Government
spending does not stimulate the economy because government is far less
efficient than private enterprise. Tax rate cuts would stimulate the economy because they would reward productive investment with a better rate of return and ultimately put more resources in private hands.
The crash of 2007-2008 was due to over leveraging. To unwind it, a lot of debt
needed to be converted into equity. A couple of changes would encourage that. First
would be to lower the capital gains tax rate to encourage more equity investment.
Another thing that would be to make dividends tax deductible to corporations,
just as interest payments are. This would remove the bias in favor of debt
financing for private firms. The way to prevent too big to fail banks is to
force them to have bigger capital reserves than small enough to fail banks.
Dodd-Frank could be replaced by a simple rule that says that if the bank is
larger than 1% or 2% of the overall banking assets of the United States it needs to
have a 10% capital reserve. To make this a little easier, the law could allow
banks to sell a special class of bonds that are convertible to equity in the
event of regular capital reserves falling to zero. Regular capital reserves for
big banks could be 5%, with the additional 5% coming from the convertible
bonds. None of the banks that failed or were bailed out would have needed
federal help if their capital reserves were this high. Big banks will dismantle
themselves quickly to get away from high reserve requirements and the problem
will be solved. Republicans should remember who Wall Street backs with
political contributions and do the right thing on requiring big reserves from
big banks.
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A Call for Healing
Showing posts with label Economic Growth. Show all posts
Showing posts with label Economic Growth. Show all posts
Jan 10, 2015
Nov 24, 2014
Time for a Walk on the Supply Side
The Japanese experience of losing a decade or two with massive deficits
failing to boost demand now has been repeated across the developed world,
including here in the US. Given these uniformly poor results, isn't it time to
reevaluate Keynsian Economics? Keynes' theories were always counter intuitive
to me anyway. How could taking resources out of a relatively efficient private
sector and moving them to a relatively inefficient public sector make everybody
better off? Now that we have done the experiment over and over with disastrous
results, it's time to take notice that Reagan's Supply Side Economics seemed to
work a lot better than anything we've tried lately. If government deficit
spending was the key to prosperity, Greece would be a world leading economy. It
appears instead that government deficits are the road to ruin and we should
change our ways. This means we should throw Keynes' Theories into the
historical interest section and remove them from the practical guide for policy
role.
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