The President and Bernanke

Obama went into the White House with a lot of promise.  Running as a centrist when his entire career was spent on the far left wing, he rode a financial crisis into the office of President.  His opponent, John McCain had made the mistake of stating early in his campaign, “I don’t know a lot about economics.” .  Luckily for Obama, he had never made the same statement. However, after a year in office it is safe to conclude that Obama knows very little about economics, finance, or running a simple business.

The current solution to the economic malaise is to keep interest rates low, print money and engage in Keynesian stimulus.  Bernancke has had a hand in the policy, but on the fiscal side it’s the President’s baby.  We also have used government money to prop up failing manufacturing firms in the case of autos, and prop up failed banks in the case of Wall Street.  Now that Obama and his team have lost their third election in a row, they are switching their rhetoric and talking big about jobs.  Currently, unemployment sits at just over 10%, much higher than the promised target with the stimulus package the Democrats and Obama advocated for.  We are hearing talk of stimulus redux.  Economists Paul Krugman and Brad DeLong have written that it’s not big enough!

It has been proven many times that the economic multiplier effect of government spending is equal to 0.  That’s right zero, nada. Gary Becker and Kevin Murphy from the University of Chicago have written extensively on it.  Luis Zingales, John Cochrane and others have written extensively on the crisis.  Even Christine Roemer, a salt water economist, published a paper saying as much.  Yet they push on.

First off, let me say I disagree with the GM bailout, the bank bailout, and the stimulus.  I was also against the TALF, TARP and al the other shenanigans that Treasury Secretary Paulson played under Bush. It would have been painful in the short term to have these companies fail, but far better for American capitalism if they did fail.  From burnt fields grow new shoots.  Some in Congress had the intestinal fortitude to cast a very difficult vote against all these failed economic policies.

Now that the President is refocused, my guess is “jobs” will mean union and government jobs.  It’s too narrow a focus, and too small a group.  Plus, unions and governments are not as productive as regular Joe’s.  Just compare GM and their output versus any foreign car company that has built a plant on American soil.

Instead of a narrow focus, Obama ought to take a page from a different playbook.  Milton Friedman famously said, If you want more of something, make it cheaper.  Less of something, tax it. Make is cheap to employ people.  In a broad context, lower the costs to employ someone.  Lower the payroll tax, end health insurance regulations, and other employment regulations.  Lower the minimum wage.  Raising the minimum wage adversely effects women, minorities and inner city teens. Lower capital gains taxes-as a matter of fact, cut them to zero.  Taxing capital is a tax on production.  Lower corporate taxes to a flat tax of 15%.  Instead of having the highest taxes in the world, the US should have the lowest.  It will encourage companies to re-patriate here and hire American workers.  Lower the income tax rate from a progressive rate to a flat tax of 15-20%-no deductions for anything. It will make tax filing easier, make the opportunity cost of NOT filing taxes high, and really stimulate growth.

Economic research has proven beyond a shadow of a doubt that there is a large economic multiplier effect for every percentage point you drop tax rates.

The last thing they should do is end taxes on dividends.  Why?  Lots of cash now sits on US company balance sheets.  One reason is executives say that their shareholders don’t want to pay a tax on dividends.  End the tax.  This will compel companies to make a decision, invest or release cash to investors.  Many will release cash to investors and it will be re-invested in other things.  That is a better way to stimulate the economy-rather than a listless, monolithic, wasteful government picking winners and losers.

No one in Washington has the balls to implement tax cuts and cut the government influence on American business.

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    Anonymous

    2010/01/26 at 11:07am
    I generally agree but Bernanke has not been truly independent either. Way too interventionist on behalf of banks, working way to closely with both administrations. The Fed needs to reboot. Unfortunately that’s not a real option, so … reappoint him as best of all evils.

    MC

    2010/01/25 at 5:18pm
    “Obama and his ppl want to Alinsky-ize every segment of gov’t and oversight.” –

    What an excellent comment! Thanks for the reminder. The stealth health care plan (it has to be done quickly!) was Alinsky’s teachings in action, Obama wasted no time.