Wednesday, February 25, 2004

Pushing on a Rope

Some readers have raised questions about the relationship between my Modest Proposal and the current recession and the benefits to business as well as labor. I hope this answers some of your questions.

A short discussion of the short term situation.

Why are we in a recession? Because businesses aren’t selling enough products, so their inventories grow, they cut production, and eventually lay off workers, or reduce labor costs by shipping jobs overseas. They have excess capacity, and don’t see anywhere to invest that makes sense, since demand has diminished.

Why aren’t they selling enough products? Because people, domestically or worldwide are not spending as much, or because they are not competitive in overseas markets. People have reduced their spending for a number of reasons. They are overextended on their debt, or lost equity when the market bubble burst, which paid for some of their previous purchases. They have lost confidence that their job is secure, or their incomes will no longer meet expenses, due to uncertainties in the economy or deteriorating worldwide conditions, and or other reasons.

So what should be done to get out of the recession? Where will tax cuts for business and investers go? One place is in the bank or in the market where it won’t create any demand. Will modernizing business or innovating create more demand? Maybe, if costs can be reduced so products can become more competitive in overseas markets. But, what if overseas markets are also depressed? Putting money in the hands of business and investors will be like pushing on a rope. It will only create demand if modernizing will improve competitiveness and demand is already there. Demand pull is needed either domestically or from abroad to stimulate business. Only after overcapacity is worked off will investment and hiring be needed. GNP increases, without corresponding hiring suggests that overcapacity is not yet worked off, or that hiring is coming mainly from offshore. What is needed in the short term is to put money in the hands of people who will spend it, i. e. tax cuts for spenders, not business or investors.

What is required in the long term?

About the only thing that will help the long term situation, with the disparity in labor rates here and abroad, is for companies to improve their competitiveness in offshore markets in other ways. The domestic market in the US is a small percentage of the world market, and it’s not growing as rapidly. If we are to remain an affluent society, we must prosper in international markets, and the profits from those sales must be spread over the great mass of people in the country to sustain domestic demand and to maintain a high average standard of living.

What my proposed program does.

First, on the business side, it reduces or eliminates administration, labor, health care and pension costs from the price of the products sold, making them much more competitive in both domestic and foreign markets. It recaptures some of these costs through taxes on the increased profits which will accrue to businesses and distributes them across all economic levels in the stipend and healthcare and education benefits. The important distinction is that these costs are not including in the price of products which makes the products much cheaper both domestically and overseas.

On the people side, it reduces the cost of domestic labor to business, making domestic labor more competitive relative to foreign labor. One reason we are not as competitive as we could be on world markets is because other countries are doing precisely this already. They ship products offshore at production costs, which don’t include the costs imposed by company sponsored health care, pensions, and high administrative costs.

Even if the current complex tax system were kept, and just the earned income credit adjusted in leiu of the stipend, it would accomplish some of the benefits to business and labor addressed here. This may be more easily implemented, but there is major savings to be reaped from eliminating the whole administrative tax code mess as I have proposed.

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