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Economic downturn: Wrong diagnosis = Wrong remedy

Washington policy-makers have misdiagnosed the economic downturn, and our political system has produced only a short-term stimulus and rhetoric designed for short-term political benefit.

Since 2008, there has been heated discussion about policies to foster economic growth. President Barack Obama and Democrats in Congress championed a “stimulus bill” made up of tax cuts, aid to state governments, additional spending for a wide variety of federal programs, and a very small allocation (approximately 10 percent of their $850 billion package) for so-called “shovel ready” construction projects. Predictably, Republicans uniformly opposed the plan. Republicans now decry Obama’s jobs bill as “another failed stimulus.”  Though their opposition appears more based on politics than policy, they may be right.

The Democratic approach follows a long-held view that the federal government must deficit spend in order to “jump start” a recovery. This is called “Keynesian economics,” named for John Maynard Keynes, whose writings influenced the response to the Great Depression. Harvard economist Ken Rogoff asserts that the Keynesian formula is not applicable today. Rogoff insists that recessions rooted in the collapse of financial institutions are different. His theory? We are experiencing a reset of our economy, which for too long was built on debt (excessive consumer debt, risky second mortgages, inflated housing prices, exotic debt-based financial instruments, etc.). If he is right, and I think he is, this implies that more debt (in the form of a federal stimulus) is not the answer. It also suggests that, unlike a typical recession, the reset will take time.

So what policies would produce long-term growth? The housing collapse was central to today’s financial meltdown. It is disappointing so little has been done to address this crisis. I believe we need something comparable to the Farm Credit restructuring legislation enacted in the late 1980s (which I helped to craft as a member of Congress). This would place a floor under home values, provide an incentive for borrowers and lenders to negotiate, and reward both borrowers and lenders for any future increase in home values. Without such action, bankruptcies and foreclosures will continue to depress this sector — and home values will remain too low for too long.

The role of trade and immigration
Trade and immigration are also important to economic recovery. And on these issues both parties are part right and part wrong. Democrats are anti-trade and pro-immigrant (including pro-illegal immigration). Republicans, conversely, are pro-trade and anti-immigration. Instead, we need a pro-trade and pro-immigration policy.

Tim Penny
Tim Penny

Given that American markets are already wide open to imports, every new trade agreement results in breaking down barriers in other countries that work against American exports. Obama is right to ask Congress to approve trade pacts with Colombia, Panama and South Korea, and he will get Republican support. As for immigration, the post 9/11 limits on HB1 visas and student visas have hurt our economy. Unfortunately, we issue only a third as many visas today as compared to a decade ago. Still, fully 68 percent of our nation’s doctoral graduates are born elsewhere — and, today, instead of staying here (as they once did) most go home. By making it more difficult for bright and ambitious foreigners to come here, study here, and contribute by working here, we are stifling our nation’s future growth.

Energy policy can also “fuel” our recovery. But it is time to move beyond the tired slogan of the conservative right — “drill here, drill now” — and the tired dogma of the liberal left — “go green.”  We need instead an “all of the above” energy strategy that allows us to responsibly develop our own energy reserves (off-shore oil, clean coal and natural gas) while developing non-carbon alternatives (wind, solar, ethanol, bio-mass, cellulosic, nuclear and hydro). The mix can and should be more “green” as time goes by, but we need our own reserves in the meantime. And, our economy will be stronger if we become more energy independent — sooner than later.

Tax code: overly complex, increasingly inequitable
Sensible tax policy is also tied to economic growth. The simplistic slogans being spouted by Democrats (tax the rich) and Republicans (no new taxes) are divisive. While in Congress, I proudly supported the bipartisan 1987 tax reforms fashioned by a Democratic Congress and signed into law by Republican President Ronald Reagan. Those reforms simplified the tax code and lowered rates — and were a factor in the economic growth our country experienced in the 1990s. Sadly, in the ensuing 25 years, the tax code has again become overly complex and increasingly inequitable. As in 1987, we need bipartisan tax reform designed to clean out the code’s loopholes while lowering overall rates.

Most economists warn that our growing government debt is a major threat to long-term growth. Addressing debt means getting control of our entitlement programs — the largest of which are Social Security, Medicare and Medicaid. Baby boomers will explode the cost of these programs over the next two decades. Already, Social Security is collecting less tax revenue than is needed to pay annual benefits — and that has been exacerbated by recent “temporary” payroll tax cuts. More worrisome, Medicare and Medicaid are increasing at three times the rate of inflation. In short, something has to change — and the sooner the better — or our debt will limit future growth.

Commit to early-childhood school readiness
Any forward-looking economic policy must invest in tomorrow’s work force. In that regard, early childhood education will pay huge dividends. Some economists estimate the return on this investment at a ratio of 13 to 1 due to the reduced need for remedial education, increased graduation rates, and increased prospects for gainful employment. Accordingly, we should make it a national priority that every young child enters kindergarten ready to learn — and is ready to read at grade level by third grade. We can achieve this by dedicating AmeriCorps’ 85,000 enrollees to early childhood success. Minnesota — to its credit — already allocates most of its AmeriCorps personnel to this purpose.

Finally, is there room for any “stimulus” deficit spending, as Democrats insist?  Maybe — so long as it is restricted to infrastructure (roads, bridges, etc.). This is a matter of generational equity in that it is only fair that future taxpayers obtain a benefit for the debt they must repay. Accordingly, much needed infrastructure projects should be the centerpiece (not a tiny piece) of any stimulus or jobs bill.

The bottom line? Washington policy-makers have misdiagnosed the current economic downturn. Implementing policies that produce economic growth is truly a long-term proposition. Yet our political system has produced only a short-term stimulus and rhetoric designed for short-term political benefit. At this crucial time, facing a reset second only to that experienced in the 1930s, we need better leadership than we are getting from Washington today. Only then will we get the results we seek.

Former U.S. Rep. Tim Penny is the president and CEO of the Southern Minnesota Initiative Foundation.