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Congress is currently debating an economic stimulus package that would spend nearly a trillion dollars on measures of doubtful timeliness and efficacy. Here are three ideas on how to really hit the target much quicker, harder and for a lot less.
1. To resolve the credit crisis, make all down payments on house purchases tax-deductible. The credit crisis has been caused by a collapse of the housing market, which has made trillions of dollars of mortgage-backed securities held by major financial institutions worthless. This can be rapidly remedied by reboosting the housing market, which a tax deduction on all (not just first-time buyer) home purchase down payments would effectively do.
With house values restored to reasonable levels, there would be no incentive for people to run out on their mortgages; even if they couldnt make their payments, they could save themselves simply by selling their homes. New home construction, and thus millions of jobs creating real wealth, would also be mobilized by adequate house prices, and new mortgages would tend to be much sounder, because people would be encouraged to make larger down payments to take advantage of the tax break.
Finally, and critically, the mortgage-backed securities now held by the banks would be made good, and they could balance their books without a trillion-dollar raid on the Treasury. Assuming a healthy rate of 6 million homes sold per year at an average price of $300,000 each, with 10 percent down payments made deductible to taxpayers in the 25 percent bracket, the total income lost to the Internal Revenue Service as a result of this measure would be about $45 billion per year.
While substantial, this is a pittance compared to the trillions that would be thrown away by continuation of the bailout program, and not only Wall Street but every American homeowner and many job-seekers would benefit directly as a result.
2. To protect the recovery, pass a law requiring that all new cars sold in the U.S. be flex-fueled. The global economic crash was significantly caused by high oil prices, which hit the U.S. economy for $1 trillion, and the world economy for $4 trillion, in fiscal 2008.
For Americans, the $800 billion increase in oil tribute from 2003 to 2008 was equivalent to a 30 percent increase in income taxes a burden more than sufficient to send our economy into recession. As a result of the ensuing crash, oil prices have now declined to merely twice 2003 levels, but the Organization of Petroleum Exporting Countries has responded by taking 4 million barrels of oil per day off the world market. As soon as the economy starts to recover, this will send prices soaring above $100/barrel again, unless an effective competitive market is created in liquid fuels.