Monday, January 12, 2009

Unusual Times Call For Unusual Measures

Why some people can't see the foolishness of emphasizing tax cuts over public investment as a means of stimulating an economy on life support is beyond me. Political ideologies can often blind us to the obvious.

Two types of tax cuts are being proposed -- one which benefits the average taxpayer, and the other which benefits the business sector. As far as the average taxpayer is concerned, more than likely, if they don't use it to pay off personal debt, they'll end up using it to buy products that are made somewhere other than the USA. In the case of the latter, the only people benefiting would be the actual store in which the items are sold and the employees who work there (by virtue of the store's profit margin). The purchases, for the most part, will not benefit American manufacturing and, therefore, American jobs. (Just read the labels on the items that you purchase at your local merchants. It is becoming a rarity to see "Made in America" anymore.) Given this reality, I assume that President-Elect Obama is supporting this measure to simply fulfill a campaign promise. (And should this tax cut be implemented via lower tax deductions on our paychecks, the extra money will largely go unnoticed for the most part.)

On the business side, history has shown that tax cuts have done very little to spur economic activity in any meaningful way. During periods of economic downturn, businesses are very reluctant to take risks or make those types of investments that would yield increased employment or economic activity. On the contrary, the bulk of business investments occur during economic upswings when there is little to no risk involved. Even with targeted tax cuts, e.g. $3,000 tax credit for each new employee hired, I doubt that such an incentive will prove fruitful given the current state of the economy.

We are far, far better off with an aggressive public investment program that will definitely create jobs while simultaneously producing those types of needed investments that will have long-term benefits for everyone concerned, including the business community. And, as Mr. Krugman suggests, if we extend that investment program over a period of years as opposed to months, we are much more likely to positively effect a favorable outcome given what will likely be a growing perception or sense of economic stability and security in the minds of businesses, workers, and consumers alike.

In this scenario, the public sector will prove to be a valuable partner to the private sector in restoring stability and faith in capitalism as a means of serving the public need. Unusual times call for unusual measures. Both parties can work together for the common good. We shouldn't allow ideological preconceptions blind us to practical solutions.

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