Government stimulus doesnt work
Dollars and Sense
I was thinking the other day about how the federal government and the Federal Reserve Bank continue to discuss stimulating our ailing economy with plans such as QE3 and another round of fiscal stimulus.
Why is it that some central body (i.e. government) thinks they can 'create jobs' with policy? The reality is that businesses create jobs; government can only assist with regulation and tax policy.
Fiscal stimulus and the printing of money are two temporary ways to 'create jobs.' Once the stimulus is spent, the jobs created don't have 100 percent sticking power. With quantitative easing, the money supply must be contracted at some point to avoid hyper-inflation, meaning quantitative easing is simply-by design-a temporary creator of jobs as well. Keynesian governments assume that a temporary lift is all we businesses need to get the ball rolling.
I believe that since the 'Great Recession' in 2008-2009, the ball hasn't rolled because we've become such a global economy, and the United States simply isn't competitive. One of the main reasons for this is our punishingly high corporate tax rates.
You see, when Cisco Systems or Colgate sell products overseas, as long as that money doesn't come back to the United States, Cisco and Colgate avoid those profits being taxed at the 35 percent repatriation rate. This causes Cisco to currently hold more than $37 billion overseas. When Cisco wants to reinvest that money and build a new plant, or pay for research and development, where do you think they'll choose to set up shop? Not here in the good old USA. That $37 billion would be reduced by taxes to $25 billion available for job creation in the U.S.
Some will say I am advocating lowering taxes on 'big corporations.' The problem is, at 35 percent, no company - with the ability to achieve similar production overseas-will ever bring money earned outside the U.S. home again. So if I were to suggest reducing the corporate tax rate on repatriated dollars to zero, it would not change what the government will actually receive in tax revenue from repatriated dollars, since it is nearly zero today.
What a reduction in corporate taxes will do is cause billions of dollars from other countries (each year!) to circulate into the United States' economy to build new plants, improve new properties and hire new employees.
I admit the idea for my solution came about from the likes of John Chambers, CEO of Cisco systems, who has implored our elected officials to allow him to stimulate the U.S. economy by repatriating money Cisco has earned overseas.
If they won't listen to 'big business,' will they listen to little old me?
Adam Sommers is a financial advisor who lives and works in St. Helens