Walsh: Review and Comment

Walsh: Review and Comment

The best way to restart the economy: Do

nothing

A few weeks from now, unless a miracle occurs, we'll be listening to a triumvirate of socialists (Obama, Reid, Pelosi) talking about how they're going "to get this economy going."

There are indeed some wonderful policy prescriptions that would do wonders for the national economy (more on them at the end). Unfortunately, you can bank on this: You won't hear them from the Three Amigos.

The best we'll get for the immediate, short term are likely to be the old standbys that Washington always bestows - print more money to extend unemployment checks and probably another round of stimulus checks.

So much for "change."

In truth, if the Amigos will not do what they should do - i.e., cut spending and taxes - one of the best things they can do for the economy is this: nothing. Do absolutely nothing. Leave it alone.

Here's why: The seeds for the recovery are starting to germinate. (OK, let's not laugh at the fact these seeds were incredibly expensive - $1 trillion out of present and future taxpayers. And that there is just a single appointed plutocrat planting them, Treasury Secretary Hank Paulson.) In the short aftermath of the rescue-bailout bill, there have been what SunTrust chief economist Gregory Miller calls "legitimate" indicators that one of the intended effects of the bailout/rescue is indeed occurring. Credit is loosening.

The most tangible indicators are the three-month LIBOR (the interest rate banks charge each other) and the TED spread (the spread between the three-month LIBOR and three-month Treasuries). In both cases, the lower the number the better. In the past week, LIBOR had shrunk from 4.81% to 3.54%. From Oct. 10 to Oct. 21, TED had shrunk from 4.63 to 2.76. "That is a reliable indicator," Miller says.

This is good news. It means bankers are becoming less unwilling, or more willing, to lend - to each other and to their customers.

Miller still holds the belief that we will know the recession is over when housing prices hit bottom and businesses begin investing in plants and equipment. Those conditions, he contends, are still at least seven months away, particularly on the business side. So the question arises: What conditions are necessary to get to the bottom in housing prices and for businesses to invest?

Says Miller: "Credit."

"Banks and businesses want to restart their relationships," Miller says. "But the only reason they don't is fear." Bankers want to make sure the loans they're carrying are stable, and businesses are holding back from investing in themselves because they can't get loans or draw down on their lines of credit.

This fear is beginning to subside. Thanks to Plutocrat Paulson, taxpayers have invested more than $100 billion in banks (essentially, the same amount of money it takes to operate the state of California's government in a year). And the Federal Reserve Bank has begun lending to companies short term by buying commercial paper, short-term corporate IOUs that many big companies use to operate while they wait for their customers to pay their invoices.

All of these steps are like a hair dryer thawing an iceblock on a car radiator. It's working, but it's going to take time.

Reaching the bottom in housing prices will take more time, too. That will occur when investors and homebuyers believe the underlying value of a piece of real estate is an attractive bargain and when banks will be willing to fund a mortgage. There is no singular, magic moment for that; it will require thousands of transactions that add up to a trend.

On that front, we can expect consumers to be cautious through the end of the year and into the new year. They'll want to see what the new president and Congress will put at the top of their agendas. We all know the unknown that lingers after an election breeds caution. What's more, we haven't seen the end of layoffs. If you take into consideration that Florida's unemployment reached 9% in the 1990-91 recession, Florida's 6.8% unemployment is likely to cross the 7% barrier before it begins to fall.

Still, the consumer should start feeling somewhat more confident as the holidays approach. Falling gas prices are helping. In Florida, they have fallen from a high of $3.60 a gallon at the beginning of October to $2.95 a gallon. If prices hold around $3 a gallon - and Miller expects them to - that would put anywhere from $500 to $1,200 a year in consumers' pockets. They'll have more money when you take into account the amount of driving they've cut as well.

The sum of all this is that our economy - on the Gulf Coast, throughout Florida and nationally - will still have the blahs through the end of the year and start of next. But on the plus side, consider this: We're on the back end of this three-year recession, which started in Florida in 2006.

And given that we're on the tail, we should hope (and urge) our state and federal legislators to resist the irresistible temptation to intervene any more, which, of course, is asking a dope fiend to give up his habit for a day.

Urge them to do nothing. Millions of consumers making decisions every day are far smarter and more efficient at correcting economic imbalances than treasury secretaries and central bankers and politicians will ever be.

What's more, when Congress intervenes, typically it takes at least a year for the effects of those policies to filter through the system meaningfully. By the time they debate, pass more legislation, write the rules and implement the new policies the recession will be over.

On the other hand, if the Three Amigos and their bands of looters really, really want "to get the economy going," there are some simple, common-sense measures that would send great signals and do wonders quickly to put our economy back on a growth path.

Federal steps:

1) Cut the corporate income tax rate. Repeat this 100 times: Businesses never, ever, ever pay taxes; they pass them on to their customers! (See McCain plan.)

2) Cut the capital gains rate or keep it at 15%; don't raise it as Barack Obama has proposed. Fact: "For the past 40 years, every time the capital gains tax rate has been lowered, revenues have increased. Every time the capital gains rate has been increased, the government has forfeited revenue," according to author Stephen Moore.

3) Accelerate depreciation for corporate investment in equipment and give an added acceleration bonus on depreciation if that investment translates to an increase in jobs.

State step:

1) Eliminate the corporate income tax, which generates $2.2 billion of the $29 billion collected in state taxes each year. Eliminating that would attract a flurry of businesses that would: spark capital investment in land that would boost property tax collections; spark job growth, which would spark home building and in turn increase property and sales tax revenues far more than what is lost in corporate taxes.

These four steps would be quick, huge confidence and economic boosters that would put the past three years behind us once and for all. But we also know these steps are just a dream.

At best, we'll hope the Three Amigos do nothing.

McCAIN VS. OBAMA: WHICH TAXES WOULD YOU PREFER?

Present Law McCain Obama

Top Personal Rate 35% 35% 39.6%(1)

Capital Gains Rate 15% 15% 20%

Dividends Rate 15% 15% 20%

Death Tax 0% by 2010 15% / 45% /

$10 million(2) $7 million(3)

AMT Rate 28% 0%-repeal 28%

Small Business 37.9% 37.9% Up to 54.8%

Employer Rate(4)

Tax Hike N/A N/A $250,000

Marriage Penalty $200,000(5)

Corporate Income Tax(6) 35% 25% 35%

Business Long/complex Full Long/complex

Infrastructure(7) depreciation expensing depreciation

Windfall Profits Tax None None Yes, Rate

on Energy Companies(8) Unknown

1) This would give the U.S. a higher national top marginal tax rate than Canada, the Czech Republic,Denmark, Finland, Hungary, Iceland, South Korea, Luxembourg, Mexico, New Zealand, Norway, Slovakia, Spain, Sweden, Switzerland and Turkey (Source: OECD Tax Database)

2) The first $5 million ($10 million for a surviving spouse) of an estate would be death tax-exempt (Source:johnmccain.com)

3) The first $3.5 million ($7 million for a surviving spouse) of an estate would be death tax-exempt (Source: barackobama.com)

4) Self-employed taxpayers pay both ordinary income tax and self-employment tax (Social Security and Medicare). According to the NFIB, most small business employers make at least $250,000 per year (Source: nfib.org)

5) Barack Obama has said he would raise taxes on married couples making $250,000 and individuals making $200,000 per year (Source: barackobama.com)

6) The U.S. corporate income tax is currently the second-highest in the developed world. The average European corporate income tax rate is about 25%

7) It takes larger businesses several years to deduct machinery and equipment, even though they purchase the business asset in year one (e.g. a computer must be deducted over six calendar years)

8) Above and beyond the current 35% corporate income tax rate on energy companies

Source: Americans for Tax Reform