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Government and the economy

May 27th, 2009 · 3 Comments

We generally abstain from too political stuff but despite the fact that this will rouse some tempers here and there, the following article actually contains a simple elegant explanation we haven’t come across elsewhere..

We knew Robert Frank from an innovative book in the mid 1990s called ‘The Winner Take All Society’, but lost track of him since, which is a pity, because he is an original thinker…

Will Obama Be Good for Business?
By Stacy Blackman

I recently interviewed Dr. Robert Frank, professor of management and economics at Cornell’s Johnson School of Management and author of The New York Times’ “Economic Scene” column. His theories and opinions diverge from the more traditional views that the business community holds on government’s relationship with the private sector.

Why consumer spending alone won’t fix the economy

While Frank says there is nothing wrong with consumers who have the means doing their part to stimulate the economy by eating at their favorite restaurant more often or buying a new car, he his firm in his opinion that “no single consumer can make any difference. If you try to imagine the actors on the scene who could make a difference, the only one is government, whose decision to spend more is really capable of bring the economy out of a downturn. ”

The reason? The government can borrow money at two to three percent interest, compared with the average consumer credit card rate of 20 percent. Also, “there are lots of useful projects we can spend money on in the public sector — fixing roads, fixing bridges — that will help stimulate the economy. Government is one actor that is big enough and has the borrowing capacity to carry it out on a grand enough scale to make a difference,” says Frank.

The power of government spending

Frank sees government spending doing two key things: creating jobs and fixing problems that will save consumers money. As an example, Frank cites hiring people to fix the nation’s roadways, which will save consumers the $120 average per year in damages that cars sustain by driving on bad roads.

How Obama can help business

Frank also views some of Obama’s specific initiatives as being good for business. For example, Obama’s proposal to revitalize the scientific establishment. Says Frank, “We shouldn’t have been cutting the National Science Foundation resource budget at a time when a larger share of patents worldwide are going to people outside the U.S. The lifeblood of our future is the ability to produce new ideas.”

He also points to the controversial idea of universal healthcare as one that will free the manufacturing sector and other businesses from carrying the healthcare costs of their employees, a burden making it difficult for companies to compete with businesses from countries that don’t bear those costs.

Frank’s proposal for fixing taxes

At this point, readers might be thinking these ideas are all well and good, but pulling them off will come at an enormous burden to tax payers. Frank believes our tax system is indeed flawed, and proposes a new system: “Scrap the corporate income tax in favor of a progressive tax based on consumption.”

Frank explains that this tax system would report income minus savings, and that would be our income for the year. Taxpayers would receive a generous standard deduction, and the number left would be their taxable consumption.

“The rate starts out low and then it grows and can get much steeper than the highest tax rates on income. That’s advantageous because it encourages savings; a deficit of savings helped precipitate the most recent economic downturn,” says Frank.

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Tags: Public Policy · Reform Capitalism

3 responses so far ↓

  • 1 ron cobb // May 27, 2009 at 6:16 pm

    …….and your point is…..Bigger Government?

  • 2 admin // May 27, 2009 at 6:34 pm

    No, that’s not the point, although:

    1) Quality of government is MUCH more important than it’s size
    http://seekingalpha.com/article/131139-is-big-government-necessarily-a-bad-thing
    2) At present, there is a rather large demand shortfall which can only be made up by spending, and since the government has two advantages mentioned in the article (borrowing at much lower rates and investing in public goods with large multiplier effects) it’s keeping the economy from falling of a cliff
    3) Frank’s tax proposals are rather interesting, we would say.

  • 3 J Jordan // May 28, 2009 at 6:06 am

    Our gov’t is crappy at best now and hideously corrupt. The bigger it gets the more corrupt, inefficient and tyrannical is WILL become. American style socialism is much more politicized and inefficient than European style socialism. Europe has a history of 1000 years plus, and a less transient populace, which makes for more responsible laborers as families and communities expect citizens to be somewhat responsible and conform. In the US, we subsidize the barnacle/parasite class and generally encourage and reward irresponsibility, making ‘efficient government’ in the US a fantasy.

    Re-kindling the original American Spirit as embodied in the US Constitution is the key to enlarging freedom and prosperity for most.

    Oh, and if it makes you feel better, Colonial America was the offspring of the BEST ideas of Europe. The US Government was most EFFICIENT when it obeyed the Constitution.