Here’s more on my attempt to single-handedly keep our politicians from destroying the US economy.
I know — this is probably a futile and foolish effort. But since I have the space and time, it’s better than sitting around and doing nothing.
With the US debt already more than $16 trillion, and the annual deficit adding around $1 trillion a year to that total, Washington simply can’t continue to spend money in hopes that economic growth will spontaneously erupt.
As you’ve probably heard, $80 billion in automatic budget cuts will occur in eight days. When that happens, the economy — which is barely expanding to begin with — will weaken further.
When it slows, it’ll mean less tax revenue for Washington. And that, in turn, will make it necessary to cut even more spending or raise taxes further, or both.
In normal times, the Federal Reserve would react to a slowing economy by lowering interest rates.
But Ben Bernanke’s Fed — through three editions of quantitative easing — has kept interest rates extraordinarily low for years, and the economy has only been helped marginally.
That’s how things look going into the March 1 crisis called sequestration . Wobbly is the best you can say about this economy; broken would be a more appropriate word.
Congress and the White House might still delay a decision on the automatic budget cuts since stalling is what politicians do best.
Washington may even shock us with some sort of deal. But here’s the catch: No matter what ingredients you use in a deal, a bunch of higher taxes and a bigger dose of spending cuts, or vice versa, it is not going to help the economy grow.
A new ingredient needs to be added to the mix.
As I mentioned in Tuesday’s column and many times before, I think Washington should change the rules on how people can invest their personal retirement money.
At the very least, people should be allowed to use some portion of their IRA, 401(k) and Keogh accounts to, say, purchase real estate.
Buying a home has the biggest ripple effect on the economy. Carpenters, plumbers, mortgage bankers, furniture makers — all would benefit.
Ordinarily, people can’t withdraw from retirement plans until they are 59 1/2 without paying a stiff penalty. Because we want to stoke economic activity, that penalty should be waived.
Okay, some regular tax, lower than the rate that would be paid if withdrawn at 59 1/2, should be owed to Washington.
Even if that regular tax rate is only 10 percent, the US Treasury would get tax revenue that it wouldn’t otherwise get for years.
When economist Walter J. Williams and I first proposed this plan years before the financial crisis, we also suggested that, in theory, at least, the government could allow retirement money to be withdrawn and used for any purchase.
If the auto industry, for instance, needed a boost, the same exercise that I’m using above for housing could apply.
The same benefits, however, wouldn’t come to the economy if people were allowed to withdraw retirement money to pay off an existing mortgage or debt. The principle behind the Williams-Crudele idea is for people to make new purchases with this freed-up retirement dough, not pay off things already purchased.
So how would this help in the current deficit/tax talks going on in Washington?
For one thing, it’ll help the economy grow despite the cutbacks that’ll happen March 1.
And by adding a new ingredient into the negotiations, it could free up intransigent political positions.
The Republicans and their constituents, for instance, might be willing to consider additional income tax increases on wealthier Americans if this was combined with the ability of rich people to get earlier access to their retirement savings.
I can’t quite work out the numbers here without some think tank computers, but I’d wager that an American making millions in annual salary might be willing to pay an additional percent or two in income tax if the government gave her access to her locked-up wealth, including her tax-advantaged trusts.
And let me say it again, any people getting access to retirement plans and trusts earlier than they are supposed to would have to pay some amount of tax for the privilege.
And Democrats would be happy, too: The extra tax revenue coming in from my plan would reduce by some amount the budget cuts that will be needed to make our deficits more manageable.
Only true economic growth, which I propose this could achieve, will ultimately get the US back on solid financial footing.
I’m not suggesting this as a one-time thing. Allowing people to spend some of their retirement funds should be a regular part of economic policy. When the economy needs some juice, folks should be permitted to spend these funds.
When the economy needs to be slowed, the tax laws should be changed to encourage people to reduce spending but put more money into retirement plans.
To quote Forrest Gump, “That’s all I have to say about that.”
Let’s see if Washington comes up with anything better.