Sunday, March 01, 2009

Reviving the U.S. Economy: An Alternative to President Obama’s Big Government Solution

On November 4, 2008, American voters, by electing Senator Barack Obama to the U.S. presidency, collectively signaled that they wanted a larger and more activist federal government. However since the presidential elections, investors have registered their skepticism of a larger and more invasive federal government by pulling funds out of U.S. stock markets. Between President Obama’s election and the release of the details of his budget plan on February 27, 2009, the Dow Jones Industrial Average and the broader S&P 500 have plummeted by 27 percent.

In 1996, President Bill Clinton stated that the era of big government was over. President Obama’s 2009-10 budget proposal reverses even the hints of Clinton’s restraint and ushers in a return to a federal financial incursion not experienced since the war torn Truman Administration. Overall President Obama’s budget proposes the largest federal deficit as a share of the economy since the U.S. was fighting the Germans in Europe and the Japanese in the Philippines. Even the Johnson Administration’s Great Society Programs combined with Vietnam War spending did not approach the levels of government spending proposed by the Obama Administration.

The Obama deficit, combined with the 2009 Stimulus Package, are ostensibly designed to underpin a flagging U.S. economy and to stimulate growth. The current economic downturn began in housing, spread to the banking sector and subsequently ravaged the stock market leaving a hobbled “meat and potatoes” economy. Below, I present an alternative plan for each of the problem areas that relies more on private, not big government, solutions to the economic malaise.

Reviving 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, Obama’s 2009 Stimulus Package provides an $8,000 tax credit to first- time home buyers. This is inadequate since many of those who qualify do not currently have the resources to make the purchase, nor do they have the tax liability to benefit from the credit. Instead, the 2009-10 budget proposal should provide a tax credit of $15,000 for all 2009 home purchases, not just first-time buys. Additionally, the federal government should allow investors that rent homes to write off all losses against their ordinary income. Currently, investors must spend 500 hours per year working on the property.

Stimulating the banking sector. In 2006 Congress passed what was termed as “mark to market” requiring that financial institutions mark or write down assets on market value. This has meant that due to the inability to price or value packages of mortgages on the balance sheets of many financial institutions, these institutions have marked them to zero under the overly restrictive assumption that they will collect nothing from the disposition of these mortgages. This is clearly draconian and reduces the ability of the financial institution to make loans thus further weakening the economy. I recommend that the Congress suspend “mark to market” accounting for two years. My other recommendation to revive the financial sector is to pursue the Swedish model of bank reform. In 1992, Sweden, suffering through it own banking crisis, set up a “failed” bank to buy the toxic assets of the nation’s other banks. This “failed bank” using a reverse auction process would then buy packages of mortgages from troubled banks. The Swedish solution meant that all of their major financial institutions were returned to profitability by 1994.

Energizing the stock market. President Obama’s 2009-10 budget plan calls for the abolition of the 2001 and 2003 tax cuts for individuals making more than $200,000, and couples earning more than $250,000. This will mean an increase in tax rates on capital gains and dividends. This impending increase has had a significant dampening impact on the stock market since Mr. Obama’s election last November. In my judgment, restoring these tax cuts for all would rebuild a substantial amount of the stock market.

Additionally in order to support the largest expansion in the deficit and debt since 1945-46, President Obama would allow the top income tax rate to rise from 35 percent to 39 percent beginning in 2011. This is no time to be increasing the taxes on any worker, high or low income. Such a large tax increase is now having a large and negative impact on the stock market and the overall economy.

My plan is a sensible approach that does not radically alter the role of the federal government in the economy nor does it significantly increase the financial burden that baby boomers such as President Obama and I hand off to our children and grandchildren, or those who ironically voted for President Obama in abundance.


Unknown said...

I think Obama is using the "inherited" economic downturn as an excuse to push his socialistic agenda.

How many times during his press conference a few weeks ago did he use the terms

"recession I inherited"

"failed economic policies of the past 8 years"

The second comment I find the most disturbing. Which economic policy of the past 8 years caused this economic downturn? This was all caused by the government pushing home ownership to those that couldn't afford it. This policy was started by Bill Clinton.

Obama has been using the Bush tax cuts for the "rich" as the reason for the economic downturn(even though the rich are the only ones currently paying taxes)! And there's no way Obama and the liberal congress will let them expire. No way!

Furthermore, this mess didn't happen overnight, and we won't get out of it overnight. I just refinanced my home to a fixed 30 year rate of 4.875, down from 6.375. This is going to put an extra 200 a month in my pocket. As interest rates have fallen, lots of people are refinancing and will be or already have been realizing this additional cost. It's money we will spend in the market, it's money that will increase consumer spending! This is another example of how the government can create an environment healthy to economic expansion, but can't single handily fix it.

70% of the jobs created in this country are from small business, NOT GOVERNMENT.

2/3 of our economy is consumer spending, NOT GOVERNMENT SPENDING

Obama's plan is pure socialism.

Hopefully parties such as the libertarian party can gain more traction in the coming years.

Anonymous said...

Statement from National Civil Rights, Consumer, Community Development and Housing Groups Regarding Attacks on the Community Reinvestment Act (CRA)
Washington, DC – The following group of civil rights, consumer, community development, and housing groups today made the following statement:

Recent conversations pointing to the Community Reinvestment Act as the cause of the foreclosure crisis and credit market crisis are an attempt to deflect attention away from the real problem affecting our financial system. That problem is failed regulatory policy and oversight.

For more than a decade, community leaders, civil rights proponents and housing groups have raised concerns about unfair, deceptive and abusive lending practices that have undermined homeownership aspirations for millions of working families. Those pleas for better regulatory policy and oversight not only went ignored, in some cases they were contradicted by regulatory policy that made predatory lending more virulent and prevalent in low-income neighborhoods and communities of color.

Over that same period, thousands of pages of local, state and federal testimony, peer reviewed policy papers and speeches (many from the groups signed onto this statement) have forewarned of a pending crisis stemming from lax regulatory oversight and enforcement. Yet no serious federal response was made. As Harvard University law professor Elizabeth Warren has artfully stated, consumers had better protection buying a toaster or microwave oven than they had when purchasing the family home.

One example of regulatory failure is that many vital financial institutions – and the products they created and sold -- were not covered by meaningful regulation. Some market players clearly knew their actions were creating a potential market crisis. A Securities and Exchange Commission (SEC) Report recently found that in December of 2006 one analytical manager at a prominent credit rating agency wrote to another senior analytical manager to say “let’s hope we are all wealthy and retired by the time this house of cards falters.”

Improved regulation of the financial system – including brokers, lenders, appraisers, rating agencies and securitizers – was essential. If the Community Reinvestment Act – and other appropriate regulation -- had been applied to independent mortgage companies and other non-bank financial institutions, it is likely that our nation would not be confronted with a foreclosure crisis. Critics of the law conveniently ignore that about 75 percent of sub-prime loans were not covered by CRA. They also ignore the fact that most reckless and damaging subprime lending occurred between 2003 and 2007, long after CRA’s passage in 1977.

CRA exams provide clear and strong incentives for banks to make safe and sound loans and penalize them for making loans that are unfair and abusive. CRA is an antidote, not a cause of the current crisis.

Signed by:

Accion USA / Chicago / New Jersey / New York
Center for American Progress
Center for Responsible Lending
CDFI Coalition
Consumer Action
Consumer Union
Consumer Federation of America
Dēmos: A Network for Ideas & Action
Enterprise Community Partners
Housing Assistance Council
Lawyers' Committee for Civil Rights Under Law
Leadership Conference on Civil Rights
Local Initiatives Support Corporation
National Association of Consumer Advocates
National Alliance of Community Economic Development Associations
National Community Reinvestment Coalition (NCRC)
National Consumer Law Center (on behalf of its low income clients)
National Council of La Raza
National Council of Negro Women
National Housing Conference
National Housing Institute
National League of Cities
National Low Income Housing Coalition
National NeighborWorks Association
National Policy and Advocacy Council on Homelessness (NPACH)
National Rural Housing Coalition
National Urban League
Opportunity Finance Network
Rainbow PUSH Coalition
US Conference of Mayors

Pamela Banks

Anonymous said...

Do you have any liberals post to your blog? It might help you understand Obama's side better.

Let's try to look beyond the stock market to guage the economy. The economy is much larger, deeper, more important than prospects of stocks. There's employment, well being, production, cost of capital, sociology, and much more. These all deserve consideration in economic decisions. That, as you know, is why economics is not a side of business. It's much more... It's a philosophy.

The stock market does not lead to improving people's lives. Rather it's one of many avenues to finance businesses. In some cases businesses, banks, health insurance companies, indeed do improve our well being. But in others they do not nor will probably ever. This is when other organizations step in.

I also disagree with the assumption the U.S. economic downturn started in housing. For example, we've known for 30-40 years GM has been a vulnerable entity. We've had fundimental banking problems for 30 years. We've had executives taking more and more of U.S. earnings for delivering little value. See Home Depot CEO for an example of this. See Merril Lynch CEO for another example.

Reagan's deregulation of investment banking and massive business consolidations did not help either.

In terms of tax credits, that depends. The tax credit may actually go negative, in other words, cause a negative tax rate. This portion of the bill was a way to gather Republican support at any rate. I agree, he maybe should have taken it out and put more stimulus in it but he wouldn't have gotten the votes.

Mark to market accounting-I don't think the banks have adjusted their securities to a value of zero. Maybe wall street values it at zero, but the banks certainly are not valuing these mortgage investments at zero at this time nor should they. In September the SEC said the banks should use present value cash flows if a fair value cannot be determined.

I think this is different than the Sweden model. We don't know the bad assets. Without a form of nationalization, we won't know.

I'm afraid your proposed approach is much too small to address the holes in our economy. They don't address our energy, the auto industry, education, sufficiently address banking, nor helps solve our health care problem.

I agree with Obama's multi pronged approach because it is addressing many chief problems at once.

Vinu1smile said...

I have one question with regard to this article:

if you have the opportunity to be a part of US President, Barrack Obama's economic advisory team, what would you recommend that his Government do to revive the US economy?

Anonymous said...

Obama's going to go into energy, education, and health care in a big way as these industries costs are too large to maintain.

Let's go inthe health care:
Obama hired a budget guy looking for such solutions. He's currently looking toward budgeting universal access to care while reducing our national health care costs.

Here's an illustration. HC costs $2.5 trillion (I looked it up). About a fifth of us don't have insurance. So we put in zero but we use x amount. We use x amount in the most expensive circumstances (when things are so bad we go to the ER) because those fifth don't have coverage. It would be cost effective for them to pay something for insurance and then be in the hc line for service. This is added revenue which is better than zero, given costs won't change (they won't).

Also, Orszag is using the Dartmouth and Medicare studies which showed we don't implement best HC practices and we pay too much for ineffective care. A study showed 1/3 or about $850 billion is used on ineffective care. We can at minimum reduce it some at maximium reduce it by say a third pretty easily. We can reduce the $2.5T by implementing best practices across the country.

Orszag's aleady said MC rates are going to fall. HC insurance companies are now saying the same. Providers are answering to this by adopting cost cutting measures and best praciices to reduce costs. This will reduce costs.

Lastly, say I have commercial insurance. It costs about $11,000. MC costs about $8,000. This is cost savings. This will be further reduced as more and more ppl join the plan. If commercial insurance plans can offer better service at a small premium or the same service cheaper, then they're welcome to the table.

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