“You never want a serious crisis to go to waste,” as President Obama’s adviser, Rahm Emanuel, said in the early days of the Obama presidency. Mr. Emanuel’s point was that public uncertainty in a crisis gives the party in power greater license, enabling it to execute on pre-crisis agenda items.
The Emanuel Rule is a wonderful rule. But even with a doozy of a crisis like the current one, the rule can’t work for a party that forgot its own agenda. And that seems to be the case for the Republican Party currently. Instead of springing to meet traditional Republican goals, the Trump administration appears to be delivering its opponents’ program: spending like crazy, offering tax rebates in the thousands of dollars designed to encourage instant spending, bailing out target industries and widening government authority. In an election year, it seems, we are all Democrats.
The Republican memory loss isn’t just a pity; it’s a tragedy. That’s because delivering policy that fulfills the Republican Party’s old free-market agenda actually could do more than we imagine for the stock market, stability, long-term employment prospects and general American prosperity. The theories of John Maynard Keynes, the economist who taught us all that short-term stimuli such as monetary easing are the tools of choice in a crisis, don’t seem to be working. The Fed already has eased so much that the Federal Funds rate is down to nearly zero percent. This is the moment for the free-marketeers to move brashly. Why not exploit circumstances to make good on their old promise of small government and give the economy a kind of reset?
Herewith, three outside-the-box proposals that the president or lawmakers might offer:
Halve the capital gains tax rate — not temporarily but permanently. The current top rate on long-term capital gains is 20 percent (never mind the 3.8 percent surcharge, for the moment). Dropping that rate to 10 percent is a move that, all by itself, will accelerate the stock market’s recovery. That is because the entire world is aching — yes, even now — to jump into U.S. equities. The hesitation only comes because investors across the globe want to buy when American stocks hit their absolute cheapest, and some believe the market isn’t there yet.
Since a tax is a cost, cutting the capital gains tax is the investment equivalent of dropping the share price. When you take into account the actual plunge of the share prices, cutting the capital gains tax is the equivalent of putting a “Best Bargain Ever” sign over U.S. stocks. Not only foreigners, but also Americans, will pile in. The revenues from increased activity will offset some or all of the losses from the lower tax rates. After a dramatic capital gains cut, the American mood will shift from “sell” to “buy.”
Halving the capital gains rate is a dramatic move that requires action from Congress. If that action is not possible, then at least President TrumpDonald TrumpOhio Republican who voted to impeach Trump says he won't seek reelection Youngkin breaks with Trump on whether Democrats will cheat in the Virginia governor's race Trump endorses challenger in Michigan AG race MORE might extract a commitment of “no new taxes” from both parties, an idea that Stanford University Professor John Taylor, a former Treasury undersecretary, has mooted.
Another no-brainer measure that some argue requires no legislation: Indexing capital gains for inflation. That is, tax the real value of the increase of a stock between the time it was bought and the time it was sold. Americans have long accepted the indexation of the income tax; brackets move up with inflation. It’s only common sense to make a similar adjustment in the case of capital gains as well.
Create “Flu IRAs.” Giving out checks to American citizens to encourage economic activity, as President Trump plans, comes straight out of the progressive Keynesian philosophy, a philosophy that Democrats favor. The idea — but it’s just an idea — is that, with cash in their hands, Americans will feel confident and head to the mall. A free-market version of such distribution exists: Create a new form of individual accounts, “Flu IRAs,” for every worker. Then put the cash in the IRAs, and let people buy stocks and bonds for their retirement.
Some thinkers (those who are even bolder than I am) have mooted the idea of the government wading into the equity market, like J.P. Morgan during the Panic of 1907, and buying up enough shares to bring back confidence. Those shares could then be moved directly into the Flu IRAs.
This Flu IRA is anathema to Keynesians since, of course, such an IRA locks up cash for the long term. That’s the opposite of sudden temporary stimulus. Yet, the Flu IRA offers several advantages. It too exploits the fact that share prices are low, and therefore are a great bargain for Americans. The Flu IRA would shift American thinking, giving more Americans the very scale of stake in markets that all the failed Social Security privatization plans of the past envision. And by introducing the Flu IRA, as opposed to doling out dollars, we don’t have much to lose. In its day the Bush administration also gave Americans money to spend in the form of tax breaks. As it happened, there was a national emergency then, too — the Sept. 11 terrorist attacks. The administration expected Americans would spend the money. Instead, they squirreled away the cash, preferring to invest in the future. In other words, when people are anxious enough — now — Keynesian stimuli don’t work anyhow.
Reduce regulations on small business, permanently. As retailers struggle, plans for debt moratoria already are being announced. But the federal government and states also could give small businesses — the kind that will go under in six weeks without customers — a giant regulation break. Regulation, after all, is just another tax, a cost of doing business. I’ll allow the reader to put forward a favorite candidate for abolition.
The only reason the Trump administration isn’t mooting such ideas is that it’s afraid they won’t be popular in an election year. Given the extent of the coronavirus catastrophe, however, voters are looking for leaders, not politicians. If necessary, the administration could combine its free-market moves with humanitarian measures backed by Democrats.
There are models for such bold retrenchment in America’s past. One example was led by Presidents Warren Harding and Calvin Coolidge, who, in the great uncertainty following World War I, determined to strengthen the relative competitiveness of the U.S. by dramatically lowering the income tax and setting the capital gains rate at a low permanent rate, 12.5 percent. Cash and gold flowed to the United States, American business flourished, and the average American saw the standard of living improve dramatically.
A more recent example relevant to the U.S. may be Eastern Europe. There, in the late 1980s and early 1990s, national governments exploited their own crisis — the collapse of the Soviet empire — to drastically alter their economies, privatizing whole sectors and handing out shares of stock to regular citizens.
All of these ideas sound impossible but actually are more feasible precisely because of the Emanuel Rule. A corollary to the rule is that a nation in shock is docile. At the moment, the country is indeed in shock, with the vast majority of citizens turning to the private sector, whether the stock market or vaccine manufacturers, for salvation. Almost half of all American workers, about the share in defined contribution plans like 401(k)s, look to Wall Street to revive their retirement dreams. The drama of the stock market takes the wind — for the moment — out of the redistributionists’ sails.
Ronald Reagan once borrowed a question from the old religious sages. That question is worth asking this time 'round as well: “If not now, when?”
Amity Shlaes chairs the board of the Calvin Coolidge Presidential Foundation and is the author of six books, including “Great Society: A New History” (HarperCollins). She is a presidential scholar at The King’s College in New York City. Follow her on Twitter @AmityShlaes.