By Dr. Robert E. Pritchard, Professor of FinanceRowan University, Glassboro, N.J.
Newswise — In a speech at George Mason University in Fairfax, Va., on January 8, President-elect Obama outlined a multipart economic stimulus plan. He recommended a number of actions, including the following: a tax reduction of $500 for individuals and $1,000 for families (cost about $150 billion); tax write-offs for businesses with losses during 2008 and 2009; $100 billion for health care to states; billions of dollars invested in infrastructure; billions for energy research; upgrades of Federal buildings as well as for 2 million homes to make them more energy efficient; as well as teacher training and research. The total cost could range from perhaps $750 billion to $1 trillion.
That is a lot of money. Although I support the idea of fiscal stimulus, we already have massive federal debt. We must be careful about adding to that debt. At some point our creditworthiness as a country will be called into question, and our ability to borrow may be curtailed. We want to be sure that all stimulus expenditures will yield results and not simply add to political pork. Simply throwing money at our fiscal problems will not solve them.
The issues are high stake. Unemployment has reached 7.2 percent (21 percent for teenagers); there are about 11 million unemployed and some 20 million who are underemployed. The average workweek has fallen to 33.3 hours, housing prices are still decreasing, credit is tight, and the stock markets abysmal. Many economists believe the first half of 2009 will see more economic contraction and increasing unemployment with some improvement in the latter part of the year. This is not a pretty picture.
We have already learned what does not work. Last spring the government sent out checks to millions of Americans in an attempt to stimulate our economy. It didn't work. The money was, for the most part, wasted and only added to the burgeoning federal deficit. I would not repeat that experiment.
To deal with the unemployment problem, we need to take actions that will stimulate job growth now and into the future. Concurrently, we need to reduce the numbers of layoffs. I recommend taking four actions.
1. First, provide funds to states so that they can meet their current operating budgets. In New Jersey, for example, Governor Corzine has indicated plans for a $2.1-billion budget cut for the second half of the fiscal year (the first two quarters of 2009). This means cutting funds that are already budgeted. It will likely result in pay reductions, layoffs and/or the transfer of the tax burden for educational funding from the state to local communities. (Thereby increasing property taxes and adding to the downward pressure on property values.) Obviously, any of these outcomes will further damage the national economy.
It is much more efficient to keep existing people employed and maintain government services than it is to create new jobs. So, as the first part of an economic stimulus program, I urge the federal government to provide aid directly to the states to fund existing programs.
2. Completely eliminate corporate income taxes. This will provide an immediate stimulus to America's corporations and help reduce both short- and long-term unemployment. At present we have about the highest corporate tax rates in the world. This places America's corporations at a real competitive disadvantage. Some might rail against this out-of-the-box proposal, saying "Corporations must pay their fair share."
In reality, however, corporations don't pay taxes; people pay taxes. Any money corporations funnel off to the government in the form of taxes results in higher prices for their goods and services, lower wages and/or lower profits (and concurrently lower stock values). In addition, eliminating corporate taxes will add to corporate efficiency and save corporations billions of dollars in accounting costs.
Finally, it should be noted that in 2006 corporations paid $381 billion in income taxes. This is a lot of money but it will purchase a lot of fiscal stimulus. Jobs will be added, businesses will invest in new plant and equipment, the stock markets will rise, resulting in increased consumer expenditures, and American business will become much more competitive!
3. Provide communities with summer job funding and summer educational opportunities for teenagers. Summer jobs are absolutely essential. The unemployment rate for teenagers could spike to 25 percent by summer. We must provide jobs for this high-energy group; if not, we will likely pay a high cost in terms of crime and social unrest " especially in the inner cities. It is far less costly to give a young person work than to house him/her in jail.
Funding should also be provided especially to community colleges and vocational high schools to provide summer classes for young people at very low or no cost. In addition, financial incentives might be provided to students and awarded based on performance in classes. We need a well-educated work force. Let's start with summer education for our students. This will help them learn, keep them occupied, add to their job skills and provide jobs for teachers during the summer months.
4. Fund useful infrastructure projects that can be implemented immediately in locations where the skilled labor to complete the projects is readily available.
To help end the slide in housing prices, I recommend two fiscal actions.
1. For 2009 and 2010, allow homeowners to double their itemized deductions for property taxes and mortgage/home equity home interest. This would apply to both a primary and secondary property. Limit the doubling to the first $20,000 of property taxes and interest paid.
2. Encourage investors to purchase, repair and find buyers for houses (especially those that have been foreclosed) by offering them tax incentives. At present, the risk of purchasing vacated homes and making repairs/renovations so they can be resold is very high. As a fiscal incentive, consider any profits made in the process of purchase-repair-resale to be long-term capital gains and taxed at a maximum of 15 percent regardless of the time the investor may hold the property.
We must be very realistic about housing. America has a very high rate of homeownership. But, it appears that we may have pushed to hard to achieve this. Cheap money and easy lending got us into this economic crisis (think Community Reinvestment Act for a start). Now, we want lending institutions to provide cheap money for mortgages. I am not against cheap money, but I strongly advocate assuring that borrowers are credit worthy. Bankers may be encouraged to lend, but let's let bankers be bankers and hold the line in terms of loan qualifications.
To give the stock markets a jumpstart, I strongly recommend that President-elect Obama announce that he will not increase the maximum tax rate on long-term capital gains (and preferably decrease it from a maximum of 15 percent to 10 percent). This will reduce market uncertainty and set the stage for recovery.
I support research and development of alternative fuels, but such research is long term in nature. It is unlikely to provide a lot of jobs in the short run " but many jobs in the future. Similarly, I support the construction of nuclear generation plants as well as upgrading the electrical grid and installing pollution abatement equipment on coal-fired generation plants. These actions are essential to long-term energy independence and our environment. But projects such as these are long term in nature as well.
There are no global solutions or quick fixes to our economic problems. Every recession runs its course and this one will end. Weak companies will fail; stronger companies will prevail. There will be suffering and many people will have to retrain and relocate. We have good safety nets, and I strongly encourage the federal government to provide funding to states to secure those safety nets.
Finally, I encourage President-elect Obama to set up an interactive system allowing all of us to contribute ideas for improving our economy and our nation. Just as professors live in ivory towers, so do politicians. There is no reason to think that the average person cannot contribute to the solutions of our nation's problems and help guide us to the great future that lies ahead. To that end, I also encourage the President-elect to establish a web site titled "How You Can Help Your Country Today." This site would detail ways each American can contribute to America's future.
NOTE: Pritchard is the senior member of the Rohrer College of Business faculty at Rowan University, Glassboro, N.J. He completed both his undergraduate degree in physics and an M.B.A. at Drexel University, his M.A. in applied economics at the Wharton School of Business at the University of Pennsylvania and his doctorate in education administration at the University of Pennsylvania. Pritchard has authored/co-authored nine books in the fields of finance, small business management and marketing and has written more than 250 trade journal articles. He has consulted and provided financial training for many businesses and trade associations throughout the United States. Pritchard's research interests include real estate, personal financial management, retirement planning and Social Security. He specializes in applied financial research and pedagogical research principally pertaining to the teaching/learning processes in business and finance.
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