How the Next President Can Return America to Prosperity

Don't look for President Obama or President McCain to save you, America. The tumbling housing market and rising gas prices will continue to plague the U.S. economy in 2009—and there is nothing either of those guys can do about it. Unless they do something about it.

That's the strange analysis of economics writer Daniel Gross over at Slate. In a recent web column, he writes that "the factors that influence the business cycle are...myriad, powerful, and unpredictable." But one big exception, he adds, is the president's ability to boost consumer spending by talking up the national mood.

Think about the juxtaposition of Hoover's cool response and Franklin Delano Roosevelt's exhortations to fear nothing but fear itself. George H. W. Bush's "Message: I care" didn't have a prayer in connecting with the anxieties of middle-class Americans when confronted with a sweet-talking Arkansas governor who oozed empathy.

But those words only worked when accompanied by deeds, he continues:

Presidents can function as mood enhancers only when the rhetoric is backed by action. FDR's inspiring speeches and fireside chats in 1933 were accompanied by a profusion of policy experiments, many of which worked. And without the stimulus provided by the Reagan tax cuts, the "Morning in America" theme of the Gipper's 1984 re-election campaign would have fallen as flat as Gerald Ford's 1974 exhortations to "Whip Inflation Now."

Me: This is odd on so many levels. For starters, Gross equates Reaganomics with the New Deal, one of which returned the country to prosperity and one of which didn't. Second, it's clearly wrong to assume that there's nothing that Washington can do to improve the economy in a rather short period of time other than juicing consumer morale. Today's business decisions are influenced by expectations about the future, as is the value of assets, such as stocks and real estate. Changes in government policy can change those expectations and perceptions for the better—as well as create a better growth path for the economy. Just imagine if the following were to happen:

1) The 2001 and 2003 tax cuts were made permanent, removing much uncertainty about future tax liabilities.

2) The corporate income tax rate were slashed to levels similar to our economic competitors—or even eliminated.

3) Social Security was made solvent in the long term by extending the retirement age and indexing benefit growth to inflation rather than wages.

4) The rate of nondefense discretionary spending (spending minus the Pentagon and entitlements) by the federal government were frozen for two years and then limited to inflation minus 1 percent.

5) Capital gains taxes were eliminated for investors with incomes under $250,000.

6) The energy industry was deregulated.

My guess is that the dollar, stock market, home values, and the economy would soar and energy and food prices would drop. (Economist Martin Feldstein recently made a similar point when he suggested that oil prices would tumble if it were made clear to the markets that the U.S. was moving toward less reliance on oil, such as through big subsidies for alternative energy.)

Actually, any one of those events would be terrific news for the business and the markets. The idea that we're at the mercy of powerful economic forces beyond our ability to dramatically influence is just flat-out wrong—especially since many of our current problems were created by bad government policy.

It's all such a 1970s way of thinking. That's when many gloomy experts told America that the Cold War, inflation, scarcity, and economic malaise would be permanent fixtures in our lives. Americans, they insisted, needed to lower their expectations of what was possible. Life was now more of a zero-sum game. The same meme is being recycled today. Don't believe it.