This morning on CBS radio, I once again heard that the economy is about to turn the corner to higher growth. The problem, of course, has been that the business reporter on that network has been reporting the impending move to higher economic growth for the last four years, and over that time growth has been slowing in general.
How can the economy be in such a stagnant place? What can be done to speed things forward?
Let's start with what does not work:
1. Standard Keynesian pump priming -- things like the government building infrastructure and increasing transfer payments. I say that these items do not work because we tried them and they failed. President Obama had, by far, the biggest stimulus measure in human history when he came into office, and it did essentially nothing. The recession ended before the stimulus took effect, and when the nearly one trillion dollars of spending kicked in, the economy essentially yawned and then laughed at at. There was no big uptick in growth.
2. Government subsidies to new, favored businesses -- this is crony capitalism. This is another method tried by Obama which failed miserably. Think of Solyndra and the many other "green energy" companies that were going to provide millions of jobs and instead gave us bankruptcies, no jobs and a convenient way for Obama to transfer government money to his friends and supporters. No matter what politicians think, they do not have the power to overcome the market forces in a free society.
3. Lower interest rates and Quantitative Easing -- This is another item which we know has lost its effectiveness. Short term interest rates have been near zero for over four years now. Long term interest rates are also at very low levels. The Fed has been pumping money into the economy through QE at levels that are shockingly high. It is not working. All that QE does is to push the stock and commodity markets higher. The economy, however, is not responding. (Don't make the mistake of confusing the stock market and the economy. At some point, the reality that the market has gotten way ahead of the economy will dawn on the world and we will see some pretty wild and terrible days on Wall Street.)
So what does work? Is there anything?
A. Increasing incentives for investment -- Investment is the single most important driver of economic growth. Let's be clear here; "investment" means business investment. I am not talking about the perversion of the term by Obama in which he calls increased government spending "investment". A new factory or a new computer program is investment; additional spending on food stamps is not.
The way to increase the incentives to invest is to allow people to get a higher return on the cash they put into these efforts. One simple way to do this is to lower the corporate income tax rate. Right now, America has the highest corporate tax rate in the world. Cutting that rate from 35% to 20% would make all sorts of investments that previously were marginal into investments worth making. There would be an immediate boost to economic growth.
A cut of this sort or even larger could be paid for simply by closing the special deals and other loopholes that exist in our corporate tax structure. There is no reason why General Electric should make five billion dollars and pay no tax while the small store on the corner makes one hundred thousand and has to pay 35% of that in taxes. Returning fairness to the corporate tax law and using the proceeds to reduce the rates would do much for the economy.
B. Reducing the barriers to investment -- If you have ever started a business, you know that there are enormous numbers of government restrictions that prevent your activities or, at least, make them much more difficult. The other day, an eleven year old girl was told by her local government that she could not sell mistletoe during the holiday season (she was trying to help raise money for getting braces on her teeth.) The government suggested that she beg instead. The reason she was barred from selling mistletoe was that she had not gotten all the necessary licenses and approvals. The story of this girl is just an indication of the sorts of things that stand in the way of investments.
Right now, there are all sorts of land use barriers, environmental restrictions, safety rules, informational requirements, licensing rules, and other regulations that every business must follow. In many instances, these rules act to block investment as completely as if there were a law prohibiting the investment. There is no need to get rid of all regulation; some is surely necessary. We need, however, to get rid of the rules that don't work as intended, the ones that are duplicates, and the ones that put too great a burden on business. Sadly, this effort would require an intelligent look at our current regulatory structure, something that is unlikely to come out of Washington these days.
C. Reducing the level of litigation -- Litigation could be looked at as a barrier to investment or a reduction in return, but it really is something different. Sadly, our legal system has been perverted into a method to extort funds from companies in a wholly legal manner. Every day, companies are sued for things that clearly are not compensable. Most of these suits end in settlements which drive up the cost of business and do nothing other than enrich lawyers. Next time you see a stock that has a major drop in its share price, check back over the next month to see just how many law firms will have announced that they are "investigating" and then filing suit. For the lawyers, it is like playing roulette with mostly free chips. They put in the time to get the suit started and for some they get a settlement. Something has to be done to increase the cost of this sort of baseless suit. Only if they are discouraged in this way will the scourge of inappropriate litigation be taken off the back of the economy.
Aside from the trial lawyers themselves, there are really no people who defend the garbage lawsuits that plague our system. Sadly, however, since trial lawyers are such a big part of the coalition that supports the Democrats, little is likely to be done on this front.
How can the economy be in such a stagnant place? What can be done to speed things forward?
Let's start with what does not work:
1. Standard Keynesian pump priming -- things like the government building infrastructure and increasing transfer payments. I say that these items do not work because we tried them and they failed. President Obama had, by far, the biggest stimulus measure in human history when he came into office, and it did essentially nothing. The recession ended before the stimulus took effect, and when the nearly one trillion dollars of spending kicked in, the economy essentially yawned and then laughed at at. There was no big uptick in growth.
2. Government subsidies to new, favored businesses -- this is crony capitalism. This is another method tried by Obama which failed miserably. Think of Solyndra and the many other "green energy" companies that were going to provide millions of jobs and instead gave us bankruptcies, no jobs and a convenient way for Obama to transfer government money to his friends and supporters. No matter what politicians think, they do not have the power to overcome the market forces in a free society.
3. Lower interest rates and Quantitative Easing -- This is another item which we know has lost its effectiveness. Short term interest rates have been near zero for over four years now. Long term interest rates are also at very low levels. The Fed has been pumping money into the economy through QE at levels that are shockingly high. It is not working. All that QE does is to push the stock and commodity markets higher. The economy, however, is not responding. (Don't make the mistake of confusing the stock market and the economy. At some point, the reality that the market has gotten way ahead of the economy will dawn on the world and we will see some pretty wild and terrible days on Wall Street.)
So what does work? Is there anything?
A. Increasing incentives for investment -- Investment is the single most important driver of economic growth. Let's be clear here; "investment" means business investment. I am not talking about the perversion of the term by Obama in which he calls increased government spending "investment". A new factory or a new computer program is investment; additional spending on food stamps is not.
The way to increase the incentives to invest is to allow people to get a higher return on the cash they put into these efforts. One simple way to do this is to lower the corporate income tax rate. Right now, America has the highest corporate tax rate in the world. Cutting that rate from 35% to 20% would make all sorts of investments that previously were marginal into investments worth making. There would be an immediate boost to economic growth.
A cut of this sort or even larger could be paid for simply by closing the special deals and other loopholes that exist in our corporate tax structure. There is no reason why General Electric should make five billion dollars and pay no tax while the small store on the corner makes one hundred thousand and has to pay 35% of that in taxes. Returning fairness to the corporate tax law and using the proceeds to reduce the rates would do much for the economy.
B. Reducing the barriers to investment -- If you have ever started a business, you know that there are enormous numbers of government restrictions that prevent your activities or, at least, make them much more difficult. The other day, an eleven year old girl was told by her local government that she could not sell mistletoe during the holiday season (she was trying to help raise money for getting braces on her teeth.) The government suggested that she beg instead. The reason she was barred from selling mistletoe was that she had not gotten all the necessary licenses and approvals. The story of this girl is just an indication of the sorts of things that stand in the way of investments.
Right now, there are all sorts of land use barriers, environmental restrictions, safety rules, informational requirements, licensing rules, and other regulations that every business must follow. In many instances, these rules act to block investment as completely as if there were a law prohibiting the investment. There is no need to get rid of all regulation; some is surely necessary. We need, however, to get rid of the rules that don't work as intended, the ones that are duplicates, and the ones that put too great a burden on business. Sadly, this effort would require an intelligent look at our current regulatory structure, something that is unlikely to come out of Washington these days.
C. Reducing the level of litigation -- Litigation could be looked at as a barrier to investment or a reduction in return, but it really is something different. Sadly, our legal system has been perverted into a method to extort funds from companies in a wholly legal manner. Every day, companies are sued for things that clearly are not compensable. Most of these suits end in settlements which drive up the cost of business and do nothing other than enrich lawyers. Next time you see a stock that has a major drop in its share price, check back over the next month to see just how many law firms will have announced that they are "investigating" and then filing suit. For the lawyers, it is like playing roulette with mostly free chips. They put in the time to get the suit started and for some they get a settlement. Something has to be done to increase the cost of this sort of baseless suit. Only if they are discouraged in this way will the scourge of inappropriate litigation be taken off the back of the economy.
Aside from the trial lawyers themselves, there are really no people who defend the garbage lawsuits that plague our system. Sadly, however, since trial lawyers are such a big part of the coalition that supports the Democrats, little is likely to be done on this front.
1 comment:
Yes!!! Investment is the single most important driver of economic growth. I invest my money in the insurance and share market.
Regards,
Komatsu Parts
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