Joblessness and sluggish growth are hampering the economic recovery and Barack Obama’s political standing. Raising taxes on the rich, as the president called for yesterday, isn’t going to turn things around.

To get a sense of how severe the situation is, consider this: Bringing the unemployment rate back to pre-financial- crisis levels by end of the president’s second term (or his opponent’s first term) would require real Gross Domestic Product growth of 4 percent a year over that period — a rate we have not reached in more than a decade.

What sort of fiscal policy can turn things around?

The president’s announced jobs plan centers on the need for additional short-term stimulus designed to boost aggregate demand and jump-start economic growth. In some recession scenarios, such action, if timely, can indeed raise output and employment.

In our current state, however, calling for additional spending and temporary tax relief without addressing longer-term economic challenges may exacerbate the likelihood of another recession in the coming year.

This is because the U.S. economy suffers from structural problems predating the financial crisis, particularly an excessive reliance on household consumption and government spending, and insufficient attention paid to business investment and exports. The financial system and the economy need to adjust in the face of this structural shift.

This observation points out two problems with the case for stimulus being made by Obama. The first is that near-term and temporary support for household incomes does little to counterbalance the chilling effect of announced future policies. Uncertainty becomes the enemy.

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By Ezra Klein

Glenn Hubbard is dean of the Columbia University Graduate School of Business and coauthor of “Seeds of Destruction: Why the Path to Ruin Runs Through Washington, and How to Reclaim American Prosperity.” From 2001 to 2003, Hubbard served as President George W. Bush’s first chairman of the Council of Economic Advisers. During that time, he was instrumental in designing the Bush tax cuts. I called him to ask what he thought of their limited extension, and the deal Republicans cut to secure it. A lightly edited transcript of our conversation follows:

Ezra Klein: The tax cuts you helped develop look likely to be extended for at least two years. Are you happy about it? Feel vindicated?

Glenn Hubbard: I valued my time with President Bush. I think cuts in capital gains are good long-term policy. But I think a temporary extension is right. I wouldn’t support a permanent extension.

Why not?

There are two interesting questions. One is the size of government, and the second is the proper structure of the tax code. I only support extending the tax cuts until we can decide those questions – which I think will be by 2012. If the public says we want a government that’s at the size of the one in the Obama budget, we can’t have taxes at the Bush level. We have to repeal all of them and more. As for the ideal structure of the tax code, to my mind, there are elements of it in the Bush tax cuts, but I’d like to see a reformed system that emphasizes low rates but broadens the base.

Full interview here

                          

GIVEN the furor from both the left and the right, one would be tempted to think that the initial proposal from the co-chairmen of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson, must offer an excellent starting point for a discussion of deficit reduction.

Indeed, it does — particularly when it comes to tax policy. America’s fiscal mess is real. As Messrs. Bowles and Simpson aptly demonstrate, we are in a difficult situation in large part because we have designed entitlements for a welfare state we cannot afford. And, perhaps less obviously, they show how we have used the tax code as a vehicle for special-purpose spending that weakens both the efficiency and fairness of our tax system.

When I left my job as the deputy assistant Treasury secretary for tax policy in 1993, I left a message on my office blackboard for my successor. I wrote, “Broaden the base, lower the rates” repeatedly until I filled the entire space. I then had it covered with wax so it could not be erased. (Yes, the government charged me for my bit of vandalism. But it was worth it.)

The Bowles-Simpson report seems to have taken that message to heart, recognizing that when we provide tax advantages to spur certain types of spending — with, say, a deduction for interest payments on home mortgages — we in turn require higher marginal tax rates to raise offsetting revenue. Not only are those higher rates a drag on overall growth, but because the tax preferences are often more valuable to affluent households than to poorer ones, they also make the tax code less fair.

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On Election night, Tuesday, November 2nd from 7PM-Midnight ET, CNBC will broadcast a live special “Decision 2010: Your Money, Your Vote,” anchored by CNBC’s Maria Bartiromo and Carl Quintanilla (7PM-11PM ET), and CNBC’s Tyler Mathisen and Amanda Drury (11PM-Midnight ET). CNBC’s Chief Washington Correspondent John Harwood will employ the use of the recently launched CNBC Real-Time Exchange to deliver the election results, trends and analysis as polls close.

Live from CNBC Global Headquarters in Englewood Cliffs, N.J., the network’s extensive coverage will focus on the key Senate, House and gubernatorial races. CNBC will track the future make-up of Congress and CNBC reporters, experts and industry insiders will forecast what the results mean for taxes, jobs, the economy, markets and your money.

CNBC’s big line-up of guests include CEOs, business leaders and former administration insiders including Gordon Bethune, former Continental Airlines CEO; Robert Lutz, former GM Vice Chairman; Ron Kruszewski, Stifel Nicolaus CEO; Bob Johnson, RLJ Companies CEO; Tony Fratto, Former White House Deputy Spokesman; Keith Boykin, Former White House Special Assistant; Carlos Gutierrez, Former Commerce Secretary; Robert Reich, Former Labor Secretary; Anita Dunn, Former White House Communications Director; Glenn Hubbard, Former CEA Chairman; Rep. Darrell Issa; Rep. Paul Ryan; and Rep. Eric Cantor.

Full article here

                          

By Glenn Hubbard and Chris Mayer

Recent calls for another federal stimulus package raise an important question: Before considering costly short-term measures to raise overall consumer demand, have we done enough to ensure that financial markets will work properly and lead us to recovery? For housing — the sector at the center of the crisis — the answer is no. But the good news is that it might be possible to improve the housing market and invigorate the economy in a way that won’t require a costly stimulus package.

In a normally functioning mortgage market, almost all homeowners would have refinanced their mortgages to take advantage of low rates. Yet today, low interest rates are doing little to stimulate the housing market because of other stresses, including declines in house prices, falling household incomes and banks’ wariness of making loans.

To change this dynamic, we propose a new program through which the federal government would direct the public and quasi-public entities that guarantee mortgages — Fannie Mae, Freddie Mac, Ginnie Mae, the Department of Veterans Affairs loan-guarantee program and the Federal Housing Administration — to make it far easier and quicker for homeowners to refinance.

This program would be simple: the agencies would direct loan servicers — the middlemen who monitor and report loan payments — to send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork. Servicers would receive a fixed fee for each mortgage they refinanced, which would be rolled into the mortgage to eliminate costs to taxpayers.

Full article here

                          

By Kevin A. Hasset and Glenn Hubbard

The president’s proposed tax cuts for business are a welcome departure from Keynesian stimulus.

Earlier this week President Obama proposed tax cuts for business, including 100% expensing through 2011. In other words, firms that purchase new machines and other capital goods would be able to write them off immediately, instead of over many years.

Such a move offers a sound departure from the Keynesian thrust of the administration’s earlier initiatives. Mr. Obama and his team now appear to accept that growth-oriented tax cuts provide a more reliable stimulus than government spending. The investment incentive the administration proposes is meaningful—though not without some potential pitfalls—and it offers a road map for future policy change to emphasize economic growth.

A well-developed body of research by economists confirms what businessmen will tell you if you ask: When the cost of capital is low, firms are much more likely to expand their capital stock. And full expensing can reduce the cost of capital significantly. Future deductions are not as valuable as current deductions because of the time value of money, and because these deductions are not indexed for inflation. Expensing gives firms the entire deduction up front.

Expensing—or its close cousin, the investment tax credit—has been regularly used by presidents of both parties. John F. Kennedy was the first to enact an investment tax credit, in 1962, and more recently George W. Bush made partial expensing the centerpiece of his own stimulus plan in 2002. They are a potent tool for increasing investment at a low cost to taxpayers.

Full article here

                          

Watch the full episode. See more Nightly Business Report.

                          

No serious economist thinks higher dividend and cap gains taxes are efficient ways to raise revenue. Why not limit deductions for high earners instead?

Friday’s weak employment report reminds us anew of the flagging U.S. economic recovery. While the Obama administration discusses additional stimulus packages, Treasury Secretary Tim Geithner is arguing that we should roll back key elements of the Bush tax cuts passed in 2001 and 2003. The administration is particularly skeptical about the benefits of today’s lower rates on dividends and capital gains.

The tax on dividends, for example, is currently 15%, but it could increase to as high as 39.6% if the 2001 and 2003 tax cuts expire. On top of this, a new 3.8% tax on investment incomes for high-income earners begins in 2013 to help pay for ObamaCare. The administration’s arguments for higher taxes on capital center on fairness and the need for deficit reduction.

These arguments are seriously mistaken. The relationship between investment, capital and wages is such that workers are better off if capital is not taxed at all.

Think of the economy as a pie split among workers, savers and the government, with the government’s slice fixed. The savers’ slice will equal the after-tax return on each unit of the capital stock, and what’s left goes to workers as after-tax wages. The fairness advocates in effect claim that low tax rates on dividends and capital gains increase the share of the pie that goes to high-income savers. But the low tax rates increase the absolute size of the workers’ slice by making the entire pie bigger. That’s because low tax rates encourage capital accumulation, productivity and wage growth.

Full article here