A Stimulus Alternative

Outside of government, it’s hard to find a serious economist who is really jazzed about the “economic stimulus” package passed and signed into law earlier this month. And I mean really hard.

I was on panel at Dowling College on February 15 with two other economists. I was the supply-side economist. There also was a pretty hard-core Keynesian. And the other economist seemed to come down in between the two of us. None of us viewed the stimulus package as being substantive for the economy.

In an article for today’s Newsday, I noted the following regarding stimulus package, as well as the push for the Federal Reserve to act as the economy’s savior:

Government checks dropping from the sky is merely a case of income redistribution; in effect, a handout. Tax rebates didn't work in the mid-1970s or in 2001, and they won't this time. Meanwhile, the impact of the investment tax breaks for business will be severely limited because they're only temporary. At best, the timing of some investments will shift.

 Beyond the stimulus, many on both sides of the political aisle, along with various TV talking heads, also agree that the Federal Reserve should be trying to juice up the economy through interest rate cuts and added liquidity.

 But the purpose of monetary policy is to keep inflation low. It is not a magical means for manipulating economic growth. And since consumer price inflation during the past three months has been running at a red-hot annualized rate of 6.8 percent, the Fed needs to get refocused on getting inflation under control. Low inflation, of course, helps consumers and investors.

So, is there an alternative to this misguided policymaking? Yes, there is:

How about the Fair and Simple Tax Act proposed late last month by Rep. David Dreier (R-Calif.)? Rep. Peter King is one of the original co-sponsors.

 The bill would simplify the personal income tax by reducing six brackets to three, with the top rate cut from 35 percent to 30 percent. 

The capital gains tax rate would fall from 15 percent to 10 percent, with gains indexed for inflation. And the corporate tax rate would drop from 35 percent - one of the highest rates among developed nations - to 25 percent. In addition, the death tax would be thrown out, and the alternative minimum tax exemption would be adjusted for inflation and made permanent. 

This is sound tax policy that clearly would benefit the economy. The returns on starting up, expanding and investing in businesses would be enhanced. When business invests, production expands and jobs are created. In turn, individuals and families are confident and keep spending their consumer dollars.

The right policy mix is no mystery: The Fed works to keep inflation low, while Congress and the White House permanently and substantively reduce tax and regulatory burdens that hamper economic growth.