With all the running I am doing lately, I have had the opportunity to think about possible solutions to moving the nation forward out of the economic quagmire in which we find ourselves. First, I will talk about immediate things to stimulate the economy, how some plans are just plain wrong and finally, a long term solution to properly incent capital formation, stabilize job creation and eventually balance the federal budget. As many of my faithful readers will recall, I am all about teaching people to fish so they can live for a lifetime, not giving them a fish so they can eat today.
Stimulating the Economy
We need to start from an agreed upon premise that the U.S. economy is dependent upon consumer spending. We can make the best widget in the world, but if no one is buying widgets, then we might as well be pissing in the wind while widget inventories go through the roof. In the ‘80’s, the federal government drove consumer spending through a re-tooling of the military industrial complex in a strategy to out-spend the Soviet Union on defense and drive the USSR to the brink of bankruptcy. During the ‘90’s, true economic expansion through productivity gains mostly driven by technological advancements added jobs to the economy and drove per capita Gross Domestic Product at an average annual 4.5% growth rate, balanced the budget and led to federal budget surpluses. During the first decade of the 2000’s, we decided to harvest some of the growth benefits and give tax revenues back to taxpayers, in the hope that they would use those extra dollars to spur additional consumer spending and business investment. Well, under the burden of a terrorist attack, two un-funded wars and an un-funded prescription drug plan all driving federal budget deficits higher and crowding out of investments for business expansion by having cash being driven to safer, more secure investments, per capita GDP only grew at an average rate of 3.45%.
Fiscal discipline not only was thrown out the window by government, but the economy as a whole sought out ways to make a quick buck. By investing and borrowing to invest in financial assets and shortening capital gains holding periods, the markets were no longer places to stimulate capital formation for business growth; they became parachute factories, granting golden, platinum, even diamond parachutes to corporate management whose only concern was this quarter’s earnings number. The markets also gave business owners the opportunity to cash out and leave new shareholders holding the bag with no insight to what made the business marketable to begin with. This resulted in cost cutting being the primary way to drive profits; on the backs of the line employees whose jobs were sold off to cheaper markets. Investment of cut taxes in the markets also drove prices for both equity and debt securities causing the largest pricing bubble for financial assets (including real estate, equities and debt securities) in generations. As we all know, starting in 2007, it all came crashing down. While the markets over-reacted on the way up, they also over-reacted on the way down, losing 8 million jobs over a 13 month period. Businesses are still overly cautious because they have no confidence that the American consumer will come back to spending like they did in the past. In order to get things moving again, we need, yes, a REAL STIMULUS BILL. Almost a WPA for the 21st Century.
The federal government spends billions of dollars in unemployment insurance to provide a safety net to the real victims of this recession. All this spending goes on while roads, bridges, electrical power grids, water, sewer and all types of infrastructure goes un-repaired. BY employing the un and under employed in infrastructure projects, we can kill two birds with one stone. It is not the time for more tax cuts. The last stimulus bill included over $275 billion in tax cuts for people who did not really have any money in the first place. The middle class tax cuts in the ARRA went to people who LOST THEIR JOBS, for the most part. Across the country, we could start on a decade’s worth of work to repair and update the nation’s infrastructure in order to keep hold of our place as the world’s largest and most productive economy. By repairing 20th century infrastructure and building a foundation for the next century (high speed rail, green energy and agricultural advancements), we can also employ millions of workers and have the program PAID FOR with no addition to the long term debt of the nation. For every dollar that goes into unemployment benefits, the economy sees $1.67 in activity. For a 10 year, $5 trillion infrastructure package (structured with loan guarantees, direct funding for public projects and low interest loans to expand domestic material manufacturing), the economy will grow by over $9 trillion; paying for itself with increased tax revenues. These infrastructure investments will also lessen local government burdens of maintenance and will give states the opportunity to re-coup “rainy-day” funds to weather the next economic storm. Like Reagan did in the ‘80’s, we need to have government spur consumption.
Long Term Economic Stability
As I stated above, short term profits came to many Americans at the expense of long term sustainability of the U.S. economy. We need to have the capital markets return to their role as the bastion of capital formation and business expansion. To match the incentives of shareholders and management AND WORKERS, I propose ELIMINATING THE CAPITAL GAINS TAX; with one caveat: As the holding period of an equity security extends, the capital gains tax rate will fall. Starting at a rate of 40% in year one, the rate will fall to zero by the end of year 5. This will help to better stabilize the markets and have companies valued for their acumen and success, rather than just money flows. Management will be more inclined to work towards long term value creation rather than spiking quarterly profits to maximize the current value of their stock options. Also, long term value creation will best serve workers as well, since capital looking for long term returns will flock to those economies that have a strong sense of the rule of law and property rights. Long term value creation and business expansion will lessen the burden of government to provide for those needing a hand up, since they will be working, too. A lessened burden lowers expenditures, a domestic energy program lessens the need to project military power and an expanding economy raises tax revenues; all pointing to a balanced federal budget.
For the short term, let’s fix stuff; it probably should be done every 50 years or so anyway. For the long term, let’s have a long term view; because even though we are each in it for ourselves, we are all in it together.