2011: Tax Cuts Alone Won’t Do It

12/15/2010 1:01 pm EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

The tax code didn't get us into this mess—and it won't get us out of it, says MoneyShow.com Investing editor Igor Greenwald.

The quick fixes fixed what they could, and now it’s clear that 10% unemployment was not among the more tractable problems.

Nor is there much evidence that the chronic underinvestment in the US economy will end anytime soon as dollars flee offshore, where wages are lower and growth prospects stronger.

As Congress writes more IOUs to keep the stop-and-go recovery going, it’s starting to sink in that, no matter what the marginal tax rate, the nation’s best days are not right around the corner. And so the leaders make a show of seeking out prescriptions from the humble and the worthy, as if someone out there’s sitting on a magic cure and simply needs encouragement to forward it.

President Obama’s brainstorming session with corporate chief executives is merely the latest pantomime on this topic. Two weeks prior, Federal Reserve Chairman Ben Bernanke went on a well-publicized expedition to Ohio in search of all the missing jobs.

That same week, the National Commission on Fiscal Responsibility and Reform approved a long-term plan to staunch runaway federal deficits before they put the economy out of its misery.

And though the panel couldn’t muster a big enough supermajority to force congressional votes on its proposal, lawmakers took up one of the deficit-cutters’ suggestions straight away, tucking a payroll tax holiday into the extension of the Bush tax cuts.

(Among the Republican senators holding up all legislative business until the tax cuts got renewed were Charles Grassley of Iowa and Olympia Snowe of Maine, who had insisted so memorably in 2003 that the nation couldn’t afford the breaks unless they expired in 2010.)

See Your Flat Tax and Raise You
At any rate, there’s clearly a clamor out there for solutions, before the other party steals the march and offers them. Obama’s said to be considering a major push next year on tax reform. Bernanke championed the same on “60 Minutes” as a long-term tonic for the economy. The notion also has powerful backers among Republicans.

There’s no question that cleansing the tax code of a quarter-century’s worth of lobbyist shenanigans would be a good thing; the best tax systems are simple ones that collect revenue as unobtrusively as possible.

But before we bog down in year-long trench warfare over the mortgage interest deduction and a national sales tax, we ought to at least discuss some of the economy’s other problems. The tax code didn’t get us in this mess, and a new one won’t usher in prosperity on its own.

The economy’s most painful symptoms are jobs and housing, but the underlying causes of those ailments are an unaffordable health-care system and an overvalued dollar.

Taking the Dollar Down a Peg
I can hear the howls: A dollar that buys less of everything and thereby lowers living standards is a terribly unappealing prospect. But then so’s a 17% rate of underemployment, and a permanent caste of middle-class exiles who haven’t sniffed work in years.

The gold bugs and various strict constructionists wish to pretend that they’re entitled to some fixed value of the dollar. But since the dollar is being artificially propped up by foreign central banks (and China’s hardly alone on this score) it’s not clear why its current value is the real deal. The unemployment rate hints strongly that its true value is much lower.

It’s been some time since the gold standard helped bring about the Great Depression, and in that time India’s cranked out millions of computer programmers, while China’s gone into space, gone crazy for autos, and sent waves of capitalists swarming luxury boutiques in Hong Kong.

The dollar doesn’t properly reflect these developments just yet. Bernanke said as much in Frankfurt. What he didn’t say is that heavily indebted economies can use a good bit of inflation. The most valuable service the Federal Reserve’s bond purchases could perform would be to drive the greenback significantly lower against Asian currencies.

Moving Beyond Obamacare
On the other hand, the Fed can’t do anything about the annual drain on the gross domestic product from a health-care system that consumes 16% of the GDP yet produces worse results than Canada’s 10% investment, judged by either life expectancy or infant mortality.

A future Congress might, if it were to let workers opt out of employer-run insurance schemes, investing a fraction in catastrophic illness coverage and pocketing the rest, tax free. We’ll never rein in costs so long as people don’t pay full freight for routine services and tests, and so long as the fees aren’t displayed in every doctor’s office and hospital room.


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Similarly, only Congress can approve a credible long-term plan to cut budget deficits that might stop interest rates from soaring at the first hint of decent growth. The national commission’s plan gores so many oxen, it just might prove a workable basis for a compromise. The alternative is a stagnant public sector starved of funds by soaring interest costs, and private borrowers crowded out by the same high rates.

Unleash the Market Forces
If Congress really wanted to solve the housing problem, it would hold a one-time immigration auction large enough to put a real dent in all the vacancies. Advanced degrees might be worth bonus points, as would a willingness to create jobs. America remains a highly desirable place to live, and there are enough willing millionaires and rocket scientists overseas who could help the economy perform, if only we would let them.

Eleven million US mortgages are under water, and if the borrower should happen to be unemployed and unable to find work within driving distance, the choice becomes one between default and being able to put food on the table. Wider adoption of telecommuting would be one way to improve and restore the economy’s famous flexibility.

By all means, let’s let the billions sitting in corporate accounts overseas come home. Auction off tax-free repatriation quotas based on the companies’ commitments to create net US jobs.

The list of no-brainer government savings would be quite long: One day, we might just learn to say No to ethanol, just as state governments in dire straits will find electronic monitoring bracelets much cheaper than prisons.

They say necessity is the mother of invention. It’s time to invent some new ways of doing business.

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