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.