Fighting the recession

Tom Raum of The Associated Press published a column yesterday on the dearth of options available to policymakers in combating the recession which left me scratching my head. Raum writes:

The traditional mechanisms for blunting economic pain and nurturing a recovery are no longer available or are just not working:

• Unemployment benefits for hundreds of thousands of Americans are running out or have already expired. Successive congressional attempts to extend them anew have failed amid partisan wrangling on Capitol Hill.

• Lower taxes, often used as a quick remedy for economic distress, have already been tried. Now taxes are probably going up. The special homebuyer tax credit expired on April 30, and a wide range of income and investment tax breaks "pushed through Congress by former President George W. Bush" are due to expire in 2011 without congressional action to extend them.

• Mortgage rates have sunk to their lowest level in more than five decades. That should be good news for the battered housing industry and put cash into the hands of homeowners as they refinance. But a wave of refinancing hasn't materialized. Some homeowners who qualify refinanced last year, but the many Americans who owe more than their homes are worth can't easily do so.

• The Federal Reserve, in holding a key short-term interest rate that it controls at near zero percent since December 2008, has lost its ability to spur growth with further rate cuts. Although there are other steps the Fed can take, such as direct loans, further increasing the money supply or buying mortgage-related securities, many such programs already have ended or are being wound down.

• Federal aid to cash-strapped states, including Medicaid grants and money to avoid layoffs, is drying up, and efforts by President Barack Obama and his congressional allies to extend and enhance them have so far been thwarted by bitterly partisan battles in Congress.

Raum's column would have been far more accurate if he would have replaced the word "traditional" in his first sentence with "Keynesian," as there are dozens of measures which can be used to improve the economy which have not yet been tried.  The primary problem facing the economy isn't a lack of government initiatives, it's too many of them. As today's Los Angeles Times says:

Adding to the uncertainties for businesses of all sizes are the shaky global economy and the prospects of higher taxes to deal with the federal deficit and higher costs to deal with healthcare and the recent government overhaul of financial regulations.

The upshot is that the typical small-business owner sees a lot of reasons to sit tight.

Joy Staveley of Flagstaff, Ariz., said it was clear to her why people are more scared to take a risk on a new business: There are more regulations, taxes and government-mandated costs — and fears of more to come — with President George W. Bush's tax cuts expiring soon, new healthcare rules and pending legislation on energy.

"I've seen poor economies in the past, and I can deal with it," said Staveley, who with her husband has been running Canyoneers, a Grand Canyon river-rafting business, for 30 years. "But what I can't get through is a runaway government."

Such sentiments are not uncommon among many small-business operators, the bulk of them conservatives who believe Washington does not understand or respond to their needs.

If policymakers in Washington want to get serious about both lifting the economy from its current slowdown and improving its long-term prospects, here are but a few of the many steps which could be taken:

Tax reform. For all of the talk about tax cuts being a major component of the stimulus package, the fact remains that not one single tax rate was reduced. Perhaps the best single thing Congress could do is pass a tax reform bill which scraps the tax code entirely, eliminating all deductions and credits. Replace the existing code with lower rates, or ideally a flat rate. Taxes would be imposed starting from the first $500 of income, ensuring that virtually everyone pays something. Such a measure would reduce the burden of tax compliance, reduce taxes and be paid for by the elimination of tax breaks which distort economic decision-making and the efficient allocation of resources. 

Cut spending. The less money spent by the government, the more there is available to the private sector. Lower spending also helps reassure investors over the prospect of tax increases.  Agriculture subsidies and unspent stimulus money are excellent places to start.

Free trade agreements. There are three bilateral free trade agreements with Panama, Colombia and South Korea gathering dust in Congress. There is almost complete unanimity among economists that eliminating tariffs and other barriers to trade improves economic welfare. Pass them. 

Repeal the Jones Act. The Jones Act is a piece of legislation passed in 1920 which mandates that all goods transported by water between U.S. ports be carried in U.S.-flag ships, constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. It has done nothing to improve the fortunes of the U.S. shipping industry and has raised costs for those who rely upon such shipping, harming productivity and economic competitiveness.

Eliminate restrictions on foreign ownership and participation in the U.S. airline market. Foreign airlines are prohibited from flying between U.S. cities and foreigners cannot own more than 49% of a U.S.-registered airline. This raises transportation costs, and explains why Europeans -- who enjoys an open skies agreement within the EU -- can travel for much cheaper than Americans.

Repeal ObamaCare. A huge new burden on businesses which raises costs, will worsen health care and is based on a model which has already failed in Massachusetts. 

A general move towards deregulation. Regulations are best understood as an enormous tax on economic production. At a bare minimum Congress could establish a committee which reviews the Federal Register on an annual basis and recommends regulations which should be abolished, with would be voted on in toto. With the Federal Register now over 78,000 pages there should be plenty which could be cut.