More stock would tend to decrease stock prices.
If you want to know why businesses aren’t investing, why don’t you just ask them? Or read an article by someone who has asked them? It’s not a real mystery, you know.
The Chamber of Commerce and the Business Roundtable have weighed in on this. Small businessmen almost always say the same thing when asked about investment.
It’s all about uncertainty. If you know what the tax and cost structure of the future is, you can plan accordingly and start investing. Even if the taxes are high, well, at least you can plan for them.
But if you simply don’t know what the business environment will be in a year, in five years, and in ten years, then you can’t cost large projects. You can’t figure out what your return on investment will be. You can’t attract venture capital, and you can’t get your board to approve new capital expenditures.
There was already plenty of uncertainty in the market because of the financial crisis. But the policies of the Obama administration have made it much worse:
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The stimulus spread money around by political whim, diverting resources and making it hard for businesses to know what the competitive atmosphere looked like.
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The health care plan promised a huge change to the cost structure of American business, but without providing much in the way of specifics until the legislation is written. No one really knows how much their employee’s health care coverage is going to cost in five years.
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The huge deficits have raised the risk of long-term interest rates going up, and there is much disagreement among economists as to how much of an effect that will have.
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The Democrats keep blabbing on about how they still want to do cap and trade and the EFCA, threatening even to ram these through in a ‘lame duck’ session if they lose the Congress. Cap and Trade would represent a huge change in the cost structures of many business, and they can’t plan for it. EFCA would make labor more expensive.
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The Democrats threw into this volatile mix the largest financial reform package in U.S. history. But again, no one knows how expensive it will be until the bureaucracy finishes writing the hundreds of rules that will be required to enforce it. It’s a huge unknown right now that could affect trillions of dollars of capital. And you wonder why people aren’t investing?
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The Bush tax cuts may or may not be expired. Even the Democrats seem to change their minds about this every second day. If the tax cuts are completely expired, it will be the biggest one-year tax increase in U.S. history, in the middle of a recession. I recall when liberals were justifying the stimulus, they said that the biggest mistake FDR made was raising taxes in 1937 because he was afraid of the deficit. But now the same liberals are advocating the same thing. That has businesses worried.
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The Democrats didn’t pass a budget this year, for cheap political reasons. Instead, they’re just using a series of ‘deem and pass’ rules to provide funding. So no one has a budget they can work from and plan for.
Any of these policies can be debated on their merits. Some may or may not be good ideas. But the Democrats didn’t even consider whether this was the correct time to dump these burdens on the economy - they only considered whether it was the correct time for THEM to ram them through.
In my opinion, it’s insane to talk about implementing a huge carbon tax in the middle of the deepest recession in eighty years. It’s insane to impose a huge new health care mandate in the middle of that recession. It’s insane to demand that businesses struggling through a recession suddenly spend huge gobs of money to comply with vast new financial regulations. And it’s insane to leave the status of the Bush tax cuts hanging until the last moment.
Then there’s the assault on the rule of law that comes from bailouts, strong-arming businesses into making 20 billion dollar guarantees, screwing over investors of GM in favor of labor, the suggestion that banks should be forced by government to write down mortgages if people can’t afford them, etc. No one knows what the rules are anymore.
Not only that, but Democrats inject even more uncertainty by using business-hostile rhetoric and making vague statements about a new era of re-regulation, and how business as usual needs to be reigned in. When Obama talks about ‘putting his boot on the neck’ of a business, it spooks people. It may be even to the point where business’s fears are becoming a bit irrational. But that makes the effect no less real.
The Democrats have taken a bad situation and made it much worse than it needed to be.
So back on point for this thread: The Democrats should leave capital gains rates where they are, and promise not to raise them. They don’t need to reduce them further at this point. Just tell the market what they’re going to be, and stick to it.
Yep, no guarentees they invest it wisely or invest in in U.S. jobs. Might suck - a lot. Would get money moving though, which would have the multiplier effect. Especially if you got rid of short term capital gains tax. Money would move a lot.
Not necessarily good economic policy - personally, I think the unintended consequences would suck long term. Greedy folks would game the system, then the system would collapse. But short term, I think you’d very likely get a good kick to the slow economy.
Yes, but companies don’t release more stock when their stock price is climbing - so you dilute the stock, but you don’t dilute the price by the same amount. i.e. - they are selling their own company at what they think is “high” in order to invest and get “higher.” When the stock is low, they buy back their own company in buy backs - which has the same “not one for one” effect on stock price - it goes up, but general not to an equivalent market capitalization.
Money would get moving ,if other money was not already available and in great supply.
That is the point. There is plenty of money around . The rich are rolling in dough and profits have soared. This would be another giveaway to those who don’t need it.
So, you are calling investors stupid, are you? They are passing up high growth investment opportunities for safety just because they are scared of capital gains taxes? Maybe, just maybe, they read the papers and see the demand problem, which is something I recommend you try someday.
Here is a chart showing VC activity over the past few years. Notice the drop along with the economy. Notice the article says nothing about taxes. When VCs are uncertain that their aggregate return will beat other investment vehicles, they don’t invest. You don’t invest in a startup which will find better ways of making widgets when no one is buying widgets, and you don’t know when they will start.
You appear not to even understand what Marxism is, since it has not been a factor in the discussion at all.
Tell you what, why don’t you propose a big new housing development in say, Salinas. Good idea? Is it a good idea with 0% capital gains tax? Let us know what the bank or private investors say when you propose this deal. Maybe then you’d understand something about the state of the economy, and stop calling anyone who disagrees with your radical views a Marxist.
In fact, the Times reported yesterday that those who still have jobs are beginning to get pay increases, a share of the profits you mention and enhanced productivity as a result of the cutbacks. The number of layoffs has decreased - the big issue is lack of hiring. But your basic point holds - there is lots of money out there, just no good places to invest it, and tax policy has little to do with that fact.
The point is that the money is available, but not moving. This would incentivize the movement of that money.
I don’t think its a good idea by the way. But it WOULD start moving money, which would have a multiplier effect.
Only if the ROI of potential investments without a capital gains tax is above a given threshold, and with it is below that threshold. Since investments people are flocking to now, like T-bills, are way under any reasonable ROI level, I doubt this is the case. it seems to me that investors are seeing relatively low levels of return coupled with high risk, and are staying away. The capital gains tax cut wouldn’t impact risk at all. Putting the money to increase employment directly, and thus demand, would see to work much better.
Why didn’t cutting the rate from 28% down to 15% create jobs? The Bush admin has the worst record on job creation in 80 years.
Do people really consider a 15% tax a disincentive to invest? I don’t consider a 30% tax rate a disincentive to work for a living.
Here’s where Keynesians keep going wrong - they keep dealing in aggregates. “The demand problem” is not real. There are many demand problems. And there are many areas where demand is not a problem at all. There’s certainly no demand problem for Apple, is there? They can’t make iPhones and iPads fast enough to meet demand.
Here’s some data that indicates the problem is labor price uncertainty, and not just a general demand problem: Temp hiring is off the charts. Businesses are employing lots of labor from temp agencies - but they aren’t hiring permanent employees. This is consistent with the notion that the biggest problem today is uncertainty around the future price of labor, and not aggregate demand.
You yourself just admitted that labor productivity is rising. This only happens when business activity is increasing with a fixed pool of labor. It generally means businesses are still trying to expand, build inventory, and do the other things they want to do to be profitable, but they’re unwilling to hire new employees to do it.
Another data point: The Seasonal Job market for students is still strong. If aggregate demand was low and there was a general oversupply of labor as a result, then the availability of students in the summer wouldn’t have as big an effect as it has in years when labor was scarce. But the student employment spike was just as strong as it’s been in previous years compared to overall employment, suggesting that businesses are still perfectly willing to hire people - just not permanent employees (by the way, I don’t agree with everything in that cite, and I think the guy overstates the case, but the underlying data behind his assumptions is still valid).
This was my point in my other message. The U.S. doesn’t currently have a problem with too much tax - it has a problem of uncertainty. Even in high tax regimes you’ll see venture capital move - just not as much. The threshold for profitability has to be higher. That pushes out marginal ventures. But when capital isn’t moving at all, that indicates it’s frozen because of a lack of ability to plan.
I think the Republicans are potentially wrong about needing to drop tax rates to spur a recovery. For example, if the leading cause of uncertainty is deficits and future interest rates, then cutting taxes could signal the market that the government is not serious about deficit reduction, and actually make things worse. Historically, taxes are relatively low right now - at about 15% of GDP. This is due to the recession of course, since tax policy hasn’t changed since 2007, when it was almost 20% of GDP.
In the long term, the U.S. has to get capital gains and dividend taxes down, simply because that’s what the rest of the world has done and therefore the U.S. is at a structural disadvantage. But right now, the key problem is uncertainty. And government can’t fix that with new spending and regulations - in this instance, government is a big part of the problem because its actions are unpredictable and an activist government pushes capital around and mucks with interests rates and changes money flows and burdens some businesses with new regulations and not others, and it’s all very chaotic.
So don’t reduce taxes. A case can be made for not expiring the Bush capital gains taxes and the taxes on the middle class. Because the market is already structured around the current tax rates, and changes will add more uncertainty.
Right now, the government should focus on stability. The Obama administration should announce that their primary goal is to reduce uncertainty in the market. Announce a regulatory freeze. Suspend the financial reform and announce that cap and trade and EFCA will not be considered for a minimum of five years. Streamline regulatory approvals. I think the health care plan is a big contributor to the problem, but I don’t know how to undo that. But it should never have been done at this time.
The government should also work on fixing the entitlement crisis, and come up with a feasible plan for long-term deficit reduction to reassure markets that there will not be a debt crisis in the near future.
The other thing the government should be focusing on like crazy is trade. Trade has been largely ignored by this administration, and it’s the one thing that can improve economic growth without more taxes or borrowing.
Even with all this, don’t expect big growth. This was a ‘balance sheet’ recession - trillions of dollars in paper value were lost, destroying the balance sheets of individuals and businesses. The government can’t fix that by borrowing and spending. Savings rates need to stay high for a while until people feel comfortable about their net worth. Then they’ll start spending again. In the meantime trying to force them to spend with fiscal stimulus or tax breaks for spending is just going to make the recovery longer and shallower.
[QUOTE=Sam Stone;12795462This was my point in my other message. The U.S. doesn’t currently have a problem with too much tax - it has a problem of uncertainty. Even in high tax regimes you’ll see venture capital move - just not as much. The threshold for profitability has to be higher. That pushes out marginal ventures. But when capital isn’t moving at all, that indicates it’s frozen because of a lack of ability to plan.
I think the Republicans are potentially wrong about needing to drop tax rates to spur a recovery. For example, if the leading cause of uncertainty is deficits and future interest rates, then cutting taxes could signal the market that the government is not serious about deficit reduction, and actually make things worse. Historically, taxes are relatively low right now - at about 15% of GDP. This is due to the recession of course, since tax policy hasn’t changed since 2007, when it was almost 20% of GDP.
.[/QUOTE]
One thing I would add to your well-written post, which you implied but maybe should be stated explicitly, is the credibility that any tax change (and policy/regulatory change) will be permanent.
A capital gains tax cut, for example, would have to be credibly permanent for it to have any significant effect over the short-to-medium term.
For example, given the two choices of
- A 0% capital gains tax ‘holiday’ or targeted boost vs
- Keeping long-term cg taxes at 15% permanently (and getting investors to believe that) and not playing politics with ‘special cases’ like PE firms
The latter is obviously preferable.
You may already feel like you stated that Sam, but given the signal-to-noise ratio that is invariably injected into these discussions from the left, it probably bears repeating.
So why would anybody else buy it? There has to be a buyer for there to be a seller. See my reply to Sam Stone’s post above.
I don’t know. I think you’d get a LOT of churn from idiots daytrading. Buy 100 shares of Home Depot at $27.61. Wait for it to go up a buck, make $100 tax free. People are always looking for an easy buck - and you just gave them $100 instead of $60. That’s a significant difference in return for risk - and daytrading has a whole different risk profile than sensible investing.
That would drive the market up, the fundamentals still would be the same, but a whole lot of yahoos trade on trends. They are sheep.
(Oh, did that sound judgmental…)
As I said, I don’t think its a good idea, but I think you’d move money and that money would create more money. Not from sensible investors. And it would only last for as long as the shell game continued. And some people would get rich. But most of us would end the shell game worse off.
Exactly
Totally agree with this. There might be one benefit, in the short run. If we could magically boost the Dow by 5,000 or 10,000 points or so, people would see lots more money in their 401Ks, might feel richer, and might start spending again. The trick would be letting the air out of this bubble slowiy to get to a sustainable point. We’ve not been very good about doing that, have we?
Gee, jigsaw puzzles and movies did great during the Depression. No demand problem there either? The sale of smartphones in general went up 50% last quarter, according to El Reg. But saying consumer spending is flat in general does not imply that there aren’t markets doing great. That we have jobs, and my wife’s writing business is going great guns is not a sign that there is no unemployment problem.
Temp hiring is indeed doing great, but saying that concern about the cost of labor is the reason is absurd. If you have a short term need for labor, but are very concerned that it will go away, hiring a full time employee is very expensive, and firing him is even more expensive. You can get rid of a temp in no time, with no morale issues and no severance. With 9.5% unemployment, who is going to worry about wage pressures, at least in the short term? if you are claiming that HCR is the cause, you should be able to show me differentiation in hiring between industries which already provide benefits, and which won’t see their costs increase, and those who don’t.
My wife always does well in transitions because as a freelancer she works for companies who either are getting more work but are scared to hire permanents, or who just laid off more people than they should have for their workload.
Or when business activity is static with a decreased pool of labor, which is actually the case.
Or that they are trying to wring every bit of work out of the people who are left. Robert Reich notes hiring is happening overseas, or profits are being invested in labor-saving technology. I can’t argue either of those actions from a purely economic viewpoint, but neither indicates worry about the future cost of labor. The present cost seems to be the problem.
I think you are misinterpreting the chart. The increase in employment versus May is indeed roughly the same as in previous years. However the number of student employees relative to 20 - 24 y.o. employees is reduced. Since the reduction is more or less the same in May as in July, you can get the expected spike relative to May without a strong job market. In addition, student employees are temps, and we both agree that the temp market is relatively strong. But not as strong as you’d expect. That’s probably because there are lots of unemployed adults clogging up those jobs - at least that was the experience of my daughter’s friends.
Agree with this, and a bunch of other stuff I deleted.
Saying there is a demand problem doesn’t imply I know how to fix it. Individual balance sheets are improving - business balance sheets are in general good. I think 80% of companies reporting profits beat forecasts. But this has been at the expense of demand and employment. We seem to be translating productivity gains into higher wages, which will help demand for those with jobs, but how do we grow enough to employ the rest? I agree that trade might be the answer, but we are getting frozen out of the fastest growing market through currency policy, IP policy, and import barriers.
Here’s what small businesses have to say about their current situation :
The National Federation of Independent Business’ survey of small businesses shows that entrepreneurs aren’t happy with Washington, but not for the reasons Mr Brooks suggests:Unfortunately, Washington, D.C. and many state legislatures seem determined to undermine any economic forward momentum for small business owners. And even though small business owners continue to plead their case for policies that will help foster economic growth, many lawmakers are unwilling to listen. Small business owners keep saying that poor sales (“It’s the consumer, stupid!”) is their most pressing problem and the reasons they aren’t interested in expanding are due to current economic conditions and the political climate.
Small firms are on the sidelines, and it’s not just because of tight credit from the financial meltdown, as the Obama administration and others have been saying.
Rather, a host of factors — some well-recognized and others seemingly unnoticed in the national debate over economic policy — are converging to restrain small-business owners from hiring.
Among them:
Near-stagnant demand for goods and services as a result of consumers’ reluctance to return to their free-spending ways.
A disturbing falloff in the creation of new small businesses.
The devastation of the real estate market.
Uncertainty about the economic outlook at home and abroad.
“Small businesses are not hiring, and until then, we will not have a strong, sufficient recovery,” said Rep. Daniel Lipinski (D-Ill.), a member of the House Committee on Small Business. “I think this is why the economic recovery is moving very slowly.”
It’s a historical change of major proportions. In each of the previous three economic recoveries, small employers accounted for the vast majority of new jobs — the bulk of them coming from firms with fewer than 20 workers, according to Census Bureau data.
Between 1990 and 1993, employers with 1,000 or more workers added 258,000 jobs. Those with 500 to 999 workers shed 102,000 jobs during that period. But the smallest mom-and-pop operations added 860,000 jobs, census figures show.
The contrast was even more dramatic after the deep recession in the early 1980s.
This time around, unemployment levels are worse than in previous downturns, seemingly stuck near 10%, with more dismal news coming in Friday’s jobless report for June. That and other recent evidence of economic weakness have increased fears of a double-dip recession.
The fact that many small firms are seeing little increase in demand for their services and products is decisive for Scott George, owner of Mid-America Dental & Hearing Center, which employs 55 people in the southwestern Missouri town of Mount Vernon.
“I’m not having any trouble getting money,” said George, who recently got a $250,000 loan to renovate one of his buildings. But he’s not hiring more workers because of little or no growth in sales.
So it’s lack of demand that’s their main problem, something you recently agreed was the main cause of the current recession. Now you’re back to parroting conservative boilerplate about regulations, because if there’s one thing the financial meltdown, the dodgy mortgage free-for-all and the BP spill have proved over the past couple of years, it’s that the US economy is much better off when it’s unregulated.
Temp hires are up but average hours worked per worker is down. Temp hires are dropping recently too as stimulus money dries up :
People knew what their employees’ healthcare costs were going to be in five years before the Obama bill but not after? Seriously?
Stimulus money spread by political whim? What about the fact it was 40% tax cuts? What asbout the fact another 30% was aid to states to prop their budgets up?
Nobody is planning to ram any legislation through congress, it’s completely impossible due to not having 60 votes in the Senate anyway, yet more parroting of conservative nonsense.
And yeah, financial regulation is going to cripple the economy. The financial sector was doing so well before the dead hand of government regulation caused a multi trillion dollar meltdown. Oh wait!
And as for the point of the thread of capital gains causing an economic boom, look at the pile of money businesses have been sitting on for decaes now :
Corporate capital accretion really took off after Ronald Reagan slashed taxes on business. Why is that, anybody?
Maybe you missed the part about a zero percent tax rate. It doesn’t matter how much capital gets shifted into investment - none of it will ever be government revenue. And it’ll be a double hit - zero taxation will draw capital from other areas that are taxable.
As for the idea that investment equals job growth - cite? Trickle down economics (aka “voodoo economics”) doesn’t work. Plenty of businesses are increasing their profits by reducing their labor force or moving it overseas.
The idea is that the rising stock market would increase consumer and corporate confidence. That would induce both to spend. For them to spend, their needs to be labor - that labor then becomes your tax base.
i.e. and simplistically - Some daytrading yahoo makes $100 on Home Depot and decides to get her hair colored. That’s $100 in the pocket of the salon. That’s a colorist working for two hours. The colorist gets longer hours, she then feels like she can splurge on dinner out - that’s money in the hands of the restaurant and the waiter and the food suppliers. The profits from that money are taxed as income tax. The state gets sales tax on the transactions. The daytrading yahoo tells her friends how easy it is to make $100 in the stock market. Her friends start daytrading, the market goes up.