Download A Republican Road to Economic Recovery

A Republican Road to Economic Recovery
Obama's proposals – the good, the bad, and some better alternatives.
By PAUL RYAN
http://online.wsj.com/article/SB123595257066605147.html?mod=djemEditorialPage
Inheriting countless challenges, Congress and the Obama administration have moved quickly
on many fronts to implement their economic agenda. After two months of drastic interventions,
has hope replaced fear, and confidence pushed aside uncertainty? Hardly.
David Gothard
The budget the president released last week, however, does provide some certainty about where
we are headed: higher taxes on small businesses, work and capital investment.
Add to this the costly burdens of a cap-and-trade carbon emissions scheme and an effective
nationalization of health care, and it is clear that the government is going to grow while the
economy will shrink. In a nutshell, the president's budget seemingly seeks to replace the
American political idea of equalizing opportunity with the European notion of equalizing
results.
A constructive opposition party should be willing to call out the majority when it falls short.
More important, Republicans must offer alternatives. In this spirit, here is what I would do
differently:
- A pro-growth tax policy. Rather than raise the top marginal income tax rate to 39.6%, it should
be dropped to 25%. The lower tax brackets should be collapsed to one 10% rate on the first
$100,000 for couples. And the top corporate tax rate should be lowered to 25%. This modest
reform would put American companies' tax liability more in line with the prevailing rates of
our competitors.
We've seen 10 years of growth in our equity markets wiped out in recent months, while
401(k)s, IRAs and college savings plans are down by an average of 40%. The administration
and congressional Democrats want to raise capital gains tax rates by a third. Instead, we should
eliminate the capital gains tax. It supplies about 4% of federal revenues, yet it places a
substantial drag on economic growth. Individuals already pay taxes on income when they earn
it. They should not be socked again when they are saving and investing for their retirement and
their children's education.
Capital gains taxes are a needless burden on investment, savings and risk-taking, activities in
short supply these days. Getting rid of this tax could help establish a floor on stock prices and
stem the decline in the value of retirement plans by increasing the after-tax rate of return on
capital.
Democrats oppose this, playing on emotions of fear and envy. But while class warfare may
1
make good short-term politics, it produces terrible economics.
- Guarantee sound money. For the last decade, the Federal Reserve's easy-money policy has
helped fuel the housing bubble that precipitated our current crisis. We need to return to a sound
money policy. That would end uncertainty, help keep interest rates down, and increase the
confidence entrepreneurs and investors need to take the risks required for future growth.
I believe the best way to guarantee sound money is to use an explicit, market-based price guide,
such as a basket of commodities, in setting monetary policy. A more politically realistic path to
price stability would be for the Fed to explicitly embrace inflation targeting.
Transcripts from recent meetings of the Federal Open Market Committee meetings suggest that
the Fed may already be moving in this direction. This would be an improvement over the status
quo: It could help combat near-term deflation concerns while also calming the market's longerterm inflation fears.
- Fix the financial sector. A durable economic recovery requires a solution to the banking crisis.
There are no easy or painless solutions, but the most damaging solution over the long term
would be to nationalize our financial system. Once we put politicians in charge of allocating
credit and resources in our economy, it is hard to imagine them letting go.
The underlying structural problem at our financial institutions is the toxic assets infecting their
balance sheets and impairing their operations. In order to help purge these assets from the
system, we need a government-sponsored, comprehensive solution, but one that is transparent
and temporary, and which leverages -- rather than chases away -- private-sector capital.
The general idea is to establish an entity or fund to purchase troubled assets from financial
institutions and then hold them until they could be sold once the market has recovered. The
Treasury has announced its intention to use capital from the Troubled Asset Relief Program,
along with financing from the Fed's soon-to-be operational Term Asset-Backed Securities Loan
Facility, to set up such an entity. It will be a tall task to get all the details and incentives right,
but the administration's general strategy appears to be sound.
A good model for this government-sponsored entity is the Resolution Trust Corporation (RTC),
which helped clean up bank failures in the wake of the savings-and-loan crisis in the late 1980s
and early 1990s by absorbing and selling off bad bank assets. The circumstances of today's
financial sector are different, but the goals of our current efforts should mirror the general
merits of an RTC-like entity. We should aim to recoup a portion of our initial expenditures, and
we should leave only a fleeting government footprint on the financial sector and the economy.
- Get a grip on entitlements. With $56 trillion in unfunded liabilities and our social insurance
programs set to implode, we must tackle the entitlement crisis. President Barack Obama
deserves credit for his recent efforts to build a bipartisan consensus on entitlement reform. But
we can't solve the entitlement problem unless we acknowledge why the costs are exploding,
and then take action.
I have proposed legislation, called "A Roadmap for America's Future," that would bring
permanent solvency to Medicare, Medicaid and Social Security. By transforming these openended entitlements into a system with a defined benefit safety net for the low-income and
chronically ill, in conjunction with an individually owned, defined contribution system for
health and retirement, we can reach the goal of these programs without bankrupting the next
generation. It would also show the world and the credit markets that we are serious about our
debt and unfunded liabilities.
Republicans can help Washington become part of the solution, not part of the problem. We can
do this by pushing to enact tax policies that boost incentives for economic growth and job
creation, focus the Fed on price stability, fix our banking system to get credit flowing again,
stop reckless spending, and reform our entitlement programs.
Our economy is begging for clear leadership that inspires confidence and hope that the
entrepreneurial spirit will flourish again. Our goal must be to offer Americans that leadership.
Mr. Ryan, from Wisconsin, is ranking Republican on the House Budget Committee and also
serves on Ways and Means.