Five compromises Obama should embrace to boost the economy

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If Republicans win the Senate, President Obama risks another bruising recession if he doesn’t embrace compromise and abandon ineffective populist prescriptions.

Slower growth in Europe and emerging markets like China and Brazil threaten U.S. exports and demand for American-made products. At home, stock market volatility threatens consumer confidence and sales of autos, new homes and other big ticket items.

Stimulus spending only temporarily boosts growth but permanently increases deficits.

Specifically, before the financial crisis, the federal deficit was only $161 billion, but after five years of recovery it stands at $580 billion.  

Here are five things Obama could do with Republicans to boost growth.

1. Tax Reform: The 35 percent U.S. corporate tax rate encourages business to move jobs and headquarters abroad.

Obama and GOP leaders want to close loopholes to lower rates. However, Obama wants to use reform to boost revenues, while Republicans want lower taxes overall. Neither side wants to abandon its favorite corporate favors—for example, the GOP likes breaks for the oil industry, while Obama recently shelled out new benefits to the telecom sector.

To end the wrangling, junk corporate income taxes altogether in favor of a lower, revenue-neutral value added tax on corporate sales. Without the special favors, investment decisions would be based on sound economics, not tax gaming, and that would boost growth and jobs.

2. Patch ObamaCare: Republicans should accept the president won’t sign a bill repealing the Affordable Care Act but he should accept the law needs major fixing.

Restaurants, retailers and others employers can’t afford to provide decent health coverage to all full-time, low-wage employees. To comply with the law, they are hiring more part timers, forcing more working poor to hold two and three jobs to survive. By exploiting a loophole, many employers are opting for “skinny” plans that only cover preventative care and a few other services, and omit hospital coverage.

Ban skinny plans, but allow businesses to offer workers earning less than $15 an hour tax-free allowances to sign up for coverage and qualify for subsidies on the health insurance exchanges, instead of slapping employers with penalties as the law now provides.

Other reforms could include benchmarking prices for drugs, medical devices and standard hospital procedures to prices in more advanced European countries like Belgium, Holland and Germany.

3. Encourage the Fed to Normalize Interest Rates: The Federal Reserve appears poised to raise interest rates in 2015, but that won’t much increase stock market volatility. Even if the ten-year bond rate, currently 2.2 percent, rises to 4 percent, profits on stocks, currently above 5 percent, would remain attractive. However, raising interest rates would give the elderly more income to spend from their CDs and boost growth.

4. Open up Offshore Oil and Gas Development: Opening oil and gas development off the Atlantic, Pacific and eastern Gulf coasts would not much add to energy consumption or increase CO2 emissions, but it would reduce production in more remote third-world locations where environmental risks are less well managed.

Along with reasonable conservation measures, more offshore production could make the U.S. self-sufficient in oil, boost GDP by 2 percent and create about 3 million jobs.

5. Level the Playing Field with China: Facing slower growth, China is driving down the dollar exchange rate for the yuan to make its exports artificially cheap on U.S. store shelves and send unemployment to the United States.

Until China lets market forces determine the value of its currency, tax dollar-yuan conversions to raise the cost of importing unfairly subsidized goods and corporate investment in outsourcing to the Middle Kingdom.

That could easily boost GDP by 3 percent and create another 3 million jobs.

Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland.