I Have a Funny Idea to Fix the Economy

10 Jul
I have an idea.
The world economy is a in a free-fall right now.  We have thrown the following three levers:
1.  Government has attempted to stimulate demand through massive expenditures (didn’t work)
2.  Interest rates have been cut to the point where rates can’t be lowered anymore (see Europe and how well that is working)
3. We have attempted to stimulate consumer demand through lower payroll taxes (not working)
All of these attempts are meant to do one thing: create jobs.  Once people have jobs, they will spend money, borrow money for houses, invest again, and stabilize the banks.  
Corporations are sitting on trillions of dollars of cash that has been accumulating for years because they are too scared to spend it.  They are scared because the cost of a new employee is unknown versus the payoff of what a new employee will earn.
The most direct way to solve this is to give an incentive for corporations to hire people; that is, they need to know a new employee will earn the company more than it costs them.  They don’t know this right now, so they don’t hire.  Let’s remove that risk.
We drop the corporate tax rate to zero. At this point, every board of directors on the planet will be assured a new employee will add to profits, more people will get hired, and we will have economic growth.
With a zero corporate tax rate, A) corporations will expand and hire more people, hence stimulating the economy or B) they will increase dividends or bank deposits (stabilize the banks), the stock market will increase because the corporations are worth more, increasing the wealth effect, people will spend more money, and we’ll grow the economy.
Once the economy is growing again, we go do what we did in the nineties: economic growth wiped out the deficits and good things started to happen.  No one seems to remember during the early nineties we talked about how we could never pay off our national debt.  We did through economic growth; the best cure for poverty.   
This seems to me to be the next lever we can throw.   Businesses pay a small fraction of taxes anyways, so I’m not really worried about the decrease in Government revenues.  Besides, we are adding to the debt anyways, so let’s try something different.  
Where is my logic wrong?



Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: