Why we should help the rich
The right kind of relief for businesses and the wealthy might be just what the economy needs.
(Fortune Magazine) -- Absolutely everyone has a really good idea for how Barack Obama should design his economic plan, but here's a proposal you probably haven't heard elsewhere: Let's help corporations and the rich.
The idea - call it plutocratism - may sound ridiculously unsalable, since it entails helping the two most loathed players in the entire U.S. economy, but it is serious. There's some evidence that Obama's team understands the logic behind it. But if we want to fix the economy, we need to go even further than what the incoming administration has suggested so far.
No one in either party seems to dispute that America needs to create jobs and increase investment. I hate to be the one who says this out loud, but where do those things come from? They come from companies and the wealthy - not the focus of Obama's plan at the moment.
To some extent this is understandable; he figures this economic crisis requires emergency measures, so he proposes massive federal spending plus giving money directly to individuals. But let's think hard about the effectiveness of those measures.
Mammoth federal spending will certainly create jobs directly, providing a shot of Red Bull to the economy. But as a long-term means of employing people it's unsustainable, and some economists argue that it accomplishes nothing, since deficit spending is really just taking out a mortgage against America's future prosperity.
The other main part of Obama's plan, giving cash directly to individuals, isn't very effective, as we saw when President Bush and Congress tried it last year. Obama is calling his plan a tax cut rather than a tax rebate, but since it's a one-time tax credit rather than a reduction in tax rates, it's the same thing. And once again we can expect that people will save most of the money, especially since none of it will go to high-income people who might actually spend it.
So am I suggesting that we stimulate the economy by sending government checks to Bill Gates and Paris Hilton? Of course not - just the opposite, really. Rather than spending more, our plutocrats need to invest more, since private investment creates long-term jobs. So let's offer high earners the very modest help of just leaving them alone, not doing what Obama proposed during the campaign and reducing their investment incentives. He advocated increasing the capital gains and dividend taxes on couples earning $250,000 or more - exactly what we don't need.
The Obama team has hinted that it realizes as much and will not push for investment tax increases this year. Instead, the new administration may just wait for those rates (as well as ordinary income tax rates on the wealthiest) to rise as they are scheduled to do at the end of 2010. A question: If leaving those rates low is good for the economy now, might it not still be wise later?
With the unemployment rate soaring, we should also be helping private employers - but not in the ways Washington has been doing. Bailing out industries or companies is economically senseless. I'm still searching for why it's right to subsidize American-made Chevy Malibus but not American-made Toyota Camrys. The Obama team is also reportedly planning to extend Bush's misguided rules that let companies accelerate depreciation of equipment they buy. Those rules distort incentives: Why push companies to buy machines when the most valuable investments today are in human capital and research, which don't count as investments for tax purposes?
Obama has also proposed giving businesses a tax credit for each new job they create, an idea that could come only from someone who has never worked in the private sector. It has been tried before, with the unsurprising result that companies game the system and collect tax breaks for hiring people they were going to hire anyway. Instead, let Obama wipe out corporate welfare, as he has said he wants to, and then lower our corporate income tax rate from 35%, among the world's highest. In a widespread downturn it makes sense to lighten the burden on every company.
Those initiatives could be parts of what will surely be the most ambitious economic program since Ronald Reagan's first term. How Obama shapes that program will be an early test - and perhaps his most important.