Sunday, July 31, 2011

Fixing the Economy

Now that Washington seems to be on the verge of a debt deal, it's time to do something that might actually work to boost economic growth. I will soon meet with my Congressman to pitch one idea for doing so that was inspired by my friend Carl Goldsmith, the chief investment officer of Delta Asset Management. I met with Carl and his colleagues last Wednesday in his office in Los Angeles. Carl rightly observes that one of the main drags on the US economy is the housing industry. In the past, it always rebounded from recessions with V-shaped recoveries, which would boost overall economic growth. This time, the industry remains in a deep recession, which is weighing on the overall economy’s recovery.

Housing starts have been hovering between 475,000 and 690,000 units per month, at seasonally adjusted annualized rates, since the end of 2008. That’s the slowest pace on record, which starts in 1959. Payroll employment in the construction industry has plunged 2.22 million from a record high of 7.73 million during April 2006 to 5.51 million during June.  There must be lots of construction workers among the 6.3 million Americans who have been without a job for more than 27 weeks, i.e., the long-term unemployed.

Carl and I agree that the best way to revive economic growth is to quickly reduce the huge overhang of unsold homes that is depressing both home prices and construction activity. During June, the inventory of single-family existing homes on the market totaled 3.31 million units. There may be another million houses that are in the process of foreclosure or are heading in that direction. Our plan is simple and cost effective:

(1) The federal government should provide a $20,000 matching subsidy toward a down payment on a house to any homebuyer who puts up at least the same amount and is approved for a mortgage loan. The program would be capped at two million existing single-family homes. So the cost of the program would be $40 billion. The purchased property would have to be the primary residence of the buyer.

(2) This program could be paid for by slashing the corporate tax rate on repatriated foreign earnings from 35% to 10%. We estimate that doing so could easily raise the $40 billion necessary to finance the program. Moody’s research recently estimated that at least half of US companies’ record $1,240 billion in cash balances is held overseas. It’s over there and not here because of the large repatriation tax. In recent conversations with top executives of several major US technology companies with cash overseas, Carl was assured that lowering that tax to 10% would bring most of the money to the US.

(3) Rental income would be tax free for 10 years for homebuyers who purchase existing single-family houses as rental properties. They would not be eligible for the down payment subsidy. The 10-year tax-free status of the rental income would be transferable to new owners during that period. The number of rental units under the program would be capped at one million.

The Obama administration has opposed lowering the repatriation tax, arguing that a similar program during 2004, when $300 billion returned to the US, was paid out to shareholders rather than invested in job creation. Our proposal would use the tax revenues from repatriated corporate profits to fund the down payment subsidy program. Combined with the incentive to new landlords, we believe that the overhang of unsold homes could be eliminated within a year. That should set the stage for a significant revival in home building and construction employment.

On May 20, 1862, Congress passed the Homestead Act, which accelerated the settlement of the western territory by granting adult heads of families 160 acres of surveyed public land for a minimal filing fee and five years of continuous residence on that land. Our New Homestead Act should be a win-win for all of us by accelerating the recovery in the housing market. We welcome your thoughts, which will appear in the comments section of the blog.


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