Published: November 07, 2008 11:49 pm      

Fixing the economy for the long-term

Every day seems to bring more bad news on the economy, and provide more evidence that the U.S. economy has fallen into a recession. The question is, what do we do now?

In just the past week there has been a rush of bad news on the economy.       

• The nation’s Gross Domestic Product (GDP) — a measure of overall economic activity — declined by 0.3 percent in the third quarter of this year. This is the second decline in the last four quarters and the largest decline since the 2001 recession.

• Personal consumption expenditures fell by 3.1 percent in the third quarter — the first decline in consumer spending since the 1991 recession and the largest since the 1980 recession.

• The economy shed another 240,000 jobs in October raising the total job losses for the year to nearly 1.2 million, and 651,000 jobs have been lost in just the past three months. The private sector (excluding government jobs) has fared even worse, shedding more than 1.3 million jobs this year.

• The unemployment rate for October jumped to 6.5 percent — the highest rate since 1994 when the economy still was recovering from the 1991 recession.

Clearly, the economy is now in a recession. From a public policy perspective though, the pertinent question is, What should we do about it?

First, we need a new economic stimulus package to help American families persevere through these dark days. This should involve putting more money back into the pockets of taxpayers who have been struggling with stagnant incomes and rising bills. Congress can do this by sending out another round of rebate checks or by reducing tax rates and tax withholding levels. In either case, this tax relief needs to be targeted to middle- and lower-income families in order to provide the greatest benefit for the lowest cost.

Additionally, any short-term economic stimulus package also should include an extension of unemployment benefits. With rising unemployment and mounting job losses millions of American workers will be exhausting their unemployment benefits in the coming months. By extending eligibility for longer time periods we can provide help to the working families most in need, at the time they are most in need.

Finally, the short-term stimulus package should include funds for state and local governments — most of which are witnessing declining tax revenues amid an increase in demand for governmental services. Since most state governments face balanced budget requirements, these governments often are forced to make deep cuts in needed governmental programs like education and health care. Unfortunately, cuts in these programs disproportionately harm children. However, by providing assistance to these state and local governments, we can help them to avoid making the deep, painful cuts to necessary programs.

However, we also must make sure to take a long-term view of our situation. We must recognize that efforts to further increase our national debt will have some serious long-term consequences. Economists long have noted that rising national debt levels hamper business expansion and slow economic growth. Thus, any long-term tax relief should be targeted in areas that provide the greatest impact on economic growth with minimal effect on the national debt.

One such policy would be to dramatically reduce corporate income tax rates. The U.S. has one of the highest marginal tax rates on corporate income in the industrialized world. Economists long have noted that this tax is one of the most inefficient, most counterproductive and most complex of all U.S. taxes. By reducing business investment this is a tax that generates several negative consequences including slower economic growth, lower shareholder income and lower worker wages. Thus, by reducing this tax we increase corporate profitability, increase business investment and increase wages — all of which stimulate economic growth.

In the coming days, weeks and months we are going to hear President-elect Barack Obama and Congressional leaders propose ways to address the economic downturn. If they follow these suggestions and take both a long- and short-term view of the problem, then they will be taking the steps we need to take in order to fix the economy.



MICKEY HEPNER is an associate professor of economics at the University of Central Oklahoma.