At worst the tax cuts will validate current market valuations, says Tom Essaye. At best they’l...
Congratulations, GOP, Now Get to Work
11/03/2010 3:12 pm EST
Republicans won a smashing victory in Tuesday’s midterm elections, striking a sharp blow to the Obama Administration and especially Congressional Democrats, many of whom have been sent into premature retirement.
The GOP took the House of Representatives by an even bigger margin than pollsters had predicted, probably picking up 60 seats. The Senate will barely remain in Democratic hands, with a narrow majority.
The weak economy dominated everything: Voters are angry and disappointed with Congress’s and the administration’s inability to make a bigger dent in unemployment and were unmoved by Democrats’ claim that things could have been much worse.
And the emergent Tea Party energized Republican voters, but also gave a powerful theme to disenchanted independents: rein in spending and cut the size of government.
Now comes the hard part.
The early rumblings aren’t promising. Various Republican leaders have vowed “no compromise” with the president. Some of the president’s own comments in the final days of the campaign weren’t exactly conciliatory, either.I hope for all our sakes that this pre-election trash talking comes to an end soon, because we face deep problems that need creative solutions—now. By overwhelming numbers, American voters want both parties to compromise to put the country back on the right track.
The rest of the world isn’t waiting for us to get our act together, either: Countries like China, India, and Brazil are rapidly becoming major players on the world stage. Two more years of partisan bickering and ideological purity here will only help them catch up faster.
But the good news is, there are actually some areas where Republicans and Democrats can work together to fix the economy and the US’s fiscal condition—if they’re willing to try. Some of these are long shots, but hey, I’m an optimist, and I think the public’s demand for action will win out in the end.
Here are four of them.
|1.||Fix the foreclosure mess. The recent revelations that big banks and mortgage servicers have used robo-signers to expedite foreclosures has created a major scandal, and rightly so. Some of the same people who brought us the financial crisis and then paid themselves huge bonuses as a reward are now throwing homeowners out on the street, with insufficient or bogus documentation.
True, many of these homeowners may have been struggling to hang on to homes they no longer could afford. But this is an egregious violation of property rights and due process—fundamental Constitutional principles Republicans strongly support. A Republican legislator in Virginia is pushing the state’s Republican attorney general to investigate one of the big mortgage servicers, and that’s just the beginning.
Although a full-fledged foreclosure moratorium is a bad idea, Congress might be able to pass a set of standards that protected individuals’ property rights and due process in foreclosures, backed up with stiff penalties. Who but the banking lobby could oppose that?
Meanwhile, the Obama administration should quietly put an end to its well-intentioned mortgage-relief program, a miserable failure.
The program may help only about half a million homeowners modify their mortgages and stay in their homes, far short of the initial goal of three million. It could cost taxpayers as much as $75 billion from the Troubled Asset Relief Program.
Obviously, the housing and mortgage markets will have to hit bottom naturally—but let’s make sure people’s rights aren’t violated in the process.
|2.||Freeze domestic spending and cap defense-spending increases. These have actually both been proposed by the administration, believe it or not, and while they won’t solve the big budget problems (primarily future Social Security, Medicare, and Medicaid obligations), a journey of ten thousand miles must begin with one step.
Discretionary domestic spending represented 18% of the federal budget in fiscal 2011, and simply freezing it for three years as the president proposed early this year would send a message that both parties are at least starting to get serious about the deficit.
As for military spending, 19% of the fiscal 2011 budget, Defense Secretary Robert Gates already has proposed $100 billion in cuts over the next five years.
No doubt many congressmen will try to preserve their pet projects, but can anyone honestly say there’s fraud and waste in domestic spending but not at the Pentagon? The point is, the government can spend money more efficiently in both areas, and this is a good place to compromise.
|3.||Lighten the tax burden. The Financial Times reported that President Obama has spoken with top executives about cutting tax rates on businesses while removing some tax deductions, so that any corporate tax cut won’t make the deficit worse.
I’m not convinced that a broad cut in corporate tax rates will boost employment in the US—history shows mixed results.
Only targeted tax cuts by local governments—of the kind Intel (Nasdaq: INTC) and General Electric (NYSE: GE) recently got for expanding their domestic manufacturing facilities—really work in creating jobs by big multinationals here.
But we should try anything that might succeed, and if one of the roadblocks to full recovery is businesses’ uncertainty about taxes, we should clear those away. We should also slash capital gains taxes dramatically for start-ups, the true job engine in this country.
|4.||Privatize Fannie Mae and Freddie Mac. Treasury Secretary Timothy Geithner has vowed that 2011 will be the year of decision on the two mortgage giants that could turn out to be the financial crisis’s most costly casualties. Taxpayers so far have shelled out nearly $150 billion
propping up these dinosaurs, which are in turn supporting the mortgage market.
In a little-noticed speech
this past summer, Geithner acknowledged that the dual private/public status of the two mortgage companies is unworkable, and he opened the door to “[making] room for the private sector to get back into the business of providing mortgages.” Also, if we’ve learned one thing over the last decade, it’s that promoting home ownership can be very, very bad policy.
It’s clear that fully privatizing Fannie and Freddie is the only workable plan for the long run. Pulling the plug right away wouldn’t make sense, because the two companies are now the only game in town in mortgages. But a five- to ten-year path to privatization should allow an orderly transition.
Of course, the nasty climate in Washington may make any of these reforms impossible. But this will be a big test for a chastened president and the victorious GOP. If they can work together—even a little bit—it would be great for markets, the economy, and the dollar.
But if the next two years are all about scoring points, pointing fingers, and calling names, then keep stockpiling gold and buy Rosetta Stone (NYSE: RST) stock, because we’ll all need to start learning Mandarin.
Howard R. Gold is executive editor of MoneyShow.com. The views expressed here are his own, and he does not own any security mentioned in this commentary.
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