Summers: Let Bush Tax Cuts Expire

In case you missed Sunday's Meet the Press, Top Economic Advisor to President Obama indicated in no uncertain terms that the Bush tax cuts will have to expire, which of course would include elimination of lower rates on capital gains. Summers said "I don't think there's any question they have to be repealed. The country can't afford them for the long run. ... They have to be allowed to expire. What the timing will be, that's something that's going to have to get worked out. That's something that's going to have to get worked out through the legislative process."

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Rehab Taxes, Not Roads

In case you missed it, a very astute analysis of the current financial meltdown was offered in an op-ed in yesterday's WSJ by Alberto Alesina, professor of economics at Harvard, and Luigi Zingales, professor of finance at the Chicago Booth School of Business. Moreover, they suggest that rather than investing in highway projects, the economy needs the proper antidote to promote more saving and long term growth--temporary elimination of the capital gains tax.

More savings need to be invested, and firms need an incentive to invest in order to help aggregate demand in the short term and promote long-term growth. The best way to do this is to make all capital expenditures and research and development investments done in 2009 fully tax deductible in the current fiscal year.

A large temporary tax incentive may be just enough to jolt investors from their current paralysis to take action. Such a switch will also be fueled by the temporary capital-gains tax cut mentioned above, which will motivate people to move their savings from money-market funds to stocks, increasing valuations, investments and confidence.

Many are concerned about what we can do to help the poor weather this crisis. Unlike during the Great Depression, we have an unemployment subsidy that protects the poor from the most severe consequences of this recession. If we want to further protect them, it is better to extend this unemployment subsidy than to invest in hasty public projects. Furthermore, tax cuts have a much better effect on job creation than highway rehabilitation.

No doubt, it is much easier to sell the public and Congress a plan for more public works than tax cuts, particularly while Main Street despises Wall Street -- with some good reason. But the role of a good economic team is to courageously propose the right economic policy, even when it is unpopular. The role of a president is to sell it politically, as real change we can believe in.