“Jesus Saves, Moses Invests”

I have to agree with my old friend and Bear, Stearns colleague Larry Kudlow that the Obama stimulus plan is a monstrosity. But I don’t think that the old Reagan magic will work this time. Americans postponed a decade’s worth of saving because they thought capital gains would substitute for savings. That’s what we supply siders told them. We used to ridicule savings. In 1990 I shared a podium one Sunday morning wih then Federal Reserve Governor Wayne Angell, who had just given a sermon of sorts on the virtues of saving. Jude Wanniski, the moderator, quipped, “That concludes the Baptist portion of our Sunday morning service. Now we hear from David Goldman.” When the chuckles died away, I said, “My text for today is: Jesus saves, but Moses invests.” I then explained that capital gains due to productivity increases made savings unnecessary. A few years later I wrote a piece for an economics journal in which I disputed that savings had much to do with human progress. How much stored-up capital did the Egyptians need to domesticate the cat, I asked? “A bowl of milk.” And how much labor? “Here, kitty-kitty.”

I repent. I’ve seen the light, or perhaps I’ve just gone over to the dark side. Whatever. America is tired and out of ideas. There’s no next new thing. Back in the Reagan years we had cell phones, CD players, PC’s, microwave ovens, video games, the Internet — a wave of innovations that made life different. Maybe somebody somebody will make money with genetic engineering and nano devices, but it’s not this year. Americans assumed that steadily rising asset prices were our birthright. Well, we were wrong.

Now we all want to save at once, which shuts down economic activity. The only way to save without shutting down the economy is to export. So, what should President Obama do?

1) Robert Mundell is right (well, that’s a layup, because he’s almost always right) that the US needs a corporate tax holiday followed by permanent corporate tax cuts. Corporate balance sheets are in better shape than household balance sheets, and corporations are more likely to use tax cuts to spending rather than to pay down debt, which is what households will do.

2) Get rid of the capital gains tax on homes — owner-occupied, speculator-purchased, whatever. Open the floodgates of speculation by restoring the ridiculous tax shelters of the early 1980s (where you could borrow money to buy real estate and make money off the deductions even if you lost money on the investment). Kick families out of their homes and let speculators move in. Forget about stopping foreclosures. Skew the tax system to create demand.

3) Stop browbeating China to raise the value of its currency, and fix the dollar-yuan parity as a solemn binational commitment. The U.S. wants the Chinese to stop saving so much and to start spending, and spending on American goods.

4) Cut employment taxes, as some prominent Republican economists have suggested. Nothing helps spur employment more than reducing its cost. That, by the way, takes the tax burden off the lowest earners, who pay payroll taxes but no income taxes.

5) Modify mark-to-market for bank portfolios. In a sharp business cycle downturn the financial system is ALWAYS insolvent on a mark-to-market basis. The issue is whether cash-on-cash returns are positive: to the banks earn enough on their portfolios to pay their bills? Let them in effect lie about how much capital they have. That would save a trillion dollars of taxpayer bailout funds (although some bailout money in the form of guarantees of debt will be required).


Source: blog.atimes.net