A History of Short-Term Solutions

 

History proves that fiscal policies can be effective in stimulating private demand in a downturn. To be meaningful, however, the actions must be large enough to restart influential economic sectors and sufficiently broad-based to incentivize consumption. History also shows that temporary measures or narrowly targeted programs simply do not work.

The Obama Administration came into office in January 2009 during a severe economic recession. The fate of Lehman and Merrill Lynch had already been sealed, and that of other troubled financial giants overshadowed the financial markets. Unemployment was rising, mortgage financing had dried up, house prices were in full retreat, and construction was declining. Overseas, in many developed nations, the situation was even worse. Clearly, gloom hung heavily over the financial markets.

In early 2008, the Bush Administration had passed the Economic Stimulus Act in an effort to boost economic activity. The main features of this law included a $300 per person tax rebate for those with adjusted gross income of less than $75,000, an increase in the business investment tax credit, and an increase in the mortgage limit to be eligible for purchase by Fannie Mae and Freddie Mac. None of this proved to be adequate.

 

The new administration tried its own, vastly larger fiscal stimulus. This included a staggering array of targeted programs good for limited periods. Among them were the $860 billion spending program intended for “shovel ready” projects, the housing stimulus tax credit, the 2009 automobile stimulus credit in addition to Cash for Clunkers, the appliance rebate program, the solar tax credit program, the $250 social security payment check, the making work pay tax credit, and others lost to memory.

The U.S. economy is now struggling as these programs wind down. For example, the $8,000 first time home-buyers’ tax credit expired last December. Since its demise, housing activity and prices have declined and are just recently showing signs of life. The total reliance on government solutions has distorted the underlying strength of our private market system. The future of central planning by government is playing out before our eyes in the current budget deliberations. While much depends on the outcome, our economy will ultimately emerge as one of the most durable, not because of government programs, but because our economy, left to its natural instincts, remains full of promise and opportunity.

Alfred A. Lagan

By

Alfred Lagan is the founder and chairman of Congress Asset Management Company, a respected investment management firm in Boston, MA. Prior to starting Congress in 1985, he held senior investment positions in several financial services firms. Mr. Lagan holds an MBA from New York University with distinction, and a BA in economics from Iona College. He was born in New York City of Irish immigrant parents, and served four years in the Navy.

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