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Thursday, March 19, 2020

ANALYSIS/OPINION:

No one with any sense would deny the coronavirus spread has had a deleterious effect on the U.S. economy. The panic selling on Wall Street has caused the gains created by Trump administration policies on taxes and regulation to be largely erased. Mortgage interests are creeping up despite the Fed dropping the rate at which it loans money to financial institutions to as close to zero as it can go. And people are preparing for massive layoffs, and days if not weeks without paychecks, as the push toward voluntary isolation moves forward.

The Trump administration is doing as good as job as any might fighting the spread of this disease which, unlike those which sparked previous pandemics, not all that much is known. At the same time, the White House and Congress are obliged to take sensible steps to keep the economy from crashing through the floor. As we know from previous experience, when the United States goes down, it brings the rest of the world with it.


Some of the solutions being bandied about in Washington right now, like giving every American who needs it a check for $1,000 don’t make a lot of sense. This is not stimulus. If anything, its conscience money, paid out by political leaders afraid of losing votes and looking to be able to tell the most economically vulnerable among their constituents that they did something.

The right solutions are those that forestall further collapse and stimulate the economy to stabilize or, even better bring back growth. One idea would be for a temporary cut in the capital gains tax rate or for the Treasury to move ahead with a proposal that has been sitting on Secretary Steve Mnuchin’s desk to change the definition of cost to eliminate the effect of inflation on assets held for many years. Either step or both might set off a rally thanks to individuals and corporations have been given an incentive to act. We know, in the short term at least, that every cut in the capital gains rate generates increased revenues to the federal government because things that have been sat on because its cheaper to keep them are sold.

Another proposal, released Tuesday by Steve Forbes, Art Laffer and Stephen Moore through their Committee to Unleash Prosperity, strikes us as just the kind of thing that would provide real economic stimulus rather than moving dollars around like deck chairs on the Titanic as House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer want to do.

Step one in the committee’s plan is a suspension of the payroll tax for every business and worker through the end of the year, retroactive to March 1. This, they say, would be equivalent to “a 7.5 percent pay raise for every worker and a 7.5 percent payroll cost reduction for all businesses.” That works on, on the back of the envelope, to be a lot more meaningful than the checks currently being considered.

Such a move would, as Messrs. Forbes, Laffer and Moore say, reward both work and hiring. It would keep the economy going for many months, certainly through the election, and give investors enough confidence in the future that the stock market free fall may soon end.

Under their plan, which is akin to something President Trump proposed early on, the lost revenues would be made up through the creation of 50-year “Unleash Prosperity” 1 percent Treasury bonds. There’s still no shortage in the demand for U.S. securities, and it’s easy to foresee lots of people, lots of institutions and lots of countries moving their investments to the United States as the pandemic spreads. We’re still the safest bet there is — so we should take advantage of it but creating new investment instruments that will have value over the long term.

Lastly, Messrs. Forbes, Laffer and Moore want the Treasury and the Fed to open a short-term loan window to make credit available to collateralized but cash-strapped businesses needing funds to make payroll and avoid bankruptcy. These are good solutions, unlike those being talked up by the politicians who include expanding welfare programs and other income-redistribution schemes, adding paid leave to the menu of benefits employers must offer by law and extending out unemployment benefits. These all discourage work, impede creativity and inhibit growth. As the Committee to Unleash Prosperity points out, they didn’t work for Barack Obama in 2009 and there’s no reason to believe they’ll work now.

The challenge for policymakers is not to keep the economic ship of state from sinking. It’s to create a rising tide that lifts all boats, as Jack Kemp used to say, so that we can emerge from the current crisis strong on the fundamentals and headed in the right direction.


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