The past year has been a difficult one for the economy and for Americans. We are used to an economy that grows -- as it has for the past several years. But this year we’ve seen it slow dramatically and everyone is feeling the pinch.
That’s spurred an industry of ideas about what should be done to stimulate America’s economy and return it to a path of growth and success. However, I believe that some ideas being discussed could actually inhibit our ability to recover. Rather than simply treat the symptoms of a bad economy, we must take the steps that offer real solutions to improving the economy and creating new jobs.
First, we must reject calls to raise taxes. During an economic downturn, the last thing government should do is take more money out of the economy by increasing taxes. Low tax rates encourage American families and businesses to work more, save for the future, and invest in businesses that create goods and services that we sell here and around the world. This is how the economy can grow again and good jobs can be created. The U.S. Bureau of Labor Statistics found that when tax rates were lowered in 2001 and 2003, over five million jobs were created over five years, and the economy saw 17 straight quarters of growth.
When Congress begins its new session, the first priority should be to reassure taxpayers that we will maintain the current income, capital gains and dividend income tax rates, and keep marriage penalty and death tax relief in place. Extending – or making permanent – current tax rates now would give individuals and small businesses the certainty they need to plan their family budgets and encourage small businesses to make critical long-term investments in our nation’s economy that will increase job growth.
Second, we must not be afraid to compete. American workers are the most productive and innovative in the world. However, we’re hampered by having the second highest corporate tax rate in the world. Lowering corporate tax rates is the key to preventing companies from moving overseas and it would make the U.S. more attractive to foreign investment. Further, we must encourage trade with other countries by enacting the existing free trade agreements with Colombia, Panama, and South Korea. Such agreements create American jobs.
Third, Congress must stop enacting massive “stimulus” bills – spending billions of taxpayer dollars so politicians can be seen as “doing something.”
Last year, Congress sent out $600 rebate checks to individuals, adding more than $115 billion to the federal deficit. Supporters of the rebates argued that people would spend these checks, injecting money into the economy, thereby preventing a recession. But respected economist Martin Feldstein (who initially supported the rebate idea) recently wrote, “[t]he evidence is now in and that optimism was unwarranted. Recent government statistics show that only between 10 and 20 [percent] of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity.”
Congress must also avoid bailing out troubled industries. Ford, General Motors, and Chrysler – commonly known as the “Big Three” automakers – recently asked Congress for $14 to $35 billion in taxpayer money. These companies are riddled with structural deficiencies and are weighed down by tremendous “legacy costs” (financial burdens resulting from agreements with labor unions, obligations from previous contracts, and state laws restricting them from dropping local dealer franchises). While a majority in Congress rejected their request, the Bush administration decided that it, nevertheless, would provide over $13 billion in taxpayer loans to the auto industry. The President’s action means that the Big Three will receive short-term financing to carry them through into January, but, in my opinion, it fails to adequately address any of the serious structural and financial problems that continue to hurt the automakers.
Of course, sending “federal” money to the states and building roads and bridges also adds to the deficit and debt without having any stimulative effect or creating any new jobs for laid off workers.
Some have wrongly argued that Congress “bailed out” the financial industry. Actually, the $700 billion “rescue plan” was intended to create liquidity in the financial industry so that all Americans would have better access to credit. Unlike the auto industry, the financial industry provides the financing throughout every segment of our economy.
Most of our economy runs on credit. In fact, most people cannot afford to make major purchases without it. So if it’s not available, as happened in September, economic activity can grind to a halt.
Even though only $350 billion of the $700 billion has been utilized, the rescue plan, along with the Federal Reserve’s action to buy debt and cut the interest rate, is beginning to stabilize the credit markets. Loan interest rates are falling, and private banks are starting to lend again, although at a very slow pace. With the financial shock of the housing bubble burst, it will take time for banks and financial services firms to regain the confidence to lend at sustainable levels.
Our economy has recovered from difficult periods before, thanks to the creativity and ingenuity of the American people. While there are unique and rare times when the government must intervene, I believe that going forward we can best ensure a strong and lasting economic recovery by encouraging American businesses, entrepreneurs, and workers to do what they do best: work hard at creating the best and most innovative goods and services the world has to offer.
Please note that the following column first appeared on January 4, 2009 in the Arizona Daily Star.
