Why should we believe them?
Ben Bernanke and Hank Paulson, that is. What have they done to earn our trust? Nothing they have done has seemed to work, and their policies allowing the dollar to weaken drastically in recent years quite arguably played a big role in causing the current economic troubles.
But let’s look at their crisis management.
First they bailed out Bear-Stearns. A very wise man who is “in the know” told me about six weeks ago that all the government should have done with Bear was to step in just long enough to stop the panic, while continuing to work to try to help find a buyer such as Bank of America — but without putting taxpayers on the hook as a backstop. If no buyer were found, the feds should just have served as referee for an orderly liquidation. Let the Chinese bond-holders soak up the losses. Work to strengthen the dollar to make dollar-denominated assets more attractive. Cut corporate taxes. Increase domestic energy production. And let the markets work — including letting them take the short-term hit from the collapse of Bear.
By extrapolation, the feds should not have bailed out Fannie Mae and Freddie Mac. (Deroy Murdock suggests what should have been done instead.) Nor AIG. Nor the whole financial sector. The best analogy is to the boy-with-finger-in-dike story, but with a twist. What our Lords of Government Interference are doing is pulling concrete out of one spot in the dike to fill another spot in the dike, then pulling concrete out of a third spot to plug the second spot, and so on. It just doesn’t work.
What happens when you commit so much government money to a bailout is that you make the government’s own money less valuable. With added federal debt, you get a weaker dollar. Hence, just days after the bailout proposal was enacted, the prices of gold and oil shot through the roof — meaning that the overall economy is now in even worse shape, completely counteracting any beneficial effects of the intended bailout.
Neither of our presidential candidates is helping matters. Barack Obama continues to insist on another “stimulus package.” In other words, the government should add even more debt on our children in order to boost spending today — and thus also keeping pressure on consumer prices, which will have more reason to rise if demand is high. This is proto-typical left-wing madness, from a proto-typical left-wing ideologue.
Then there was John McCain’s routine of flailing around like a man in the midst of delirium tremens trying to play pin-the-tail-on-the-scapegoat. Fire Chris Cox! Hire Andrew Cuomo! Don’t do the bailout but trust Paulson to do the right thing! Greed and corruption! Malefactors of great wealth! Green-eyed monsters are attacking our way of life!
Okay, he didn’t really say that last part — but, changing metaphors, if McCain wants to make the case that he’s as steady in a crisis as John Wayne, why did he spend a week acting like Joe Pesci?
UNFORTUNATELY, THERE IS NO silver bullet to kill this credit-crisis monster. But there is a way immediately to bolster the overall economy — the economy that actually runs on real goods and services, widgets and trucks and steel and overnight deliveries and even haircuts and shoe-shines — that might cost the Treasury less, in the long term, than the massive bailout being proposed by the Treasury Secretary.
Eliminate the corporate income tax. Immediately and permanently. As I argued months ago, the corporate income tax is a drain on profits, a drain on the value of every old-age pension, a drain on the value of every 401K plan, a drain on every union’s employment-insurance package, and a drain on the enforcement resources of the IRS. Sure, the corporate income tax is supposed to bring in about $300 billion this year. But that looks a lot less daunting in the face of Paulson’s proposed $700 billion bailout. And some of the Treasury’s loss from eliminating the tax would be made up by increased tax receipts on the higher dividend payments that would result; some of that (over time) would come in through substantially greater capital gains tax receipts; some of that will be recouped through non-inflationary downward pressure on interest rates (including the rates the government itself pays on its debt), and some through overall economic growth.
It also would encourage corporations to stop outsourcing jobs to foreign lands and bring them back home.
Plus, in a facet of this that should appeal to McCain, it would eliminate the need for half the lobbying in the nation’s Capitol — because without a corporate income tax, there would be no need for lobbying for special corporate tax advantages. It would be the single best reform measure, from McCain’s standpoint, that could be imagined.
Finally, the psychological boost it would give the entire corporate community would probably be substantial enough to stop any panic in its tracks. If every company that is not a purely financial outfit suddenly can keep the remaining 35 percent of its profits, the ripple effect — or tidal effect — throughout the markets might be great enough to give everybody confidence, even the lenders and the traders of derivatives and all that other tommyrot.
GRANTED, THE UNDERLYING problems in the financial sector would still be there, or at least would be there until the housing market stabilized. Bad loans and credit-default swaps (or whatever they’re called: I’ll admit to being a bit mystified by the more exotic specimens of debt trading) would still be bad. A lot of people would still be forced to pay the piper.
But the rest of the economy would be far more likely to be strong enough to absorb the losses.
In the long run, meanwhile, a strong and stable dollar will do more good, by attracting increased investment, than will any artificial effort to prop up the financial system with tax dollars and long-term government debt.
Again, this is not to suggest that eliminating the corporate income tax is all that needs doing in order to stabilize this shaky economy. Congressmen Paul Ryan and Jeb Hensarling and their colleagues on the House Republican Study Committee have a number of good ideas. So does Chairman Thaddeus McCotter of the House Republican Policy Committee. But the elimination of the corporate income tax is a simple way to cut the Gordian Knot in one quick motion; and by the standards of everything else being discussed these days, it is comparatively quite affordable.
To avoid the fallout from the bailout — a bailout that is a philosophical sell-out — take the corporate income tax and throw it out. Now.
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