The business and political press is anxiously awaiting Fed Chairman Ben Bernanke’s pending speech from Jackson Hole later this week, looking for him to once again prop up the financial markets with words of wisdom and promises of support. The market has already exhibited signs of lift in anticipation and pundits are offering subtle and not so subtle threats of coming catastrophe should he dare to disappoint – because while we give lip service to job creation, what we really seek from our financial leaders are perpetually rising stock prices.
The rationale for the Fed’s persistent zero interest rate policies, and any other feats of legerdemain and levitation that Mr. Bernanke may produce from his hat, is that they are supposed to stimulate productive investment. But they don’t. They stimulate leverage and financial speculation. They stimulate inflated asset valuations: bubbles, destined to pop.
The rationale for preferential tax rates on investments is the same; it is presumed that savings and investment must be subsidized by preferential tax policies in order to stimulate growth. But here again, reality has diverged from intention. Our tax code has evolved to incorporate byzantine complications and exceptions which have the unintended impact of subsidizing unproductive capital and obstructing its free and fluid reallocation to more productive uses. By sheltering investors from losses and subsidizing low return investments with tax preferences, our current investment tax structure impedes productive private investment and is a brake upon the economy. The impact is directionally the same as with artificially low interest rates; tax preferences which subsidize low return capital distort valuation metrics, inflate the value of unproductive assets, and help make financial speculation more profitable than productive enterprise.
The popular consensus claims that slow private sector job growth is a result of high taxes. But reality suggests that slow job growth is more accurately attributable to misplaced subsidies and incentives in government tax and monetary policies that are diverting private investment away from productive job-creating opportunities.
Private job growth will not significantly recover until we change those policies.
How big is the opportunity? The Fed reports aggregate Household and Nonprofit asset holdings total approximately $72 Trillion. Reallocate 3% of that toward more productive activities and you will unleash $2.1 Trillion of private stimulus. Now measure that opportunity in relationship to the obstacles, both political and financial, of a comparable public stimulus program. A $2 Trillion government stimulus program, initiated over a twelve month period, would require increasing federal disbursements by well over 50%, placing vastly increased pressure upon the federal balance sheet and its continuing solvency. Not only does the private balance sheet have more capital to draw upon, more productive reallocation of private capital has its own underlying benefits, while all government expenditures eventually must be funded from tax revenues, either current or future.
Late last week the Obama administration floated a trial balloon proposing to bribe business to increase hiring with new tax credits and increased subsidies. Business leaders, true to form, responded with cautious optimism, quietly salivating over the prospects of another opportunity to feed from the public trough. But increasing credits and subsidies is simply doubling down on the cause of our problem. We need to return to principles of more equal treatment that lie at the core of both democracy and capitalism. We need to unwind the rat’s nest of special preferences and subsidies that raid the treasury and distort investment incentives.
The key to private job growth is comprehensive structural reform of investment tax policies. I believe if we level the playing field and stop subsidizing unproductive capital with preferential tax and monetary policies the natural response will be an aggressive reallocation of private capital that would provide far greater economic stimulus than anything government can afford to offer.
If we desire to stimulate job growth we must first examine and acknowledge the myriad ways in which current policies are obstructing it.
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Author – A Citizen’s 2% Solution: How to Repeal Investment Income Taxes, Avoid a Value-Added Tax, and Still Balance the Budget. ISBN 978-0-9828328-0-6