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.