THE BLOG
02/02/2009 07:13 pm ET Updated May 25, 2011

A Better Stimulus for the Economy

The problem with our economy is not weak spending, which is just a symptom of our predicament. The root problem is lack of confidence in the future. We already know that spending is not the cause of economic prosperity. In fact, profligate spending is exactly what got us into the tight spot we are in. Borrowing even more from the Chinese and adding that on top of our already bloated budget is monumentally irresponsible, especially given that the Chinese might not be forever willing to extend us credit at low interest rates.

In addition, by launching spending programs, bailouts and subsidies to private enterprise, we effectively make all of us poorer. Wholesale government intervention creates the most unintended consequences: in the 1930s, the New Deal's artificially high wages kept unemployment up for a decade. In the 1970s price controls created shortages.

Forcing the American tax payer to subsidize this parlous state of affairs is not smart policy. Sure, adjustments brought about by capitalism are not pleasant, but they make the system more transparent, more efficient and more fair, because they weed out the unworthy and incompetent.

But there is a better way to create stimulus. Professor Russell Roberts of the economics department at George Mason University has proposed a more efficient way to stimulate the economy, by eliminating the payroll tax.

The payroll tax (15%) is a regressive tax, which means it disproportionately burdens low income earners. It is also mischievously deceiving, which is not becoming of an administration that promises to be transparent: while most people wrongly believe half the payroll tax is paid by employers, the fact is the tax effectively lowers employees' compensation. Therefore, eliminating the payroll tax will create jobs and spur stimulative spending by the private sector.

If you are worried about the impact on the deficit, you should know that the payroll tax currently generates about $700 billion, less than President Obama's stimulus plan that cleared the House last week. And keep in mind that if we cut just 10% of all departments in government -- nothing draconian, simply bringing them to the same level they were two years ago -- we save $250 billion annually.

If you are worried about the future viability of Social Security, remember that the current payroll tax is not used towards future social security payments, but to pay current entitlements and other ongoing government expenditures. Either way, Social Security and Medicare are not practical solutions. Those are fake pension and insurance programs that have been effectively bankrupt for a long while. It is better, Professor Roberts perspicaciously suggests, to make Social Security and Medicare a safety net program for the people who really need it, and let richer Americans who can afford it handle their own retirements.

We should recall Thomas Jefferson's famous maxim: "a government big enough to give you everything you want, is strong enough to take everything you have", and choose tax reduction as a superior solution to another growth spurt for Washington D.C., in a futile effort to jump start the economy using the very same methods that got us into this crisis.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.