Friday, July 3, 2009

The ‘Second’ Obama Stimulus Plan That Could Possibly Have A Chance To Succeed

You’d think that with close to $1.7 trillion of stimulus pumped into the veins of a beleaguered $14 trillion American economy, something would be accelerating along the way by now, wouldn’t you?

The President announced this week in our previous hometown of Annandale, Virginia that the first stimulus package was “working”.

Really? The Labor Department announced today that over 475,000 more jobs were lost in the month of June and the unemployment rate jumped up to 9.6% heading towards 10% by the fall.

How can that be if the stimulus package is 'working'?

A lot of the problem is that much of the first stimulus package was geared towards plugging the leaks in the dikes of the state governments, the financial institutions and Detroit automakers that were hemorrhaging cash all over the place in the spring. (How does that $35 billion in bailout assistance going into GM and Chrysler in March look now that they have both filed bankruptcy?) The difficult spending cuts that have to be made in states such as California and North Carolina were sidestepped with the hopes that somehow, someway, the Tooth Fairy would come through and deliver the increased tax revenues everyone was hoping for to cover these yawning budget gaps across the nation.

It did not happen.

(By the way, how come a state like Texas can be running a $11 billion budget surplus nowadays with no personal or corporate income tax while California is running a $24 billion deficit? Could it be that Texas did not embark on a break-the-bank spending spree since 2000? I wonder….)

The first stimulus package was predicated upon the old fiscal notions from over 80 years ago in the 1930’s that all we have to do is build more roads and bridges and pump up public sector spending and all will be well. Make no mistake about it: the first stimulus Obama package was written to satisfy the unions who helped him win the presidency. Now it is time to pass a second stimulus package that will benefit the entire country.

The 21st century American economy has a backbone built primarily on technology and services instead of unskilled labor so very little of the first stimulus package went to stimulating the economic ‘animal spirits’ of investment and risk-taking on the part of entrepreneurs and businesspeople as Adam Smith said in 1776.

Since we are in uncharted economic territory water anyways, why don’t we try something radically different for a change for the second stimulus package that is sure to come soon? American business is dying to see some sort of positive shock to their economic projections and forecasts that will entice them to hire people and expand their investment in plant, equipment and technology upgrades.

Now is the one golden opportunity in our modern history to do something so shocking that it will send our economy into an unprecedented economic expansion for decades, and bring back jobs from overseas. It would generally repair the economic growth model in America that has led to our nation being the most prosperous economy that has benefited the widest range of people across all income levels that the world has ever known.

“Abolish the corporate income tax code now!”

We have made this argument several times before and unless we want to see a reprise of the extended decade of economic malaise from 1930-1939, then we strongly suggest that the corporate income tax be abolished and see what happens. We can’t afford to do another $1.7 trillion WPA-style jobs program like the first one, can we? And based on current projections of lowered corporate profits for 2009 and 2010, abolishing corporate taxes will only ‘cost’ the Treasury maybe $55 billion this year and maybe less than $100 billion next year.

That is not a lot of money to re-energize the American dream of prosperity, now is it?

In PAYGO terms, $155 billion in forfeited tax revenue is a heckuva lot better than blowing another $1.7 trillion in federal spending and loading it all up as more debt on the backs of our children who will have to pay it back one day. I even feel sorry for the poor Chinese who have no idea of what to do when it comes to loading up on American debt nowadays in return for having our ravenous consumers to whom they sell their low-cost products. They are floating the idea of coming up with a new ‘reserve currency’ of some sort in the hopes that something magical will appear to save them from the losses they will surely incur when inflation rears its ugly head soon again and rips the value out of their dollar-denominated debt holdings well in excess of $1 trillion now.

We have one other proposal to make to get this economy moving again and it has to do with cutting the Social Security payroll tax for everyone by at least 10% and possibly as high as 23%...forever. Reducing Social Security payroll taxes to equal outflow would ‘cost’ the Treasury about $80 billion in this fiscal year but we would be relieved from living the hoax of raising more payroll tax than we need to meet current obligations. (see "On Way To Zero Debt") Since we are not using the so-called Social Security surplus of close to $200 billion this year for its intended purpose of paying down the national debt anyway, it is useless and counterproductive to be collecting it anyway.

We will save that for the next posting and wish you a Happy 4th of July with all the attendant fireworks, hot dogs and baseball games. Remember this one because it might be the turning point either one way or the other in our nation’s history.

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