The 5 Worst Economic Ideas Of 2011 (And 12 Great Ones For 2012)

 

By James Pethokoukis

December 20, 2011, 7:46 pm

The longer the Great Stagnation/Long Recession/New Normal continues, the greater the risk that some profoundly terrible ideas—spawned by economic desperation and political opportunism—will pop up, gain a foothold, and start to spread. Indeed, the past twelve months are evidence that the risk of a devastating policy error by Washington is escalating.

Here are the worst economic ideas of 2011, in reverse order:

5. The “People’s Budget” from House Democrats. This proposal from congressional “progressives” claims to balance the budget by 2021. It does this by … wait for it … imposing massive tax hikes (on income, corporate profits, and investments) and by cutting defense spending by $2.3 trillion over a decade—and then shifting most of those savings into government “investments” that would supposedly supercharge the economy.

Please. Macroeconomic Advisers, one of the White House’s favorite economics consultants, examined the plan and even they concluded the following: “We find this estimated impact on long-term growth to be implausibly high. … Nor does it even mention the potential deleterious supply-side effects of raising marginal tax rates.” In other words, the Dems assume all those tax hikes don’t hurt growth a smidgen. Plus, the plan does nothing about the real debt drivers—entitlements.

4. The Brandeis inequality tax. Two liberal law professors cooked up this one (which they named after jurist and progressive hero Louis Brandeis): Legally cap income inequality. Here’s how it would work: “… we propose an automatic extra tax on the income of the top 1 percent of earners—a tax that would limit the after-tax incomes of this club to 36 times the median household income.”

Please. Forget, for a moment, the tax-planning mess this would create. And forget that Yale’s Ian Ayres and Berkeley’s Aaron Smith would explicitly enshrine an ideology of class envy and wealth distribution into the U.S. tax code. What problem would they be solving, exactly? To the extent income inequality has risen—and it is much less than wealth inequality, a better measure—you should “blame” technology (for increasing rewards to education), globalization (for creating a worldwide market for CEOs, athletes, and rock stars), teachers unions (for dragging down the once world-class U.S. education system), Hollywood (for contributing to harmful cultural pathologies), and Big Government (for backstopping favored industries such as Wall Street). Which of those does the Brandeis tax begin to fix? None.

3. Doubling U.S. income tax rates. It’s now the liberal economic consensus that tax rates need to be returned to where they were before the Reagan tax cuts—and possibly before the JFK tax cuts, as well. As one liberal economist told the New York Times, “The inequality problem is not going away and won’t until drastic policy changes are made (as happened during the New Deal).” The economist, Emmanuel Saez, has published research arguing the top U.S. income tax rate should more than double to 80 percent. Saez has also done research with Peter Diamond, a failed Obama nominee to the Federal Reserve, that suggests the top income tax rate should go at least to 70 percent. Other advocates include influential liberal economists Paul Krugman and Brad DeLong.

Please. We are in an extended period of economic stagnation, and these guys want to return tax rates—punishing wealth and job creators in the process—to the level they were at during the last extended period of economic stagnation, the 1970s? The only thing such a policy blunder would create would be a hiring boom for tax attorneys. Oh, and even more economic misery for America. Instead, the United States needs to be lowering rates and removing economic distortions to boost growth. Doing that might improve annual U.S. GDP growth half a percentage point or more.

2. The Osawatomie Speech (President Obama’s call to reject the past 30 years of economic policy). During his recent speech in Osawatomie, Kansas, Obama repeatedly pointed out how the U.S. economy had gone off track over the “last few decades.” In other words, America’s 30-year economic experiment in enhanced economic freedom—lower tax rates, less regulation, freer trade—has been a failure. Indeed, Obama says that although the “theory fits well on a bumper sticker … it has never worked.”

Please. (First a fact check: The U.S. economy grew at an average pace of 3.3 percent from 1983-2007, inflation—the scourge of the 1970s—was defeated, and the stock market rose by 1,400 percent. Median middle-class incomes rose by roughly 50 percent.) What policies would Obama prefer? Well, the liberal economic consensus wants a) higher taxes, b) more income equality, c) more inflation to reduce debt, and d) higher energy prices to reduce dependence on fossil fuels. Clearly, Obama wants to return to some Golden Age that had all those attributes—high taxes, high inflation, high energy prices and high income equality. Again, hello 1970s.

1. The Occupy movement. An obsession over income inequality runs through this entire list. And Occupy Wherever—so praised and embraced by Elizabeth Warren, Obama, and the MSM—is a big reason why. But what would the rabble—a  mix of communists, union pros, the mentally deranged, and a few truly heartbreaking stories—have us do? Time travel so as to prevent the microchip revolution and reinstate command-and-control economies in Asia? Sadly—and tellingly—the protesters haven’t uttered a peep about teachers unions or Hollywood. Just the banks.

Please. What we should be focusing on is a) the level of income mobility in society, and b) the absolute income gains of the broad middle. Income inequality zoomed in the late 1990s but since incomes were rising broadly, no one much cared if the rich got richer even faster. Everybody was winning. There was no Occupy Silicon Valley back then, despite the fantastic northern California weather.

Occupy and its fellow travelers have no apparent interest in advocating policies that would boost innovation and growth and incomes. But I do. So here are 12 ideas for 2012, some of which I gleaned from two of this year’s best economic policy books, Race Against the Machines and Launching the Innovation Renaissance:

1. Pay teachers more but get rid of tenure so the bottom five percent of teachers can be replaced by even average ones.

2. Encourage more high-skilled immigration.

3. Reduce regulatory barriers to new business creation.

4. Replace payroll taxes with more economically efficient ones.

5. Phase out and eliminate pricey and market-distorting subsidies like the mortgage interest deduction.

6. End Too Big To Fail.

7. Eliminate the tax code’s bias against investment.

8. Move toward market-friendly entitlement reform like Wyden-Ryan.

9. Create a patent system with the length of legal protection depending on the cost of innovation and imitation.

10. Establish more innovation prizes.

11. Have fewer kids in college getting liberal arts degrees, more in business-run worker training programs.

12. More investment in basic research, not in crony-capitalist, industrial policy schemes like Solyndra.

These would be great policies for Washington to implement in 2012. Please!