ECONOMIC STIMULUS -- GOOD AFTER THE MORNING AFTER?
by Peter Bearse
The "economic stimulus" package thrown together by the President and Congress has been rushed through the House. It now proceeds to the Senate. The stimulus is analogous to a "quickie." Will the Senate, whose members are enabled by 6 year terms to take a longer-term, sometimes wiser view, improve the quick fix? Not likely, but let us hope for more delayed rather than instant gratification.
Any short-term package needs to be crafted so that it does not adversely affect the economy's long-term prospects. Is it more than Congress' usual over-reaction to events and media hype? What's needed so that the stimulus amounts to more than bribing people to spend their own tax money, adding the bill to the already huge overhang of the federal deficit? What more far-sighted ingredients have been left out?
We live in a new age of entrepreneurship, innovation and science-based economic development an age in which conventional economic approaches may not work. What about more entrepreneurial approaches?, such as:
1) Treating the economic downturn as an opportunity, not just to spend but to invest "to begin to work down another huge overhang" of the country's unmet "infrastructure" needs for roads, bridges and public facilities. This would also add millions of jobs to the stimulus mix. Federal dollars should go to state and local governments that have projects ready to go.
2) Beginning to solve the Social Security problem, also basically an investment issue by beginning to invest some of the Social Security funds into new, growing business enterprises. New, young and small enterprises are the greatest sources of job creation and economic growth.
3) Providing greater incentives for private investment in new, science and technology-based enterprises, such as: Further cutting the tax rate on capital gains; and providing tax credits for patient money placed in new or early- stage venture investments.
After all, a fundamental economic problem faced by our country is not consumption; it is investment. We suffer from over-consumption and under-investment. We've let foreigners finance our overspending. We've put our country at risk. China is holding billions of dollars of our currency and additional billions of dollars of our bonds. When you next go to Walmart or Hallmark, look at where the goods you buy are made. Most are made in China. So, when you try to put the Congressional rebates to work, at least try to buy American.
Peter Bearse, Ph.D., International Consulting Economist, Fremont, 1/31/08
NH INSIDER
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All of the comments you make are good practical ways for the country to begin to right itself economically, with the possible exception of 2- there isn't some huge pot of money in a social security lock box somewhere.
But these are not ways to provide short term stimulus to the economy. By the time infrastructure contracts are let and money starts to flow from them into the economy, this recession will be receding fast in the rearview mirror.
We have already cut taxes on the rich substantially under the current administration. Investors have ample rewards for taking risk, and reeducing the tax on long term investments from 15% to say 10% is not going to change behavior. If this was the solution, we wouldn't be entering into a recession now. Cutting taxes on the rich should not be the default solution to every economic speedbump. I agree that we under-invest, but the solution to this is not simply lower capital gains taxes. These taxes reward investors in companies growing in China in the same way they reward investors in companies growing in the USA. Where is the sense in that?
"We have already cut taxes on the rich substantially under the current administration. Investors have ample rewards for taking risk, and reeducing the tax on long term investments from 15% to say 10% is not going to change behavior. If this was the solution, we wouldn't be entering into a recession now. Cutting taxes on the rich should not be the default solution to every economic speedbump. I agree that we under-invest, but the solution to this is not simply lower capital gains taxes."
Taxes have been cut on "the rich" because that is where you find marginal rates where changes effect behavior. Data show that tax cuts affecting the upper 1% of income earners increase both tax yield, and the share of taxes paid, by "the rich. You ignore "supply side" effects.
I recognize the lags in getting money into people's hands. That is why I state that federal money should go to expedite state and local projects that are "ready to go." This is, of course, contrary to the usual Congression impulse to spread money around whether or not it would be quickly or contructively used.
As for Social Security (SS),this is but one example of how one needs to treat the problem of recession as an opportunity to begin to solve the basic problem of SS -- the waste or misinvestment of contributor's money. Of course, there's no SS lockbox but the money is either being spent on federal budget items or being "invested" in federal debt. Why do you think SS contributor's earn negative real rates of return on their contributions? ["real" = about 2% less the rate of inflation] PETER
I don't know why you put quotes around "the rich" other that to make the point that I view the issue in class terms. When it comes to tax equity, I do. The US has been on a 25 year program of reducng tax equity and increasing income disparty. I know that many Republicans applaud this and think it is right and natural. I don't.
As far as the stimulus package goes, one of the criticisms I hear is that it will not get out until May, and this might be too late. There is no way even a tiny fraction of this money could get into the economy if it was being spent on infrastructure. This is not a criticism of spending more on our infrastucture. We should. It just isn't a good way to provide short-term stimulus.
To quote the statistic about the increase in the percentage of taxes paid by the richest 1% of Americans wthout also noting that their share of national income increased by a similar or greater amount is sloppy at best.
I don't find the quality of the WSJ reporting to be particularly high when they are discussing issues of tax equity.
The capital gains tax is currently 15%. Reducing it further is not likely to change behavior.
Social security is not strictly an "investment" asset, it is an insurance policy. I would be very, very surprised if contributors earn a negative return, and I would be interested in the origin of that statistic. The people who currently receive social security will take out of the system much more than they ever put in. Having said that, I agree with you that investing SS money in real assets makes sense, but it needs to be done in flush times when we have a surplus.
Hooray for Senator Gregg and a few others who are telling the truth about the rebates--buying popularity before the next election. Gimmicks won't help our economy only good fiscal policy of limted taxes and limited government will help in the long run. \
Keep the $600 and put it towards my future, I don't want it put on a credit card by the government and then have them ask US to pay it back plus interest in the years to come.