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Three Ways to Jump-Start the Economy

Published: July 9, 2010


Three people offer their solutions to the stalled economy.




>Make Social Security Pay, Today
By DONALD B. SUSSWEIN

WITH the economy once again showing signs of weakness, many of the nation’s leading economists and politicians have been calling for another round of stimulus spending. This week President Obama himself said repeatedly that more action is necessary to spur job creation and to help people looking for work.

The problem is, few voters trust Washington to pay back their big outlays; even fewer are confident that the same groups who benefit from today’s stimulus will bear the costs of tomorrow’s austerity.

Fortunately, there is a powerful fiscal tool that could address both problems: Congress could grant workers a temporary holiday from the forced savings program known as Social Security.

Under Social Security, nearly all workers pay for their own retirement benefits. The amounts withheld from a worker’s paycheck, and paid by his employer, are effectively credited to an account established just for that worker.

The account is strictly on paper, of course; no actual investment is separately maintained. Even so, the tax payments essentially earn the equivalent of a small amount of interest. They are later converted, through a complex formula that emulates the workings of an individual retirement account, into a stream of retirement benefits.

As a result, the more you work and the more you earn in any year (up to an annual limit), the more retirement benefits you accumulate. If you take off four months without pay — say for maternity leave — you not only lose your salary for that period, you also reduce the growth of your Social Security pension.

To stimulate the economy now with no long-term increase in government debt, Congress should therefore temporarily exempt a portion of wages from the Social Security taxes imposed on workers; at the same time, those exempted wages would not be credited in computing that worker’s future retirement benefits.

For example, a 40-year-old earning $50,000 and paying annual Social Security taxes of about $3,000 could see those taxes cut to about $2,000. The added $1,000 in his paycheck, along with similar amounts for other workers, could be a huge stimulus to the economy.

In the future, of course, there would be a price to pay: the growth in that worker’s retirement benefits would be slightly reduced — much as if he had taken off four months without pay.

But the emphasis should be on “slightly.” Because benefits are typically paid over decades, the cost of a temporary $1,000 tax cut would be spread over many years; it could amount to a reduction in annual pension benefits of less than $100. The holiday could even be limited to workers under the age of 55, to allow plenty of time for them to salt away a few extra dollars for retirement once the economy improves.

Best of all, the costs and benefits would be matched to each worker. Those who get a pickup today would pay it back later on. This way, the Keynesians would get their stimulus, and the deficit hawks could sleep better at night.

Social Security has been an astounding success in preparing American workers for retirement. But if we need workers to temporarily increase their spending, a holiday from that forced saving can get cash into the economy — without draining it from the government’s coffers.

Donald B. Susswein is a tax lawyer and former adviser on Social Security for the Senate Finance Committee.

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>>Automatic for the People
By JEFFREY B. WENGER

ONE of the saddest lessons of this recession is that the United States has no adequate response for rising long-term unemployment. Contrast this with our policy for combating inflation: the Federal Reserve can always reduce the money supply, no Congressional approval required. There isn’t a comparable mechanism to create jobs or to protect the long unemployed, no contingency plan that kicks in whenever job losses continue to mount.

During this recession, the Fed has tried to fight unemployment by cutting interest rates, but cheap money that no one wants to borrow is not an employment policy. After all, few businesses want to expand and hire new employees, given weak consumer demand. And though priming the pump with government money is the best way to increase demand, Congress has been reluctant to spend enough to set the economy on the right course.

Then there’s the problem of unemployment benefits: Congress must vote on every extension and, with the latest impasse between Senate Republicans and Democrats, more than three million out-of-work Americans could lose their benefit payments by the end of the month. In the worst job market in decades, families won’t have money to buy food and maintain health coverage, to keep up with mortgage payments and credit card bills.

It wasn’t always this way. In 1970, Congress passed the Federal-State Unemployment Compensation Act, which established an automatic trigger: whenever unemployment increased to a certain point at a national or a state level, benefits were extended by 13 weeks.

The costs of these benefits were shared by the states, which paid them out of their regular unemployment insurance accounts, and the federal government, which increased taxes by about $8 per worker.

In the ’80s and ’90s, however, Congress diminished the effectiveness of the program by eliminating the national trigger, raising the state triggers and altering the trigger calculations in such a way that they hardly ever took effect. As a result, unemployed Americans now have to wait and worry as lawmakers debate each extension.

Fortunately, there is a simple solution: set up a new trigger. Heather Boushey from the Center for American Progress and I have proposed that whenever a state’s total unemployment rate rises above 6.5 percent or jobless claims increase by more than 20 percent, benefits should be offered for an additional 20 or more weeks. This program should be fully financed by the federal government, thereby alleviating states’ burden during the recession.

An automatic trigger would provide a tailored response to those states with the worst labor markets and eliminate the need for Congress to revisit this issue every few months. Most important, we could reduce some of the uncertainty for the jobless.

Jeffrey B. Wenger is an associate professor of public policy analysis at the University of Georgia School of Public and International Affairs.
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>>>The Write-Off Recovery
By BARNET LIBERMAN

THE slowdown among small businesses may well be the most worrisome problem in our ailing economy. Small businesses generate the majority of new jobs; if they falter, the rest of the private sector will, too.

Fortunately, there’s an easy way to get them moving again: allow them to speed up the rate at which they can write off depreciating assets. Doing so would save employers money and spur entrepreneurial risk-taking, without increasing the national debt.

As any businessman can tell you, depreciation is a fact of life. All assets lose value, whether because of wear and tear or technological obsolescence. Recognizing this, accounting standards and the federal tax code allow businesses to write off a portion of their assets’ decline in value according to preset schedules. These schedules vary from asset class to asset class, though most cover about 10 years.

For many companies, the rate at which they can depreciate assets is critical; it often determines whether or not they can make an investment. Accelerating the depreciation schedule — say, allowing a company to depreciate an asset over two years instead of ten — would put more money in entrepreneurs’ pockets, and thus increase capital investments.

True, in the short term the government would lose tax revenue. But it is the same amount the government would lose by allowing the write-off anyway, just over a shorter period of time.

And there could be a fee for anyone using the accelerated schedule, equal to the interest the government would pay on the money it needed to borrow to cover its temporarily lost revenue.

Of course, Congress would want to make sure companies put their savings into new investments. To that end, it could devise a system for rewarding entrepreneurs based on the number of jobs per dollar depreciation created or the environmental worthiness of the project. And the accelerated write-off could be adjusted for specific assets across numerous industries, spurring development in areas where the public can most benefit, from new power plants to hospitals and nursing homes.

The tough part would be devising regulations and administering such a program. Politics is bound to intrude, though an independent review panel could help keep undue influence at bay.

Nevertheless, the reward for getting this policy right would be great — for government, investors, creditors and taxpayers — and it would encourage entrepreneurial enthusiasm throughout the economy.

Barnet Liberman is a real estate developer.