Right now the US is trying to figure out how to jump start the economy. Most of the proposals involve sending people money from the government or temporarily lowering taxes. The idea on sending everyone a “rebate” goes like this:
When people have extra money they spend more, when people spend more businesses have to hire more workers. When more people have jobs, the earn money and in turn have more money to spend. So the idea is to “prime the pump” and get the cycle started.
The idea of lowering taxes follows the same thinking, but there has been some talk of lowering corporate taxes. The idea here is that if businesses are charged a lower tax rate, investors will be more willing to put their money at risk starting new businesses because they have a greater potential return on their investment. More businesses hire more workers and give them more money … and so on.
My question to you is this: How would you jump start the economy of a nation? Here are a few random ideas of my own for starters:
1. Make it easier to hire people off unemployment. For example, the government could give an employer a 90 day tax break on all the taxes they pay for employees that are coming off unemployment. This would help encourage businesses to hire people who are currently costing the government money and could drastically reduce the expenses of hiring someone until the company knows if they are a good fit or not.
2. Teach people how to start their own business. For example, if you are on unemployment, you have to spend at least 10 hours per week in classes designed to show you how to take your existing skills and find work as a sole proprietor.
3. Create a tax free for-profit business entity. The idea here would be to allow people to run a business without paying taxes on the profits if it is setup to employ people who are out of work. This would help attract investors because of the potential for a higher rate of return. The payouts to investors could still be taxed, but the corporation itself wouldn’t pay taxes on any retained earnings. The logic would be that retained earnings are there to help the corporation continue to hire people in the future.
So there are three slightly random ideas. What would you do?
I think an important lesson about the economy is that it is cyclical, and impossible to evade recessions.
Every boom is followed by a recession. The only question is how long a boom or recession will last, and of what magnitude they’ll be.
In business school, we learn that the reserve should allow banks to access money more cheaply, which Bernanke is doing (a bit late in the day) by lowering the interest rate on fresh money.
The problem I see is inflation. If you pump money into the economy to wildly, you’ll end up making the dollar useless (which it almost is already, anyway).
I don’t know about VATs in the US, but lowering them would be a definite help to entice more spending.
But I wouldn’t see it as bleak as the media makes it. If people end up saving now and not spending, they’ll have the money to spend later, and the economy will flourish again.
It’s just a pity that it all happened so suddenly with all the subprime losses. Banks learnt a BIG lesson here.
Being a FairTax supporter, I’m inclined to say that to jump start the economy, enact the FairTax. The elimination of taxes on income permits the freedom to spend or save as the earner chooses. The prebates allow for those not earning enough to have a good head start. The elimination of corporate taxes (which are always paid by consumers anyway in the form of increased end cost) encourages invenstment which encourages employment, which encourages spending, which benefits investors who then restart the cycle.
Fixing an economy first fouled by government intervention by increasing government intervention just seems to be less than an ideal solution to me.
Great post, very creative ideas.
I like the first item the most, easiest to implement with the greatest chance for impact.
The best way to fix the economy is the same as it would be for an individual…spend less than you earn. If a tax rebate was a wonderful solution it would be common and part of our taxation landscape. It’s not. We have had the lowest tax rates of my lifetime for the entire Bush Administration and that hasn’t spurred on the economy, helped the dollar or staved off inflation. If anything, the government should keep the money and pay off some debt. After you pay off your debt, you can worry about buying your citizens nice things. Until then, it’s got to be homemade birthday gifts.
@Arjun – The US doesn’t have a VAT on most items. Right not all of the federal government money comes from income tax.
@Jay – I like the idea of FairTax, but when I really started reading the purposed laws I realized it was going to get very complicated very quickly. We need to fix a bunch of stuff to make a FairTax work correctly. Also I’m afraid if we implemented the FairTax idea, the government would soon start taxing income again just to get more money. We need a movement to simplify the government. Right now complexity is costing the US a lot of money.
@Jeff – I tend to think that people getting money from the government sets a bad precedence. Didn’t someone say that a democracy will only work until people figure out that they can vote themselves money? :) It is funny because right now our tax structure is really setup to encourage people to NOT save money. Add in inflation and there is very little incentive for saving–your money is worth more if you spend it today than if you wait until tomorrow.
In a developing nation – – provide clean and readily available, safe-to-drink water. It’s hard to run any sort of business when you’ve got dysentary.
In a developed nation – – I have no idea.
Eliminate barriers to entering the marketplace. I think this is the era of small business. But so many taxes, forms and setup needs (that frustrate my clients to death) tend to lead people to shy away from starting a business at all.
Creating confidence in starting a small business will bring joy in work, employment for the unemployed, more tax money for the government, wiser spenders, good employers, useful business ideas, etc.
I also think offering small business/entrepreneurial/leadership training and education would go a long way to help jump start those who are only CONSIDERING starting a business. That’s my two cents (unless I have to give it to the gonvernment).
Thanks, Jason M. Blumer, CPA
It’s obviously a hard question to answer, but as I’ve stated before, I personally wouldn’t worry about force-reviving the economy. It’s not in cardiac arrest, it’s just, let’s say, taking a nap.
Again I’ll emphasize the threat of inflation. If you try to therapy the economy with interests, you’ll end up having more money to spend but with less buying power per dollar.
If the US wants to kick-start it’s economy, it needs to create foreign demand for US products. That’s one way to make the dollar interesting to outsiders and make people invest.
Unfortunately I don’t see much incentive for anyone to invest in the US right now, and how to create such an incentive.
Only time will tell.
@Thriveal – I think the economy would do better in every way if we could just make everything simpler. The problem is that the people who make the laws have very little incentive to make things simpler. It isn’t nearly as glamorous to say that they have been working on rewriting laws to make them easier to follow as it is to say they enacted new legislation.
@brian – So I wonder what is equivalent to dysentery in a modern society? I would tend to think that complicated bureaucracy will cause many of the same types of problems–you can’t focus on your business because you are busy taking care of stuff that adds no value.
@Arjun – Unfortunately a lot of the ideas I’m seeing thrown around to help the economy will just send money out of the country. If everyone gets a $1,000 check and they go and spend it, how many of those purchases will really benefit the US. Lets say they buy a new TV made by Sony from Best Buy. Best Buy has a very small markup. Most of the money will eventually go overseas.
I’m not necessarily worried about jump starting the economy. I’m more worried that the government will attempt to jump start things and create a whole slew of detrimental side effects. :) I guess that is what your warning about inflation is about.
“For example, the government could give an employer a 90 day tax break on all the taxes they pay for employees that are coming off unemployment.”
“The idea here would be to allow people to run a business without paying taxes on the profits if it is setup to employ people who are out of work.”
But these two proposals would punish people who get off unemployment by taking a lesser job than the one they are seeking, while continuing to look for a better job. Suddenly with the tax benefits coming to companies hiring people who are jobless, making them much more desirable. This makes life much harder for the “under-employed” as job opportunities dry up.
It’s better to create jobs overall. (No matter who gets any individual job, the increased pool helps remove people from the unemployment rolls) Reducing employment taxes in general would be a good move to achieve this.
Set up a public works program that the government pays to your home lender… (i.e. like community service). Where does the money for the houses come from… Actually to “infuse the economy” the government would buy the majority of homes being sold in the country, at what their fair market value is… You can say no… but they tender the offer. The home sellers now all have cash to spend.
Then everyone who doesn’t own a home agrees to work x hours and they get given a home for the work that we need on highways, hospitals, etc. TO save cost in tax dollars we offer to trade work for home ownership…
We could build raised highways so wild life can pass underneath, with markets, parking and highway equipment storage beneath. We could improve our public transport systems, and a national one that would make it more affordable if people had to move to go where the job is.
All public roads should stay public. The folks selling them are probably the descendants of the folks who were suppose to be maintaining them and failed their communities be if by poor management, or corruption…
We should do something about corruption and the drug laws. The police have become ethical compromised in many places.
As they are only human how can we put them in these compromising predicaments… We are going through with drugs what the Chinese went through with the British… We’re in the midst of a boxer Rebellion with China and Afganistan bringing in the dope… Is it their fault, or is it the descendants of the folks who pulled it off in China.
ok, so I like to go into theory of comparative analysis too… We are not healthy as a nation or a world. Each nation needs to look at what their country good are and we need to be able to maintain a flow of goods and services… What changed? What did the world need that it doesn’t need now??
Just curious.