Streetcar Line

Animal Economics, Unleashed

One simple step to prosperity.

By 8.20.10

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It's so simple.

Fixing this economy, that is. Simple. One step. I've written about it before in this space. But let's build some tiny suspense before I reveal it.

The key to the recovery is to unleash the spirits that motivate productive investment. Spirits, that is, and also cash. Right now there is a huge amount of the latter, an unprecedentedly huge amount, sitting around waiting to be tapped into. American businesses are sitting on a record $1.8 trillion is cash reserves, according to the latest statistics. Another $1 trillion in reserves rests in bank vaults.

Meanwhile, the personal savings rate of ordinary Americans has jumped all the way above 6 percent, more than three times as high as it was just three years ago. That means, if memory serves (I can't find this statistic at this writing), that there is another $1.2 trillion in individual accounts that is available for productive use. (Again, that dollar figure may be off, but whatever it is, it's very large if the savings rate is above 6 percent.) Actually, the economy is well off if people don't rush out and spend this latter amount -- it's a constructive thing for people to be inured against debt, for a multitude of macro-economic reasons -- but if just a little of it were unlocked for both spending and more aggressive personal investing, it would provide the economy an extra "oomph" as well.

The reason businesses and individuals alike are hoarding cash is that they don't know what's coming next -- but they have reason to believe it won't be good. Everywhere they turn, they see the Obamites and Pelosi-Reid brigades raising taxes, badmouthing businesses, bashing the profit motive, regulating the hell out of everything that moves, driving up energy prices, spending the federal government into oblivion, and taking over formerly private enterprises. They also see a Federal Reserve that seems to care not a whit about the strength of the dollar, and that seems so freaked out about possible deflation that they forget that lenders are unlikely to lend, and bond-buyers unlikely to buy bonds, if the yields are too low. There comes a point where interest rates can be so low for so long that they discourage lending while actually exacerbating deflationary expectations, becoming a self-fulfilling prophecy. (This is in the short term; in the long term, the weakened dollar, as is evident in the outrageously high cost of gold, could well lead to an inflationary explosion the likes of which this nation hasn't seen since 1979-80, if ever.)

There are lots and lots of things that can be done to make this situation better. Freeze domestic discretionary spending for three years straight. Reform entitlements. Re-institute the parts of welfare reform that Barack Obama gutted in the first stimulus package. Reform the rest of the welfare-related infrastructure along the lines that Congress reformed Aid to Families with Dependent Children in 1996. Strengthen the dollar. Put a freeze on all new regulatory rule-making. Repeal Obamacare. Repeal most or all of the Consumer Product Safety Improvement Act. Phase Fannie and Freddie out of existence. Read the Heritage Foundation's newly released "Solutions for America" and adopt it almost whole. Ditto for Rep. Paul Ryan's Roadmap for America's Future. Refuse to spend any still-unspent portions of any of the various stimulus porkages passed in the past three years. Work to elect conservative politicians at all levels of government.

But none of that is simple. Very little of that could be done without complicated legislating. And little of it could provide a virtually immediate jolt of the sort that would unleash the spirits -- the entrepreneurship, the lenders' and investors' positive outlooks, consumer confidence, stock market demand, reduction of pensioner fears -- that must be unleashed in order for businesses, banks and (to a lesser extent) individuals to stop hoarding their cash and instead spend or, far better yet, invest it productively again.

But one step could be taken in one fell swoop (with a few rather technical amendments added later). One step would be so dramatic, so easily understood by the public, so clean and simple, that it would shock the economy back to life like those devices that EMTs use on cardiac arrest victims to restart their hearts. (What are those things called -- you know, those things that look like air-hockey paddles that EMTs put on each side of a patient's chest?)

I've written about this idea before. It sounds radical, but it really isn't. It's just common sense -- which, come to think of it, is a rather radical concept in Congress these days. It stops taxing an entity that is an artificial construct -- and a construct, at that, which merely passes the taxes on to real human beings in the form of higher prices, fewer consumer choices, fewer jobs, and lower dividends and stock prices.

Eliminate corporate income taxes. That's it. Kill them. Just do it.

Paul Ryan's Roadmap calls for this same step (which means I'm no longer alone in advocating it), although he "replaces" corporate income taxes with some sort of transaction tax. The latter isn't necessary. Just stop taxing corporations completely. For now, forget all the arithmetic, even though it really does work out. (Do read the columns linked above for fuller explanations.) Forget the bean counting; and forget the likelihood that Barack Obama would likely demagogue the idea as being a sell-out to "evil corporations," because if politicians can't put both a positive and accurate spin on the idea to counter Obama's demagoguery, they don't deserve to be in office in the first place.

Instead, just imagine, upon elimination of all corporate income taxes, what would happen to the $1.8 trillion in business reserves, the $1 trillion in bank reserves, and part of the $1.2 trillion (or whatever the figure is that corresponds to a 6 percent savings rate) in individual's hoarded cash. People controlling the cash would see the obvious likelihood of gushers of corporate profits free of taxes, and would want to get in on the action. Investors who love dividends would understand immediately that dividends would rocket higher, and they would invest accordingly. People looking for capital gains would see the start of a stock market boom and want to get in on the ground floor, or on the next floor, or on the next one, with each rise in stock value building more and more confidence for even greater improvement.

And all that unlocked cash would have a multiplier effect. In the summer issue of National Affairs, N. Gregory Mankiw reviews a plethora of recent scholarship and reports that the demand multiplier from tax cuts is $3 for every $1 cut, which is twice as high as the multiplier for even well-designed stimulus spending. (Amazingly, the most definitive study showing this comes from Christina Romer, the soon-to-depart chief of Obama's Council of Economic Advisors.) Furthermore, reports Mankiw, "the stimulus packages that appeared to be successful had cut business and income taxes, while those that evidently did not succeed had increased government spending and transfer payments."

In addition to re-animating all of these unused cash reserves -- which in itself would dramatically and almost fully re-start the economy -- eliminating the corporate income tax would serve as a super-powerful magnet for new businesses to start, for businesses that have outsourced operations to repatriate in the United States, and for foreign businesses to build more plants here as well.

Again, it's all so simple. The only complication, which could be handled separately, would be to figure out what to do with arrangements such as Limited Liability Partnerships, Subchapter S Corporations, and the like. But those considerations could be worked out.

This idea is an utter, complete economic winner. Handled rightly, it could easily be a political winner too. (Again, see my earlier columns for explanations of the politics.) Eliminate the corporate income tax, and watch the United States become an economic powerhouse again, almost overnight.

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About the Author
Quin Hillyer is a senior editor of The American Spectator and a senior fellow at the Center for Individual Freedom. Follow him on Twitter @QuinHillyer.