When Lowering Interest Rates No Longer Works
Under current federal tax law, appreciated assets that are sold by an individual after being held for more than one year are considered long-term and will be taxed at a maximum rate of 15 percent. Capital gains by entities taxed as corporations do not receive preferential treatment, and are taxed at a maximum rate of 35 percent.
If the length of time for the holding period and the current rate were both reduced for capital gains tax purposes, equity investments would become more attractive. More capital would become available for businesses, and more available capital would start the scenario of expansion, increased employment, consumer confidence, and consumer spending.
Currently, the depreciation schedule for income producing residential property is 27.5 years, and the schedule for commercial real estate is 39 years. The construction industry is arguably the largest industry and largest employer (combining immediate and support employees) in our country. Real estate is the biggest item (using market value) on the balance sheets of America’s companies.
Privatization of social security means that the individual beneficiaries would become responsible for investing their funds. Obviously, this should be done under a set of federal government standards and guidelines.
The scope of this program is enormous. To put it in perspective, the 401K individual retirement program ultimately grew from zero to a point where it represented more than 20% of the entire stock market. The social security program would dwarf that in size.
The privatization of social security is an idea whose time has arrived. It will still take several years to get started, and it will not happen all at once. There needs to be a transition period where investment responsibility moves from government investment to individual investment. Initially, the amount of money that the beneficiaries invest should be small and carefully monitored. The amount of capital this transition will provide to businesses is immense.
The federal government can offer tax incentives to certain target groups. The government should choose those groups that invest in research for new products and/or expand their current operations to create more products that will have a significant positive impact on the economy.
In the past, when business couldn’t or wouldn’t expand, the federal government instituted its own work programs. The government found projects that needed to be done (i.e., road building, dam building, cleanup of federal properties, etc.). The government hired people to do the job, and the people worked, got paid, felt good, and spent money, thus having a positive effect on the economy.
There are restrictions on exporting our products to and selling our products in many countries. An effort can be made to lift these restrictions to make American-made products more attractive to overseas buyers. Lifting restrictions will increase revenue and profits and cause businesses to expand by hiring, etc. Well, you get the message by now.
Summary
The preceding essay describes eight ways to motivate the economy in addition to the Fed lowering interest rates. There are numerous variations of each method plus an unlimited number of additions that bright government minds can think up.
There is no guarantee that these programs will turn a poor economy around. Two ingredients are necessary to ensure an economic rebound: (1) The ability and conviction to start, manage, and conclude each program. These are economic fixes, not societal changes. (2) These programs require a well-educated society, and won’t work in an illiterate society. Consequently, the government’s commitment to education should be at the highest level.
Conclusion
Since World War II, there have been nine recessions. Since World War II, there have been nine economic recoveries. That’s a 1000 batting average. These recoveries were mostly encouraged through the federal government’s management of monetary policies by changing interest rates. These successes by the government were accomplished without using many of the other options available to stimulate the economy. Given this track record, it’s not wise to bet against the future success of the American economy.
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