Opinion - Politics

Payroll tax cuts won't stave off a recession, but these policies will

Jake Novak
Shoppers at a Target store in Culver City, California.
Mark Ralston | AFP | Getty Images

Whether you're still very confident about the economy or you've already started shoving cash under the mattress out of fear of a recession, let's talk about what can be done right now to make the currently strong U.S. economy even stronger.

We've heard a lot this week about the idea of a temporary payroll tax cut aimed at increasing consumer spending power to further stimulate the economy.

Now there's nothing wrong with letting Americans keep more of their money, but it's highly questionable that more spending power for salaried workers is the missing link to a more enduring economic expansion right now.

That's because America's consumers are already doing a yeoman's job when it comes to spending. The latest reports on June and July retail sales and overall consumer spending prove that. So do the latest earnings reports from Target and Walmart. America's long-running virtual full employment has its benefits.

Other possible plans aimed at higher-income Americans, like indexing capital gains to inflation, could potentially spur more investment and higher-end spending. But most of that idea is still too-closely focused on helping a sector of the economy that's already strong.

Here are two better ideas to get the economy moving even faster:

Make condo purchases easier

Throughout this long period of economic expansion, home prices have continued to rise, but actual home sales are in an undeniable slump. That's a trend that hurts sectors from real estate, to construction, to home improvement chains, to mortgage banking.

A big reason for that slump is the higher prices that continue to make millennials much less likely to buy a home than previous generations. But this generational divide gives the administration an opportunity to make a positive and swift impact by removing some of the barriers to getting a federally-backed home loan.

And the administration has already started to do one of those things. Last week it announced relaxed regulations that will make it easier to get Federal Housing Administration-backed financing for condos. Making more of those lower-priced condos eligible for federally backed mortgages is crucial because just getting millennials into the homebuying process at a lower price level raises the chances they'll eventually trade up to larger and more expensive homes. This is a move that has the potential to stimulate the economy immediately even as it pays dividends down the road.

But if the White House really wants to see a significant economic boost from stoking real estate sales numbers, it should lower the federal financing requirements on buying homes at all price and size levels. Now if that's setting off alarm bells in your head because such a policy could conceivably create another housing bubble, you're not wrong. Stimulus plans usually come with risks. But at least kicking real estate up a notch and pushing some millennials from renting to owning would come with a lot more immediate positives than a small bump in paychecks.

Cut spending – yes, cut

During recessions or when recession fears are looming, there are usually calls for the government to spend more on anything. But a better argument can be made right now that the Trump administration could do more to help the economy by cutting spending.

Read more: CBO expects deficit to grow more than projected

That might sound counterintuitive, but right now the federal government is spending more than ever. It's also running up massive new debts. At $3.7 trillion spent in just the last 10 months alone, Washington's massive footprint on the economy is clearly crowding out some other means of more organic growth.

Several academic studies show that countries with high levels of public debt shave off an average of 1.2 percentage points from their GDP. That's a classic supply side economic argument. But you don't need a Ph.D. to understand that the more the government spends, the more likely it is to waste money.

Of course, deciding where and how to cut is the tricky part that always comes with controversy. There are two controversial spending cut ideas the Trump administration has been floating, but they would have perhaps the most immediate stimulative effect on the economy.

The first is making good on the administration's plan to crack down on waste and return food stamp requirement levels to pre-Great Recession levels. Doing that should spur more lower-income Americans who are able to work or seek higher paying jobs to do so. That sounds harsh, but with the economy continuing to expand for so many months now, it's time to admit that massive entitlements and other welfare programs are likely holding labor participation rates down to some degree.

If slashing entitlements makes you queasy, another idea the administration has talked about is closing many of its foreign military bases. Shuttering them not only saves the government money, but bringing those troops back home to domestic bases would also bring back those soldiers' demand for housing and other goods and services that should increase domestic GDP.

There are many other spending plans to choose from where cutting that spending would likely help the economy quickly.

The Trump administration just has to stop talking about cutting and do it already. It will go a long way toward boosting GDP and putting a dent in recession dread.

Jake Novak is a political and economic analyst at Jake Novak News and former CNBC TV producer. You can follow him on Twitter @jakejakeny.

Here's what President Trump said about the payroll tax