Sunday, February 08, 2009

What Would Stimulate the U.S. Economy?

I have been very critical of the Keynesian approach to reviving the U.S. economy. In fact, 200 economists, including me, recently ran a full page ad in the New York Times opposing this method of stimulating the economy.

So what federal government action would put the U.S. economy back on the path to healthy growth? As an initial step, decision makers must acknowledge where the economic problems began and where the economic difficulties remain. The economic meltdown began in housing and was later reflected in an equity market (stock market) that declined at a pace not seen in decades. So I propose that the following actions be undertaken to remedy the economic malaise:

Housing. The median price of houses sold in metropolitan areas of the nation declined by approximately 18 percent last year. Without policy intervention, I expect housing prices to plunge by another 14 percent in 2009. In order to underpin the housing market, the stimulus package currently under U.S. Senate deliberation should provide a tax credit for ALL home purchases in 2009, not just first-time buyers. Additionally, the active/passive investor definition for home investors should be eliminated. These two steps WOULD cure the ailing housing market. The problem is that it would create another bubble in the housing market. However, the stimulus package currently under consideration creates its own asset price bubbles. The Federal Reserve would be required to take the air out of the bubble at a more acceptable pace in the years ahead in either case.

The Stock Market. At the end of 2010, the 2001 and 2003 tax cuts expire. This means that the tax rate on capital gains from stock sales increases and the tax rate on dividends rises. These impending increases have had the impact of stifling U.S. equity markets. Making the 2001 and 2003 tax cuts permanent WOULD bolster stock prices.

The problem with the Obama/Democrat stimulus package is that it results in a permanent increase in government programs that must be paid for in perpetuity by U.S. taxpayers. This, of course, results in a huge shift of wealth from the nation’s youth to baby boomers such as me and President Obama and most of those in Congress.

Ernie Goss


Unknown said...

The issues and the fixes for our economic downturn is so obvious, yet, in Washington they'd rather write a bloated bill that does everything but fix the issues. Good post Dr. Goss!

Anonymous said...

You are forgetting the fact home buyers aren't paying back the principle on their mortgages. If they have no money, the small size of the credit will not eliviate or help pay this burden to the investors. You are also forgetting the lack of regulation in housing which caused those who didn't have the financial capability to pay off the mortgage to purchase it.

Anonymous said...

That's fine if some economists aren't Keynesian. That doesn't make them right.

I have a feeling we really need to take a look at how houses are financed. Borrowing short and at variable rates and lending long and fixed is a tough business model for "safe banks." If this is to continue, they need to be looked at as a speculative investment.

So, on a different topic, when are tax cuts a bad idea?