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Ritholtz: Economic Stimulus? Try These 7 Ideas

The American Recovery and Reinvestment Act of 2009 economic stimulus was an unfocused series of compromises that had a modest stimulative effect on economic activity. Indeed, no matter how haphazardly you dump a trillion dollars on the US economy, it will goose employment, industrial production, retail sales and GDP. It's hard to spend that much money and not have an impact.

The limitation of most of these spending increases and tax cuts was that they had a temporary effect: As long as the money flowed, they were stimulative. Once the spending stopped, the stimulus stopped also.

Talk has begun on a new set of stimulus plans. To avoid the limited and temporary impact, perhaps policy-makers, tax-payers and voters should be asking these questions about any stimulus: “What are our policy goals? Are these the most effective and efficient spending & tax plans for achieving these goals? What are the costs? What is the likely result of the alternative — doing nothing?

So far, most proposals have been either too timid or misdirected (The infrastructure rebuild is a good idea but it's only a quarter of what is necessary). The goal of counter-cyclical government tax cuts and spending should be more than a temporary salve — it should be to “prime the economic pump.” With consumers and businesses so cautious, the virtuous cycle of hiring, spending, saving and investing has not gotten any traction.

If you were going to give me a trillion dollars to stimulate the economy so that the next expansion could proceed, here’s what I would do:

1) One Year Payroll Tax Holiday: Want to increase job creation and reduce unemployment? Tax it less. A 12 month employer FICA holiday will encourage job creation.

How to pay for it: Raising both the retirement age and the cap on FICA contributions.

2) Capital Investment 1 year 100% Deduction: The administration has already proposed a variation on this. It was an effective tax credit when done in 2004-05, but the drawback was it encouraged CapEx over new hiring. The idea of the payroll tax holiday is that it prevents that drawback.

How to pay for it: Via gains from the Corporate Tax-Free Repatriation (#3)

3) Corporate Tax-Free Repatriation: US corporations are sitting on trillions of dollars of cash in their overseas divisions. Offer a one year tax holiday to bring that back to the US. It can be structured in tiers (0%, 5%, 10%). The goal should be to bring to the US a trillion plus in overseas profits.

How to pay for it: It's free; These are overseas revenues that are untaxed by the US.

4) Pure Science R&D Program for Alternative Energy: Gains in the basic science of solar energy conversion, battery storage, alternative biofuels, etc. has been incremental. The private sector does not have the patience for multi-year or basic science R&D.

How to pay for it: Via a Pigouvian tax on gasoline, phased in over 5 or 10 years.

5) Mortgage Principal Write Down Plan: Buyers paid too much, banks lent too much against residences at the top of the real estate cycle. To get the sector healthy again requires prices to normalize, which is now occurring through Foreclosure. An alternative is a voluntary principal write-down, where both the borrower and lender split the losses. An underwater home is refinanced at its 2011 appraisal value, with the mortgage shortfall rolled into a 10 year interest free balloon payment. Banks cut the balloon loan in half in year 10, rolling it into the existing mortgage (assuming the owner stays current on mortgage).

How to pay for it: There is no cost, but Congress would need to make the 10-year zero interest free tax free, and allow the banks to defer reserving for eventual balloon defaults for the same 10 year period.

6) Electrical Grid Refurbishment: This is both an economic and national security issue: The electrical grid is an unreliable mishmash of public and private ownership, vulnerable to both blackouts and cyber-attacks. It needs to be upgraded yesterday.

How to pay for it: A one cent per kilowatt hour grid tax.

7) Airports, Ports, Roads, Bridges, Tunnels: The US was one of the first nations to build out a massive interstate highway system. We love big construction projects, but we seem to dislike the maintenance. Most of the transportation grid in the US is falling apart, in need of a massive repair. Many US airports look like they are from 3rd world countries.

How to pay for it: Usage tolls on roads, ports, bridges, landing slots.

Some folks believe the government should do nothing, spend no money, focus on balancing the budget. But is this the ideal time to begin a new diet and exercise regime when you have pneumonia? The time to reduce the government’s economic deficit and footprint is during a robust expansion, not during (or just after) a contractions.

The alternative is to do little or nothing, and suffer through another lost decade, with an economy that is anemic at best. In a Democracy, the electorate has other options than misdirected austerity . . .

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Barry Ritholtz is CEO, Director of Equity Research of Fusion IQ. He is the author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, and runs the blog, The Big Picture. This article was reprinted from The Big Picture.