Dear President-elect Obama: Here’s How to Get the Economy out of the Ditch – Knowledge@Wharton

Dear President-elect Obama: Here’s How to Get the Economy out of the Ditch – Knowledge@Wharton

This article was sent to me by my dear wife. I think I agree with her that there are some good ideas that should be followed. They are advocating tax cuts on both the marginal tax rates and corporate tax rates. There is one caveat though. The Wharton economists hit on the problem themselves when they say, “Government could do a lot of harm if it gets involved in ways that aren’t perfect.” Since there’s no way to know if government is doing the right thing until the damage is done, throwing a lot against the wall and seeing what sticks is not a very good idea.

Let’s look at recent history. This year we had rebates sent out to a selection of American taxpayers, and a $700 billion bailout package passed by Congress. Last time I checked, no one is dancing in the streets claiming, “Hooray! The bailout worked!” Quite the opposite. The banks who got the money sat on it. The people who got rebate checks spent it mostly on gasoline. Meanwhile, the stock market is at an all-time low (not really, but I thought a little hyperbole was appropriate here) and the only sector of the economy that is still flourishing is the oil companies, despite oil prices going down by more than 50%! If anyone is a believer in the saying “Past is prologue” need only look at recent history to see how we should address the current situation.

The Wharton economists suggest some form of tax cut or rebate for middle-income taxpayers, “without driving the federal deficit to unmanageable depths.” I hope they aren’t suggesting that tax cuts cause deficits. EVERY time we have cut taxes in this country over the last 50 years, revenue has increased. The problem has always been a Congress who can’t spend the money fast enough. Of course, that is an oversimplification of why deficits have gone up. There have been some good reasons for allowing the deficits to rise due to issues of national security and the like. For example, in the 80’s, Reagan was trying to rebuild the military and started the arms race believing the Soviets wouldn’t be able to keep up with our spending due to the limitations of their economic system. He was right and we won the Cold War. Their economy collapsed while ours flourished. Many economists refer to the time from the middle to late 80’s as the longest period of peacetime recovery in history. In this case, these deficits would fall under what the Wharton economists refer to as, “perfectly rational to run a deficit to get through hard times.” Reagan inherited a flagging economy and used his economic training (yes, Reagan was an economist) to do the right thing and unleashed the power of the American economy: capitalism! He reduced the marginal taxes from a high of 70% down to 28%. This is the easiest way to “Do No Harm” as the Wharton economists warn. You put the power in the hands of the American people.

Just within the last few years, Bush lowered taxes for everyone and lowered the capital gains tax. This encouraged investments and as a result, the value of the stock market DOUBLED! between 2001 and 2007. Obviously, most of those gains are gone as a result of the current crisis but there is no mistaking the dramatic effect tax cuts have on the economy. In fact, this chart shows the dramatic rise in revenues after the 2003 tax cuts.

Tax cuts encourage growth. To me, that’s an axiom. Right now, Ireland is experiencing tremendous success with their national experiment of lowering corporate taxes to 12.5%. Compare that to 35% here in the US. If we as a nation accepted the notion that tax cuts generate revenue and encourage growth, we could put to bed the notion that taxing those who create wealth will help us out of our economic slowdown. Then we could concentrate on solving our other economic issues.


1 Comment

Filed under economy, tax cuts, wharton

One response to “Dear President-elect Obama: Here’s How to Get the Economy out of the Ditch – Knowledge@Wharton

  1. fancybeggar

    While I agree with both you and the Wharton SOB that the government indiscriminately screwing with the gears of the economy can generally mess things up pretty good, I really don’t think that means we should sit on our hands and do something only when we have a priori evidence that it will work. That road leads nowhere.

    I’m not sure I think that throwing a bunch of shite against the wall to see if any of it sticks is a great idea either; but if those are my only two choices, I’m slingin’ it. (I’m already crapping my diaper over the economy, so I have a ready supply.)

    What I can’t get behind is your suggestion that we put our economic future in the hands of the American people. Ick! It sounds like you want another incentive check to be bulk mailed to the unwashed masses. I remember Pres JC suggesting that same idea back when I was a kid in the late 70’s (I don’t think they ever actually did it – not sure), and it just beats with the heart of liberalism to me. I still can’t believe Dubbya did it.

    Good gawd, the American people are stoopid – whatever you do, don’t give ’em their money back. Like you said, they wasted it on gas last time, and they’ll probably just squander it on food and heating oil now.(I’m being a bit tongue in cheek here, but it’s to make a point.)

    If you have some extra money floating around to stimulate a sagging economy, I have an idea. I think we should use it to fund a government think tank of scientists and entrepreneurs to start the search for the next radical technology. America will then use that superior technological innovation to catapult itself back to the top of the global heap where we belong. I’m sure there are still some dot-commies out there who haven’t drank the corporate kool-aid yet – they’d be perfect for the job.

    Hopefully it will be some amazing “green” power source that provides a phenomenal advantage in the manufacture of consumer goods – so we can smack down China and Saudi Arabia at the same time. Win that one for the Gip.

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