By Dr. Robert E. Pritchard, Professor of FinanceRowan University, Glassboro, N.J.
Newswise — We are experiencing a severe economic turndown, and we urgently need a stimulus plan. But, the plan needs to be very well thought out. We don't have another trillion dollars to spend if this trillion-dollar stimulus plan is not effective.
The current proposed stimulus plan will result in limited economic stimulus and a lot of spending for questionable pork, exceed the entire cost of the Iraq war, result in tremendous increases in the national debt and set the stage for rampant inflation when the economy starts to grow.
In addition, many of the proposed stimulus plan programs will commit us to long-term social welfare programs. We may need changes in social welfare programs, but such programs require very serious and lengthy deliberation.
Before addressing new social welfare programs, we need to remember that there are two gigantic and very costly existing social welfare problems that we must address: Social Security and Medicare. Before we consider massive spending on new social welfare programs we should focus on fixing Social Security and Medicare.
Our single largest problem is the ongoing financial system quagmire. I believe our primary focus at this time should be on fixing the financial system. If this is not "fixed," it is likely that other stimulus programs will have little long-term positive effects. I support the idea of establishing a "bad bank" to deal with questionable bond and mortgage portfolios. This is likely to stimulate the economy by making funds available for lending and investment. And, over a period of years, the government might actually realize a profit on its investment in a "bad bank."
In addition, the value of housing must be stabilized and incentives provided to increase the value of stock prices. More than 100 million people who participate in and/or depend on defined benefit and defined contribution plans are dependent on the stock market. As much as we may detest the greed of overpaid Wall Street titans, we must realize that all of America is now tied to the stock markets.
One simple way to stimulate the stock market is to freeze or reduce the maximum tax rate on long-term capital gains. This will, at very low cost, eliminate significant market uncertainty and buoy up stock values, resulting in increased consumer expenditures and job creation.
Another way to increase stock values is to change the tax laws to favor investment in plants, machinery, vehicles, etc. We should resurrect the investment tax credit — a tax credit used effectively during the 1970s to stimulate business investment. Such stimulation will result in increased business efficiency (making us more competitive in the world markets), increased business capital spending, job creation, increased business profits, increased stock market prices and increased consumer spending.
With respect to housing, I suggest we establish a program whereby existing home owners and new home buyers can refinance/finance their primary residences at four percent (five percent for a secondary residence), using fixed-rate mortgages for up to 30 years. This would greatly stimulate the housing market and free up consumer cash. To facilitate this program, the government would lend (not give) banks and other lending institutions funds at two-percent interest. The lending institutions would be required to follow pre-established lending guidelines to prevent a recurrence of the existing mortgage crisis. In addition, for 2009 and 2010, allow homeowners to double their itemized deductions for property taxes and mortgage/home equity home interest.
There are many homes currently in the process of foreclosure. The investor risk of purchasing vacated homes and making repairs/renovations so they can be resold is very high. As a fiscal incentive, tax any profits made in the process of the purchase-repair-resale process of such homes as long-term capital gains regardless of the period of time the investor may hold the property.
Finally, let's cut through all of the pork and limit the stimulus plan to $300 billion. If, six months after passage of the stimulus package, the economy still is languishing, pass another stimulus bill. Don't just throw $1 trillion at pork and new programs that are likely to waste money, result in unintended consequences, and set the stage for high rates of inflation two or three years down the road.
NOTE: Pritchard is the senior member of the Rohrer College of Business faculty. He completed both his undergraduate degree in physics and an M.B.A. at Drexel University, his M.A. in applied economics at the Wharton School of Business at the University of Pennsylvania and his doctorate in education administration at the University of Pennsylvania. Pritchard has authored/co-authored nine books in the fields of finance, small business management and marketing and has written more than 250 trade journal articles. He has consulted and provided financial training for many businesses and trade associations throughout the United States. Pritchard's research interests include real estate, personal financial management, retirement planning and Social Security. He specializes in applied financial research and pedagogical research principally pertaining to the teaching/learning processes in business and finance.
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