Feb 07 2009
What You Should Know About Economic Stimulus and Job Creation
The current economic crisis is accelerating. It is time to take a hard look at what economic stimulus creates jobs and what does not!
The facts are alarming. Initial jobless claims last month rose to 626,000, a 26-year high, according to the Labor Department. The number of claims by people continuing to apply for unemployment benefits reached a new record of nearly 4.8 million, by the end of 2009 unemployment claimants could exceed 10 Million Americans.
The problem is that there are sacred cows in the tax code and fiscal policy which are assumed to be effective. These assumptions are just supposed to work, without real logic supporting them. Let’s look at some of these tax code (monetary policy) assumptions that don’t work, and then discuss what will.
Assumption #1: CAPITAL GAINS tax rates fund the economy. NOT! Current monetary policy rewards wealthy individuals and companies who make money with their assets - regardless of job creation. The axiom here is that by allowing wealth to accumulate wealth, the money will find its way into the economy — it doesn’t.
Take stock market transactions - except for the Initial Public Offering, when a share of public company stock is bought and then later sold for a profit - not one penny goes into the economy. At purchase, , individual (#1) exchanges his cash for a share of existing public company stock,- at the sale, individual (#2) gives his cash to #1 for that same share. NO MONEY goes to the company or into the economy, so not 1 new job is created by this process, yet current policy rewards this transaction with 60% lower taxes.
Assumption #2: Well then, certainly, selling a home and buying a replacement home must create lots of jobs. NOT! Not unless one of these homes is new construction. No, just a very few people, the Realtor, the appraiser, the Escrow or lawyer, and some financing folks make money as one time payments. But, the US Government says, “Made money with your money - keep 60% more than a working wage earner.” Compare this to constructing a new home, which creates or maintains 100+ jobs.
Assumption #3: Oil Depletion Allowances that reduce the taxes paid by Oil companies, and Farm Subsidies that pay farmers for not planting crops and/or planting a specific crop must help create jobs. NOT! These represent huge discounts on taxes - with not one job created.
It has been calculated that for every $1.00 earned in a new permanent job, the U.S. economy receives an overall benefit of $100.00. Compare current tax code models to the new one proposed by The Prosperity Mandate organization, that promotes Net Worth funding jobs.
Under this new Prosperity Mandate model, if you create a job, you pay less tax! It proposes that capital gains on stocks of existing companies be limited to $25,000 per year, and on the sale of existing homes to the first $250,000 of profit. It suggests that the Oil Depletion Allowance and Farm Subsidies for NOT doing something be eliminated. It proposes a 10% Tax Credit for any cash placed into a 3 year Bank CD and pledged to secure a loan to a “Fund America” program, creating jobs under a PayBack structure. The U.S. Government will further incentivize these deposits and pledges of collateral by guaranteeing the CD principal and declaring the CD interest income tax exempt!
The goal of the program is $1 Trillion in bank deposits, shoring up the Banking system, and large scale employment creation without $1 of direct government spending. Risk management, real time transparent accountability, and insurance policies will safeguard the capital funding Fund America Programs. This same $1 Trillion can be used over and over again to fund more and more jobs.
‘PayBack’ means that every loan MUST have a clear form of pay off. New and retrofit infrastructure construction will sell future revenues of usage fees (like a toll on a road or a fee for water or electricity) to fixed income investors (like major insurance companies or huge retirement funds); job training and placement and/or Higher Education will include contractual wage garnishment so loan payments come directly from payroll; research and development of new energy efficient technologies will function as for-profit Venture Capital, paying off Fund America loans from revenues.
5 Million new jobs can be created over 15 months, IF we act NOW. Share your thoughts and comments below and please pass this along to your email list and write your congresspersons.
3 responses so far
An interesting model. It would certainly work better than the present, unfairly tilted one, and the deeply flawed tax code. However, I’m not entirely certain the banks, or even private investors, can be trusted to act on their own in any way other than their own self-interest/profit margin –even with assurances and government payback promises. They’re just so out of practice at it.
Doing permanent good costs real time and money, plain and simple. And we need to get more leveled, realistic expectations in place, re-learn to downshift sometimes on the personal or local level, in favor of the common good. Is a new but mostly empty strip mall, instead of low-rent but functional and well-planned apartments, the best way to go for a real-estate developer? Who benefits from the gentrification push? From planned obsolescence? From the constant bigger-better-faster consumption mindset of Western business models?
Yes, one can still make money by investing in future-oriented, sustainable efforts. But that difficult, narrow opening we have to squeeze through, of investing with little or no SHORT TERM payback, *that* is where businesses and banks refuse to go. It’s uncarted territory. To go there enthusiastically is counter-capitalist, in a way. Their fear of the new holds them back. Businesses, banks, investors, and economists think and act in monthly and quarterly chunks, …not so much four-year, ten-year, or fifty year periods. They “play” the markets. They play the odds. Immaturely, with little attention to *improving* the jobs and/or products that already exist, or expanding the ability of a working class customer/employee base to actually enter the next tax bracket.
But that doesn’t mean we shouldn’t try. Institutional resistance to change, to adopting new paradigms, is a famously difficult problem known to those who study mass communication, psychology, and sociology. But if we move toward a more firmhanded governmental approach, not just an incentivized, optional, “change if you want to” approach, then we might be able to get unstuck. Enforcement, regulation, and removal of competing/outdated portions of the tax code are required. Plus, we don’t live in a dictatorship like China, where government policies reach deep into peoples’ lives, so that when the government shifts, everyone else is forced to follow suit.
Mark -
Thank you for your comments and insights. Points well taken.
Ideally the entire Fund America Program using The Prosperity Mandate financial model will serve as a guided tutorial for the Banks and other Financial institutions on Wall Street to UNlearn bad practices and RELEARN constructive ones that can provide a profit.
For example, we would establish Master Limited Partnerships on the major exchanges that aggregate the funds for CD deposits from individuals who want to invest $5,000 and up and direct that investment into a designated Fund America Program. Instead of the 12% they make on an underwriting — the MLP will be allowed to make 25% or 25 basis points on the large volume transaction — for the public good.
Of course, it will be difficult to generate $20 Billion in bonuses, but, they’ll learn to make do!!!
Thanks for sharing your thoughts.
Neal Katz, The Prosperity Mandate
[...] Mandate (with a good model for incentivizing job creation, hop over and check it out), I ended up ranting in their blog’s comments section . I ranted about the challenge of changing the dominant (and inaccurate) Western mindset when it [...]