5 Ways to Make a Bad Economy Better

5 Ways to Make a Bad Economy Better

The National Association for Business Economics released a study Monday downgrading its growth prediction from 3.2 percent to 2.6 percent for this year, with next year dragging along at the same pace. The forecast showed the jobless rate hovering above 9 percent through 2011.

The study comes after the Congressional Budget Office pegged growth next year at 2 percent, a pace the office described as “anemic” compared with other post-recession recoveries.

So what can the government do about it? Washington has been pushing out bold, new economic proposals since the recession started, but one glance at the job-fair crowds these days would prove these proposals have had limited effect.

There is no shortage of comments in the suggestion box. FoxNews has compiled recommendations from top economists about what Washington can do to give the country’s job market and productivity a kick in the pants:

Cut the Corporate Tax Rate

The United States has the second-highest corporate tax rate in the developed world next to Japan. The federal rate is 35 percent and combined with local taxes it climbs toward 40 percent.

A recurring chorus from conservative and libertarian think tanks has been to cut, nay chop, that rate down so it’s in line with other wealthy nations.

Sure, that would exacerbate the deficit in the short term, but advocates for the change say it would stimulate private sector growth — keeping investment inside the United States, in turn allowing the federal government to recover its losses from the increased tax revenue.

A bipartisan team of senators, Sen. Judd Gregg, R-N.H., and Sen. Ron Wyden, D-Ore., even proposed a bill this year to cut the federal rate to 24 percent.

Chris Edwards, director of tax policy studies at the Cato Institute, suggested bringing the federal rate all the way down to 20 percent.

“It’s a no-brainer,” he said, arguing that the change would prevent U.S. firms from opening new branches in countries like Mexico and China. “It’s hugely important for jobs and investment. It is by far the single best thing we can do. … Jobs follow the investment.”

Renew Unemployment Benefits

The jobless benefits debate pops up, like clockwork, every time the federal extension is set to expire. It should be no different from the most recent extension set to expire at the end of November. Expect a lame-duck speech-fest in Congress over the pros and cons of continuing these benefits, which, combined with state benefits, give unemployed workers up to 99 weeks of government aid.

But the argument in favor of extending them is not just humanitarian, it’s economic.

“Unemployment insurance is helpful to the families receiving it, but it’s also helpful to the economy because those people spend that money,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities. “It’s one of the most cost-effective stimulus programs there is.”

This argument tends to be ridiculed by conservatives who say the prolonged benefits create a disincentive to find work. The counterargument is that the job openings simply aren’t there, and it’s better to have the unemployed spending money than not.

Stone said that ideally, Washington would extend the federal benefits through the end of 2011. Otherwise, “a lot of people get cut off immediately.” He, too, called the extension a “no-brainer,” though he predicted a political battle that ends with another short-term fix.

The Congressional Budget Office, in a September report, lists a short-term increase in unemployment aid at the top of its recommendations.

“Such an increase would slightly raise unemployment among the affected individuals, but it would also raise people’s spending and thereby increase output and employment in the economy overall,” the CBO said.

Extend the Bush Tax Cuts

Both parties are pledging to extend the Bush tax cuts to some degree, but Congress so far has not acted and a compromise still seems out of reach.

Analysts and lawmakers warn that a failure to legislate the extension will result in a devastating tax hike — the Tax Foundation estimates the median family would see an annual hike in excess of $1,500 — and have proposed several options for averting that scenario.

The CBO outlined four proposals: Permanently extend all the cuts; permanently extend all cuts except those that apply to high-income earners; extend all the cuts through 2012; extend all cuts except the high-income provisions through 2012.

According to the CBO, all these options “would raise output, income, and employment” over the next two years. The drawbacks of each vary. The CBO said the permanent extensions while providing a bigger short-term boost, would in the long-term add to the debt and deficit while putting strains on the federal budget and reducing overall income.

Pump In More Stimulus

To support anything resembling stimulus is sacrilege to Republicans and some moderate Democrats, but there’s still an appetite for it in some corners. President Obama is pushing anew for infrastructure investment — $50 billion to start — and some analysts say the federal government needs to resist the urge to tighten purse strings when the economy is still so weak.

“You want to put the money in the hands of people who will spend it,” Stone said. He said more state and local aid and more infrastructure investment — the kinds of things that composed two-thirds of the 2009 stimulus package — are in order.

The CBO says the stimulus, despite not living up to the administration’s own expectations, has boosted output and employment compared to what would have happened without it.

Looking back on the past year, one of the biggest policy disputes is between those who say the stimulus was too big and those who say the stimulus was too small.

Stone said the administration’s biggest mistake was to worry too much about the deficit, forgoing additional stimulus in the process.

But Edwards said the biggest mistake was — you guessed it — the stimulus.

“That was over $1 trillion of new debt,” he said, counting interest on debt in that equation. “That’s just made the whole business situation and financial markets more uncertain and unstable.”

Cut Spending

On the other end of the spectrum, the anti-stimulus crowd has its own solution for an economic recovery that defies the New Deal mentality. Cut, cut, cut.

The Cato Institute cites Canada as a success story — a country that cut spending and saw its economy grow. The argument is that the federal government can spur the economy by returning certain responsibilities, and employees, to the private sector, in turn reducing the national debt.

The CBO said in its latest report that the debt could reach anywhere between 70 and 100 percent of GDP over the next decade, a path that is “clearly unsustainable.”

Among other options, the Cato Institute proposes cutting federal education money, farm subsidies, defense spending, and federal worker compensation and scaling down federal drug enforcement.

Article Source: Foxnews


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