficits, and when the economic crisis was caused by too much debt...is just ridiculously silly.

The solution is obvious -- a return to small government and more freedom. But then...they need to keep power and control, so we can't have any of that.

Jan 23 01:47 PM

[bogwad_Seig...:]

To quote:
"Incentivize capital formation"
Nuts...why go through hoops. The thought that comes to mind is "right church, wrong damn pew"
I'll give you an easier way; stop capital gains taxes for 5 years - completely. Yes, kill it. AND THEN (to avoid leaving a job half done) reintroduce it at a dramatically...breatht... lower rate. There's your damn incentive towards capital formation.

"Suspend mark to market accounting"
Excuse me, but are you completely out of your cotton pickin' mind? Have you been asleep since this mess began? Evidently so - FFS this is what caused the freeze in interbank lending a/k/a/ "The Credit Crisis" - because no one had any clue how to value anything.

Your article makes zero sense to me, and I paid you the compliment of reading it through a number of times.

Jan 23 03:01 PM

[Chris B:]

Just an observation, but prior to the 1999 repeal of the 1933 Glass-Steagal Act, it would not have mattered much to the economy, business, or consumers if the investment banks lost money. They were separate from the retail banks that were at the core of our economy. Had we kept that law in place, the retail banks would be just fine, doing the traditional banking business of taking deposits and lending them out instead of leveraging mortgage CDO's and buying commodities futures. There would be no TARP and probably no mortgage crisis. The repeal was pushed through by the folks who created Citigroup, after $600,000,000 in industry lobbying.

Just a few short years later, the same type of bank crisis that started the depression reoccurred. What - A - Surprise.

Reinstating this vital depression-era reform should be at the top of the new administration's list. Not allowing too-big-to-fail bank oligopolies should be at the top of the justice dept's list. Hopefully we've relearned the lessons our grandparents learned.

Jan 23 05:22 PM

[perceptions...:]

Three reasons why any stimulus plan will not work.

1) The massive deleveraging of credit markets after 20 years of over-indulgence.
2) Falling demand, over the next 20 years, due to the Baby Boomer generation, first retiring and then leaving us forever.
3) Peak Oil, here now.

Jan 24 04:38 AM

[Conan the B...:]

There was a rule that No Financial institution could have more than 10% of the Nation's depositors.

I believe that line has been crossed by BofA.

Does anyone know of any site which provides those kind of stats?

Jan 24 01:56 PM

[neutrino23:]

I think people are suggesting lower taxes and smaller government without thinking it through. Small government might have made sense in the horse and buggy age when most people lived on the farms. Most of the common areas were left to fend for themselves. That world is gone. The population is enormous, demands on the environment are large, we need a large institution to manage the large areas of common interest to us. Government after all is us, not some alien entity.

As to taxes, lowering taxes only provides a short term bubble followed by a crash, it doesn't lead to long term stability and growth. High marginal (emphasis on marginal) rates promote the growth of business.

When rates are low people are eager to take the cash out of the business, they go for the quick return. When rates are high money is kept in the business and people are more protective of the business because they view it as a long term source of income, not a quick score.

If tax cuts were so good our economy should be pumping on all cylinders given the enormous tax cuts of the Bush administration. Businesses taxes now only account for about 7% of federal income, that used to be 35%. If tax cuts are so great why didn't these huge tax cuts help?

There was an article I read last month ranking states on taxes. It called California unfriendly to business because of high taxes and ranked it second from the bottom. It ranked South Dakota at the top due to low taxes. What a joke. No knock on SD but if these guys were right then entrepreneurs should all be moving to Sioux Falls and abandoning Silicon Valley. It must be an absolute puzzle to these guys that nearly half of VC money is spent in business unfriendly California.

It shouldn't be a surprise. Taxes pay for infrastructure. You can't have world class research universities, national laboratories, NASA labs, libraries, museums and open space without spending money and that money comes from taxes. Money invested in a community creates the environment where business can thrive.

My suggestion to President Obama would be to roll back the Bush tax cuts, close loop holes, reinstate Glass Steagal, improve regulations, put the unemployed to work as much as possible. It doesn't do that much to just give people money. They need jobs.

Jan 24 09:20 PM

[Conan the B...:]

Payroll Taxes: having paid taxes on that income and then having to pay taxes on interest earned just because I want to save some money IS not the way to promote saving.

If we want Americans to spend, lets Tax everything. Get rid of the 15% tax rate, that only benefits the Rich. Tax 401Ks, only the Rich can afford to have 101Ks anyway.


What a Crock. Eliminating all of Bush's tax cuts translates into taxing millions of Americans who are NOT rich. Taxing the Top 10% who already pay 70% of all taxes is Okay by me as long as Warren Buffet is forced to pay the AMT. Just Like all of the Fat Cats who have figured out loopholes to avoid paying the Alternative Minimum Tax, Mr. Buffet pays less than his secretary.

Last year he figured out a way to avoid paying taxes on his $50 Billion Estate, donating it to charity.

Not only is he not paying his fair share now, he has made sure to spare his family after he dies.

The Rich can buy Tax exempt income earning assets. Park money in countries that do not report interest income to the US. Avoid taxation altogether but you want to eliminate All of Bush's tax cuts which help mainstream as well.

When were corporate taxes 35% of all taxes paid? Name just one year. The corporate tax rate was 35%, but taxes paid...Please, name one year out of the past 50 years.

Corporations figured out how to reduce tax payments via Permanent "One time " corporate writedowns against earnings.

Who gave them these accounting loopholes, The RepubliCrats, the Pork ridden Tax Bills spanning decades which always left something intact with every new Tax Bill.

I do not mind paying my "fair" share, as long as Buffet, and his ilk, who have spent a lifetime avoiding paying their Fair Share do so likewise

Jan 25 12:10 AM