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Stimulus for Dummies: How We Could Really Get Our Economy Moving Again

By Noel SheppardAssociate Editor, Newsbusters.org

Imagine for a moment you were more concerned with the economy than politics, and you truly wanted to increase consumer confidence as well as consumer spending. What would you do?

How about putting more money in people's wallets?

Seems pretty simple, doesn't it -- so simple it's shocking that's not exclusively being discussed in Washington right now.

After all, the Congressional Budget Office -- the government agency responsible for reporting economic data to our Senators and Representatives as well as rendering opinions on budgets and spending bills -- made it clear last Wednesday that the stimulus plans currently being debated on Capitol Hill will have a negative impact in the long run.

As both versions of the stimulus bill dramatically increase the federal debt, and, therefore, the amount of treasury bills, notes, and bonds in circulation, the moneys placed in them are removed from more conventional investment channels -- stocks, corporate bonds, private equity, limited partnerships, real estate development, etc. -- thereby reducing future economic output.

If CBO is correct about this, shouldn't all deficit spending be off the table right now with Congress exclusively considering tax cuts? If the $800 billion currently thought of as an adequate stimulus were put directly into the consumers' hands this year rather than politicians', how might that get the economy going?

Before answering, consider that if you add interest expense to that figure, the real cost is about $1.3 trillion, which just so happens to represent about half the tax receipts taken in by the federal government last year. With this in mind, for the same amount of money, you could give all Americans -- including companies -- a six month tax holiday.

What might happen when John Q. Public opens up his paycheck every two weeks finding a few extra hundred dollars there?

The cynic in Washington says John would just save that money. Or pay down some of his debt.

Sure, this would probably be the case with the first check. Maybe even the second.

But by check number three or four, after some bills had been paid off, and the savings account massaged a tad, the desire to head to the mall would become too great.

After all, John's an American, and Americans like to spend almost as much as their elected officials do.

But let's not stop there. Let's do something to address the current housing crisis and the growing inventory of homes on the market by permanently eliminating the capital gains tax on residential property purchased in 2009.

The present tax code gives each individual a $250,000 exemption on the sale of a primary residence twice every five years. What this means is that if you and your spouse bought a house for $200,000 ten years ago, you could sell it today for $700,000 and not owe any taxes.

Let's make this exemption unlimited not just for the gain in value, but also for the number of properties.

How quickly would all the houses currently available on the market be gobbled up if investors knew they would never be taxed on the gain, and they only had this year to take advantage of such an opportunity?

Probably just a few months, right?

This would act to immediately stabilize home prices thereby improving appraisals and making it easier for folks currently underwater in their mortgages to refinance them. At the same time, banks would become more aggressive with their lending practices which would also lead to some new construction.

Maybe most important, the end of declining home values would make Americans feel much more comfortable about their long-term finances thereby increasing their willingness to -- wait for it! -- spend money.

Sounds too simple, doesn't it?

Of course, the other advantage of stimulating exclusively with tax cuts is the ability to make it temporary.

Despite declarations by elected officials that the proposed stimulus spending is a short-term, one-time fix not intended to represent a permanent increase to the budget, we have absolutely no recent experience as a nation doing this. Since 1948, there have only been two years when federal government outlays declined: once in 1955 by $2.4 billion, and again in 1965 by a scant $300 million.

That's it.

As such, entrusting the current iteration of the Washington spendaholic to revert back to 2008's outlays immediately after the last penny of proposed stimulus has been allocated is akin to believing a white-bearded guy in a red suit delivers your Christmas presents every December.

Ironically, one would have to possess a child's imagination to expect the left to agree to this plan, for if Americans ever received six months worth of paychecks without any taxes taken out there would be a nationwide revolt the moment anybody tried reducing their incomes again.

At that point, much like Santa Claus, there would be no such thing as Democrats.

Noel Sheppard is associate editor of the MediaResearchCenter's NewsBusters.org. He welcomes feedback at nsheppard@newsbusters.org.

Noel Sheppard is associate editor of the Media Research Center’s NewsBusters.org. He welcomes feedback at NewsBustersNoel@gmail.com.

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