ANALYSIS: Long-term view key to recovery

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By Stuart Butler

I spent my early life in Britain, but I'm starting to feel like that all-American character Rip van Winkle. When I hear politicians talking about stimulus bills, it's as though I've awakened from a 40-year nap. It's the same claptrap that failed miserably to jump-start the British economy -- and the rest of Europe -- in the '60s and '70s.

Back then, Parliament even started pouring money into Britain's collapsing auto industry. Sound familiar? Bailouts failed the Britons, and they will fail us. We need a more sensible approach.

A recession is really a shakeout of the economy. Old, less-efficient jobs and investments ultimately get replaced with new jobs and investments that make better sense for the future.

Unwise public policy, such as encouraging families to take on mortgages they can't afford, can extend the shakeout and make it more wrenching. So can a pattern of bad business or family decisions, such as the huge growth in credit card debt. We are now paying the financial and human costs of those mistakes.

The right approach to ending a recession -- even a deep one -- is to make the transformation happen as quickly and with the least short-term pain as possible.

Government can help by creating the most favorable long-term -- repeat, long-term -- environment for investment and job creation. It does not help to borrow hundreds of billions of dollars from American savers, or the Chinese, to spend on short-term "stimulus" programs. That just repeats the European errors of the 1960s and the Japanese follies of the 1990s.

Why? For one thing, these spending programs rarely put money in the industries and jobs of tomorrow, or match the skills of Americans currently losing their jobs. Consider the focus on infrastructure. How many laid-off Citibank brokers or shopping mall cashiers are likely to get a job building bridges on Interstate 95? The money will go mainly into double and triple overtime for existing construction workers.

For another thing, so-called stimulus programs are always shaped by politicians' insatiable appetites for local pork-barrel projects rather than any inspired vision of the future economy. The result is "bridges to everywhere."

So what should government do?

Well, lawmakers need to recognize that investors will not break ground on factories or increase permanent payroll unless they are confident of a good long-term after-tax return on their investment to justify the risk. Only a better long-term tax and regulatory environment will stimulate a quick recovery followed by a lasting expansion.

First, Congress needs to enact a series of long-term, and ideally permanent, marginal tax changes to improve the returns on new ventures. Specifically, it should:

• Extend the tax rate reductions of 2001 and 2003 that are set to expire in 2010. As president, Barack Obama should improve the after-tax return on investment by pressing Congress to extend rate reductions for at least another five years or, better still, permanently.

• Further reduce marginal income tax rates and repeal the death tax, which discourages many older business owners from expanding operations.

• Reduce the corporate tax rate to 25 percent or lower for at least 10 years and preferably permanently. Our current rate is higher than those of most other industrialized countries. That hurts U.S. competitiveness and reduces after-tax returns.

• Extend "bonus appreciation" for at least two years. This tax provision allows firms to deduct 50 percent of the cost of equipment in the first year, effectively reducing the effective cost of new machinery. It is about to expire.

Second, Congress should focus on streamlining existing regulation and making sure it is enforced sensibly. We don't need more red tape and regulatory uncertainty to complicate the already high risk of starting a business. Complex regulations like Sarbanes-Oxley corporate governance rules have done little to prevent dishonest business activity. But they have cost honest corporations untold millions and driven business to more hospitable climates overseas.

Third, Congress should make sure that transitionary assistance programs take the sting out of economic transformation without prolonging it or making it more painful. That's one more reason for getting health care reform right. Congress should not, for instance, try to improve coverage by enacting job-killing mandates or taxes on employers.

Change is in the air these days, though recession is the kind of change we'd rather not have. The people who will get us out of it are Americans with vision who will invest in production and jobs if they anticipate a decent long-term return. The best way Congress can help them is with a tax and regulatory system that improves that return.

• Stuart Butler is vice president for domestic policy issues for the Heritage Foundation (heritage.org).