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a bad idea to get our economy moving a head quickly

August 20, 2011

A friend of mine sent me a link to a blog post by Dan Gilbert, founder of Quicken and owner of the Cleveland Cavaliers, and asking for my thoughts on it. The post itself is titled “An Idea to Get Our Economy Moving Ahead Quickly.” Basically, Gilbert thinks that a great way to jump start the economy and create jobs is to reduce capital gains tax to 0% on “any new capital investment beginning immediately and made through the end of 2012, with certain important stipulations (which I will explain in a moment), if the investment is held for two years or longer.” The types of investments include:

1. All NEW capital investment made by corporations, partnerships and individuals for newly issued shares of stock in both private and public companies (including start-up businesses) after the enactment of the capital gains legislation.
2. All NEW investments made by corporations, partnerships and individuals purchased after the enactment of the new capital gains legislation for all new capital assets.
3. All NEW construction real estate, both commercial and residential by corporations, partnerships and individuals developed after the enactment of the new capital gains legislation.
4. All NEW capital improvements made by corporations, partnerships and individuals to existing real estate, both commercial and residential, made after the enactment of the new capital gains legislation.

While interesting, my first reaction was more or less, Sounds great if you’re rich and have money to invest into your own company or some other eligible area of investment, but I sincerely doubt that it’ll translate into much for the working-class in the way of higher employment and wages—except, of course, for a select few industries like construction, and that only temporarily.

The key buzzword here is ‘job-producing investments.’ However, many investments don’t necessarily translate into new jobs, and according to a report by the Nation Employment Law Project, close to 75% of the new jobs added in the last two years are below $14 an hour, which isn’t as helpful in terms of economic growth as you might think. Most people at that pay rate have little in the way of discretionary income. Moreover, I don’t think that growth for the sake of growth is sustainable. In my opinion, we need to be focusing on high quality full employment, not just ‘job creation,’ since many jobs are wasteful, unnecessary or even harmful.

In addition, when people ‘reinvest’ into their own companies, it’s often just another way for them to avoid certain taxes or higher tax rates and hoard money/capital in the form of assets. For example, according to an article in Bloomberg, tax cuts for people making considerably more (including capital gains) don’t really do much to help to stimulate the economy because, much like Plato’s oligarch in the Republic, they tend to save (read ‘hoard’) it.

The main problem I basically have with this idea is that it’s the same ‘trickle-down economics‘ that have failed time and again (e.g., in the 1890s, when they called it ‘the horse and sparrow theory’; ‘Reaganomics’ in the 1980s, which Ross Perot called ‘political voodoo’; etc.). In a predominately consumerist economy, what you need more than anything are consumers who have money to spend to keep the money moving and the economy growing (or at least relatively stable), not easier-to-produce goods and services when there’s little in the way of real demand or a financially stable consumer base.

Giving tax breaks and such to the wealthy, however, actually allows very little to ‘trickle down’ to the average worker/consumer. The enormous amount of capital currently available isn’t ‘dead’ so much as it’s being hoarded or transformed into even higher record profits for the top 10%. They could use it if they really wanted to. Banks, for example, have plenty of money to lend; they’re simply sitting on it. Same for large multi-national corporations. Whether it’s out of fear of economic instability or whatever, lowering tax rates even more is like begging them to start doing something with their hoards of cash. We shouldn’t be begging; we should be demanding.

Last but not least, even if this idea does spur ‘new job-producing investments,’ which is certainly possible, I think it’s an extremely bad idea to encourage investment in, and construction of, even more commercial and residential real estate when we’ve just experienced a housing bust, record high foreclosure rates and currently have a large numbers of commercial properties already sitting empty all over the country. These kinds of measures to stimulate job growth and consumer spending simply by increasing supply, when they actually work, tend to create artificial bubbles, which is half the reason we’re in this mess in the first place.

Those are my thoughts, anyway.

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