When it comes to economics, it's surprising how little many in the media understand. It's even more surprising how many in Congress don't understand.
Let's look at a simple issue: what causes faster economic growth.
1. In the last few years, we've heard a number of items proposed to increase economic growth. President Obama once had an economic program that consisted of increasing the minimum wage, starting universal pre-K for children and increasing environmental regulations. The current Democrat plan for a "Better Deal" is not much different from that although they throw in a major government infrastructure program. President Trump is pushing tax reductions, especially for business, as well as major cuts in regulation, a huge infrastructure construction program and promotion of domestic energy production. None of these are guaranteed to work, but without a doubt, the Obama plan was guaranteed NOT to work and the current Democrat plan also has little chance for success.
2. The most important driver of economic growth is business investment. This is not a political position, but a statement of economic certainty. If you think about it, it should make sense to you. If a business invests a million dollars in a new facility, it will provide jobs and new economic activity not only from the construction but also from the ongoing use of that facility after it is completed. The profits made from the new facility will also provide cash for additional investments in the future. Raising the minimum wage, at best, means that a small portion of the population will have some additional cash to spend each week. That will help the economy, but at the same time the employer will have less to spend and invest. These tend to balance out. On top of this, the higher price put on labor makes the business less competitive and drive the employer to try to automate to reduce the need for labor. For the economy as a whole, it is a bust. Infrastructure construction by the government provides a one-time boost to the economy. Unlike business investment, however, it does not provide ongoing profit improvements to continue to help in the future. Consider the effect of rebuilding a bridge as an example. The traffic flowed over the bridge before the repair and after that work as well. It doesn't change the costs of nearby businesses.
3. The best way to get more business investment is to give those businesses an incentive to make such investments. The only things that do that are tax reductions or investment tax credits and the like. Cutting tax rates mean that the after tax return earned on an investment is increased, thereby making that investment more appealing.
4. Ending regulations that increase the cost of doing business also will bring more investments. First, the extra money left with the businesses when the regs are removed will be available for investment. Second, the absence of certain regs means that the total cost of the investment will be lowered and the investment again will be made more appealing.
Without a doubt, the program of reducing taxes and regulations on business is most likely to produce increased economic growth. The analysis does not stop there. We need to look also at why faster economic growth is important.
What are the benefits of increasing the rate of growth in the USA from under 2% to 3.5%? Some Democrats say that the only folks who benefit from that are the rich, but that just shows how little they understand the issue. Let's start with something near and dear to the Democrats, government spending. An extra 1.5% growth in the US economy means that during the first year, there will be about an additional quarter of a trillion dollars of goods and services produced in the USA. Since the government generally receives in revenue about 20% of GDP, this means an additional 50 billion dollars for the government. Then in the second year, there will be more additional growth, so the federal government will have an additional 100 billion in income. This will continue over time.
It's not just the federal government that benefits, however. The extra quarter of a trillion dollars in the first year will need labor in order to be produced. Think how many extra jobs will be created just to produce this extra bit of goods and services. Then think how many people will get raises because their employers are now more profitable. Then think how many people will see their investments pay more dividends as the companies earn more. Since more than half the country owns stock either directly or through their retirement plans, this will affect a great many people.
Then there's the increase in the overall strength of the American economy. For the last 100 years, the USA has been a world power because our economy has been so strong. Additional growth will maintain that strength.
None of this is rocket science; it ought to be rather apparent to anyone who carefully considers the subject. Nevertheless, the amount of misinformation and ignorance on the subject of economics is appalling.
We all need to make sure that our congressmen and senators understand that we are expecting them to enact a tax measure that will above all else promote economic growth.
Let's look at a simple issue: what causes faster economic growth.
1. In the last few years, we've heard a number of items proposed to increase economic growth. President Obama once had an economic program that consisted of increasing the minimum wage, starting universal pre-K for children and increasing environmental regulations. The current Democrat plan for a "Better Deal" is not much different from that although they throw in a major government infrastructure program. President Trump is pushing tax reductions, especially for business, as well as major cuts in regulation, a huge infrastructure construction program and promotion of domestic energy production. None of these are guaranteed to work, but without a doubt, the Obama plan was guaranteed NOT to work and the current Democrat plan also has little chance for success.
2. The most important driver of economic growth is business investment. This is not a political position, but a statement of economic certainty. If you think about it, it should make sense to you. If a business invests a million dollars in a new facility, it will provide jobs and new economic activity not only from the construction but also from the ongoing use of that facility after it is completed. The profits made from the new facility will also provide cash for additional investments in the future. Raising the minimum wage, at best, means that a small portion of the population will have some additional cash to spend each week. That will help the economy, but at the same time the employer will have less to spend and invest. These tend to balance out. On top of this, the higher price put on labor makes the business less competitive and drive the employer to try to automate to reduce the need for labor. For the economy as a whole, it is a bust. Infrastructure construction by the government provides a one-time boost to the economy. Unlike business investment, however, it does not provide ongoing profit improvements to continue to help in the future. Consider the effect of rebuilding a bridge as an example. The traffic flowed over the bridge before the repair and after that work as well. It doesn't change the costs of nearby businesses.
3. The best way to get more business investment is to give those businesses an incentive to make such investments. The only things that do that are tax reductions or investment tax credits and the like. Cutting tax rates mean that the after tax return earned on an investment is increased, thereby making that investment more appealing.
4. Ending regulations that increase the cost of doing business also will bring more investments. First, the extra money left with the businesses when the regs are removed will be available for investment. Second, the absence of certain regs means that the total cost of the investment will be lowered and the investment again will be made more appealing.
Without a doubt, the program of reducing taxes and regulations on business is most likely to produce increased economic growth. The analysis does not stop there. We need to look also at why faster economic growth is important.
What are the benefits of increasing the rate of growth in the USA from under 2% to 3.5%? Some Democrats say that the only folks who benefit from that are the rich, but that just shows how little they understand the issue. Let's start with something near and dear to the Democrats, government spending. An extra 1.5% growth in the US economy means that during the first year, there will be about an additional quarter of a trillion dollars of goods and services produced in the USA. Since the government generally receives in revenue about 20% of GDP, this means an additional 50 billion dollars for the government. Then in the second year, there will be more additional growth, so the federal government will have an additional 100 billion in income. This will continue over time.
It's not just the federal government that benefits, however. The extra quarter of a trillion dollars in the first year will need labor in order to be produced. Think how many extra jobs will be created just to produce this extra bit of goods and services. Then think how many people will get raises because their employers are now more profitable. Then think how many people will see their investments pay more dividends as the companies earn more. Since more than half the country owns stock either directly or through their retirement plans, this will affect a great many people.
Then there's the increase in the overall strength of the American economy. For the last 100 years, the USA has been a world power because our economy has been so strong. Additional growth will maintain that strength.
None of this is rocket science; it ought to be rather apparent to anyone who carefully considers the subject. Nevertheless, the amount of misinformation and ignorance on the subject of economics is appalling.
We all need to make sure that our congressmen and senators understand that we are expecting them to enact a tax measure that will above all else promote economic growth.
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