Monday, January 26, 2009

Reigniting Growth

The best way to buttress the financial system is to reignite economic growth. Instead of nationalizing the banking system, or making our big financial institutions wards of the state, or interfering with real estate markets through foreclosure bailouts, or expanding any other aspects of Bailout Nation, let’s have some pro-growth tax policies.

All our problems can be solved if the economy grows and asset values rise in the process. Growth also will correct the problems associated with asset-backed bonds for mortgage, consumer, student, and other loans.

Right now capital is on strike and so are investors. Let’s help them out.

Here are some possible courses of action:

1. Reduce the capital-gains tax rate—or initiate a capital-gains tax holiday—and substantially increase tax write-offs for capital losses. In other words, rejuvenate investor incentives.

2. To promote business investment, slash the tax rate on large and small companies, allow full cash-expensing of capital put into service, and reduce the business capital-gains tax rate.

3. For individuals, my perennial first choice is a 15 to 20 percent flat tax rate. Failing that, abolish the 28 and 25 percent brackets, get rid of the 10 percent bracket, and flatten the code so the whole middle class is paying 15 percent.

All of the proposed government spending is just a transfer of resources. There’s no net growth impact. I agree with Harvard professor Robert Barro, who says the Keynesian government-spending multiplier is virtually zero. On the other hand, the Federal Reserve has already created about $550 billion of new M2, which is going to be a big stimulant for the economy.

Almost 30 years ago President Reagan successfully fought inflationary recession with reduced tax rates and tight money. Today we should fight the credit-deflationary recession with reduced tax rates and expanded money growth. Lower tax rates will address the downturn and expanded money growth will offset the credit problem.

If anything, Washington should be curbing its spending growth, not expanding it.