January 10, 2009

January 10, 2009 | Commentary on Taxes

Obama's Stimulus: Wrong Rx

President-elect Barack Obama got one thing right in his speech yesterday: Our economy is in real trouble, and it needs help - the sooner, the better.

"Every day we wait or point fingers or drag our feet, more Americans will lose their jobs," he said. "More Americans will lose their savings. More dreams will be deferred and denied." Exactly.

But he was wrong when he said, "And our nation will sink deeper into a crisis that, at some point, we may not be able to reverse." Eventually, our economy will pull itself out of recession on its own.

More important, neither the few details Obama offered yesterday nor his other earlier proposals will, in fact, stimulate the economy.

Not that doubling alternative-energy production, or making federal buildings and millions of homes more energy-efficient -- two goals Obama set yesterday - is necessarily bad. But most of the emphasis in his evolving plan is on more government spending - and that's not what we need.

The Congressional Budget Office confirms that the federal deficit is already expected to exceed $1 trillion in 2009 - twice the largest deficit of the Bush years. If deficit spending were stimulative, our economy should look like it just downed a double espresso.

The problem is that the government can't just wave a wand to create purchasing power. Every extra dollar of Obama stimulus spending must be borrowed -- that is, subtracted from the money available to the private sector.

So more government spending on infrastructure means less money for private investment. More "cash in families' pockets" means less private lending for family purchases.

Government spending goes up, private sector spending goes down - and the economy remains in the doldrums.

To his credit, Obama is talking more about tax cuts. Sending families a $1,000 tax credit will help the family budget. But that wouldn't be stimulus, either - just another means of redistributing cash, because even tax-credit relief is borrowed.

For an effective stimulus program, Obama needs to address tax rates.

Step one should be ruling out any chance of a tax hike. Recovery will come harder if the economy's staring at the largest tax hike in history. Indeed, he should extend, at least through 2013, all the tax relief enacted in recent years.

Why 2013? It's far enough off to mute the effects of a massive tax hike on today's decisions. Four years down the line, we can reopen the debate over tax levels and redistributionism. The focus now must be getting our economy back on track quickly.

But even that is only the elimination of "anti-stimulus." A real stimulus would be to reduce tax rates (at least through 2013). This could energize the added investments, new hiring and extra risk-taking needed to move our economy's pace from tepid to torrid.

The Heritage Foundation suggests cutting the top income tax rates for individuals and corporations by 10 percentage points, from 35 percent to 25 percent, with similar reductions for other tax brackets. Our analysis (based on a widely respected macroeconomic model) found that this would result in 500,000 more workers in 2009 and 1 million more workers in 2010, at a cost to the Treasury of $670 billion over five years.

The American people drive the American economy, not Washington's policy trinkets. Unleash the people, and the economy will recover sooner and stronger.

J.D. Foster, is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy for the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

J.D. Foster, Ph.D. Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in the New York Post