How to Get the Stock Market Back

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Election years make cowards of governments.  How else can you explain the White House response to the challenge of markets in panic over the new coronavirus? The Trump administration has moved into a defensive crouch. Its best ideas seems to be to rail at the Federal Reserve, or to reduce the payroll tax.  A quick-stim payroll tax cut may be just the ticket for an administration desiring to supply a momentary pocketbook break to a maximum number of voters. The president isn’t doing more because – or so goes the logic – to propose dramatic changes requiring legislation is to run the danger of humiliating rejection by Congress. And this White House, any White House, wants to look strong in an election year.

But the reality is that a temporary payroll-tax cut is a baby-step Keynesian move that won’t get America its market back. And one can’t count on the Federal Reserve, whatever it does, to restore our economy single-handedly. It’s worthwhile, therefore, to suspend disbelief for a moment and at least consider the “impossibles” -- what could be done for markets by the White House and Congress if this were not an election year. There are plenty of measures that would bring the Dow Jones Industrial Average or the S&P 500 roaring back to where they were before the panic – or yet higher. And those increases would come not just because of post-panic euphoria, but also because the prospects for growth in the United States would ratchet upward. Herewith are four transformative growth proposals:

  • Cut the capital-gains tax rate. The top rate now is 20% (for the moment we won’t count the surcharge of 3.8%), which obtains for most assets held over a year. Drop that capital-gains rate to 10%, and vastly reduce the tax obligations of all the Americans who felt forced to sell in recent weeks. More importantly, a capital-gains rate cut would increase the attraction of the U.S. to foreign investors at a time when foreigners are scratching their heads at the U.S. panic. A rock-bottom capital gains rate is the equivalent of putting out a sign: “World-Class Bargain.”
  • Skip the bailouts — already under discussion -- and figure out how to use equity as a tool to help all Americans. Take advantage of low equity prices to turn more U.S. citizens into shareholders. This work starts by establishing individual accounts for equities for each citizen, as part of Social Security. After all: One of America’s long-term goals -- indeed, its long-term necessity -- is to get better returns for the Social Security pension investment. Stocks, even when you count in dramatic plunges like the recent ones, average better returns than the traditional Social Security program (which today invests in ultra-low interest rate products that cannot promise to deliver decent pensions).  When better than now, with equities at alluringly low level, for citizens to get their starter shares? Once the accounts are established, or even before, the government – or individual citizens -- can wade into stock markets and buy the securities that will go into those accounts. Most of us don’t like the idea of government playing in stock markets, which is why the individual account part of this procedure is key. It’s also key that the government invest in diversified funds, not individual stocks (no Solyndras this round).  Getting a new nest egg will warm Americans' hearts and, eventually, their pocketbooks.
  • Reschedule America’s debt and lengthen maturities, issuing 50-year and 100-year bonds.  The Federal Reserve dropped interest rates to stimulate markets this week, but that drop and the market plunge also give the government an opportunity of a lifetime. We have some 30-year debt, currently trading at a yield of about 1.4%. New 50-year bonds would probably sell at 1.5%.  Why not shift the debt to longer-term maturities and lock in permanent lower interest rates for our government? That would be another “Buy America” signal to the world’s investors.
  • Send a strong message that America is going to move past the crisis because of American capitalism, not despite it. The reality is that the private sector is the likeliest party to put a definitive end to the coronavirus episode. After all, it is Moderna and other pharma companies, not the Food and Drug Administration, that are likely to deliver the vaccine.

Which takes us to a broader point: The very reason the United States is likely to weather the coronavirus better than China is because we are an open society. The Chinese regime spent weeks hiding from itself and others the extent of the new virus spread. America will endure our pandemic better because Americans are healthier than Chinese, health being a function of prosperity that comes from capitalism. In other words, the impulse to favor a shift to authoritarianism – the usual response in war or health emergency – has got to be shaken off.

As we type these suggestions we can hear the skeptics rattle off objections. A capital gains rate cut would help the rich. How would the government share purchases operate? What new statute is necessary?  The idea of altering Social Security to include private accounts will fuel the rhetoric of socialists, who will decry a government that wants “to put citizens in risky shares.”

Sure, some of these ideas may sound wild and woolly, and require great expenditures of political capital.  But the reality is that not moving in dramatic fashion is riskier for both the country and the government.  If America does not blare its commitment to strong growth, the country may move into a 1970s style stagnation, a chain of trouble so serious that the original crash trigger, the coronavirus, soon fades in memory.

In the preceding financial crisis, President Obama’s adviser Rahm Emanuel said that “a crisis is a terrible thing to waste.” The maxim holds so true that it would be a shame if only one group took advantage of it.  If pro-government policymakers use crises to expand government, pro-market thinkers can play the same game and use a crisis to shrink government, or put it on sounder fiscal footing. Pro-growth policies nearly always prevent long-term malaise, especially pro-growth policies that strengthen government solvency. Even in an election year.

Amity Shlaes is the author, most recently, of “Great Society: A New History.” 

Brian Wesbury is chief economist at First Trust Advisors L.P.

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