Business

The secret ingredient of a recovery recipe

Let me get very serious for this one column, because I think America’s financial predicament is extremely dangerous. And I’d like to offer an idea that I believe should be considered.

As this country speeds toward the so-called fiscal cliff, Washington will soon try to concoct an elixir made of just two ingredients — budget cuts and tax increases.

The resulting potion — if our elected officials ever get around to agreeing on one — will leave a bitter taste in everyone’s mouth. That’s OK.

But whether there’s an extra dose of taxes or a bucketful of spending reductions, the results will be the same: This country will end up going back into a recession.

Why? Because either the solution offered by the Democrats (who want higher taxes on the wealthy and corporations and fewer budget cuts) or the one by the Republicans (who want social programs sliced) will result in less spending. And less spending — no matter where it’s cut from — will tip an already fragile economy over the edge.

Worse, that recession will reduce tax revenues. So much of what we “gain” in the fiscal-cliff talks could erode. We are — to put it mildly — in a fix.

This isn’t the way our economy is supposed to work.

One school of economic thought says that Washington should spend liberally whenever the economy slows. That puts money into people’s hands and primes the economy until it can make it on its own.

Unfortunately, Washington has already spent too much — as our $16 trillion-plus national debt and our $1 trillion-plus annual budget deficits attest.

When Washington is fiscally powerless, the Federal Reserve is usually able to step in. In normal times, the Fed will reduce interest rates so that companies and people want to borrow. That’s supposed to give the economy a boost.

But, like the federal government, the Fed is helpless these days because interest rates are already near zero. And these low rates have done little to boost economic activity.

Worse, the Fed has been reduced to experimental tactics. Fed chief Ben Bernanke’s solution has been to print more money — essentially creating a parallel money supply that he’s using to buy government bonds.

This $3 trillion in essentially fake money has kept rates low (and hurt savers) and stocks high (for now), but it has done little to make the economy grow anywhere near where it should.

Back in 2004, economist Walter J. Williams and I anticipated a time when this country might be in this predicament. We were spending too much back then and the Fed’s interest rates were artificially low — mainly to counteract the effects of the 9/11 attacks.

In a report for The Milken Institute Review, Williams and I described Fed monetary policy and Washington fiscal policy as being like a two-legged stool — wobbly.

The article, titled“Retail Therapy: Using Retirement Savings as a Fiscal Tool,” made a simple proposal: When all else fails, the US should unleash the power of retirement savings as an economic stimulus.

I have suggested for years that Washington should change the way people can invest their retirement plans so that they can purchase real estate.

I am not the only one who sees a healthy real-estate market as crucial to the US economy. Bernanke is keeping borrowing costs low to help the housing industry.

Once housing thrives again, it’ll take a lot of other industries along with it — plumbers and carpenters will get jobs, cabinetmakers will be busy again, appliance sales will boom, etc. And lots of bad mortgages will suddenly become good again, freeing up banks and Fannie Mae and Freddie Mac to lend again.

But that’s stuff I’ve discussed before in this column.

What we really proposed in that 2004 Milken Review piece was more encompassing than just real estate. We suggested that any industry could be revived using this strategy, although some uses are not ideal.

Real estate is truly an investment; there is a chance that a piece of property can go up in value.

Cars usually don’t appreciate in value. But we did suggest in the Milken article that — in theory, at least — Americans could have been allowed to use retirement money to buy autos. Had this been an allowable use of retirement money, taxpayers would not have had to bail out Detroit in 2008.

Now back to the fiscal cliff.

If negotiators in the current budget talks wanted to be creative, they could use our Retail Therapy ideas to change the course of the negotiations. Then there would be three ingredients: fiscal policy and monetary policy, along with what Williams and I proposed.

There would still need to be spending cuts. And tax increases.

Sure, we’d be stealing revenue from administrations of the future. If people take retirement money out now, they won’t have to pay taxes on that money later.

But overall, the country will be much better off if the current recession ended, the economy started expanding by healthy amounts and tax revenues returned to normal levels.

This third ingredient that I’m proposing could make good things happen. And if it didn’t work, the cost of failure would be small compared to the Fed’s very dangerous policy of printing extra money or forcing tax increases and spending cuts associated with the fiscal cliff.

john.crudele@nypost.com