Taxes & Spending

How to Fix and Restart America’s Broken Jobs Machine

Three years into Barack Obama’s failed presidency, America’s jobs machine remains broken, venture capital investment is on strike and much of our workforce is still idle.
 
After trillions of dollars in stimulus spending of one kind or another, unemployment remains stuck at 9% or worse—16%, counting long-unemployed Americans forced to take part-time, work, or job-seekers who have become so discouraged they’ve dropped out of the work force and stopped looking.
 
Earlier this month, the Labor Department’s Bureau of Labor Statistics said the feeble Obama economy created only 80,000 jobs in October, when it needs to produce at least 350,000 jobs a month for the next three years just to roll back the jobless rate to 6%.
 
The Department of Commerce said the economy grew at a snail’s-pace 2% rate in the third quarter, sharply down from the 2.5% level it had first reported.  That means the Obama economy remains feeble at best, with slower growth, fewer job opportunities, higher poverty levels and declining incomes in the foreseeable future.
 
Despite the White House’s insistence that the economy is growing and “moving in the right direction,” the state-by-state jobs picture has worsened in the past year.  At least 20 states are reporting unemployment rates of more than 9%, and nearly a dozen of them remain stuck in the double-digit range of 10% to 13.4%.
 
There are many reasons that Obama and his economic advisers have failed to get the economy moving again, but the biggest is the failure to free up investment capital—the mother’s milk of a prosperous, full-employment economy.
 
“Whether it is borrowing from a relative, getting a line of credit at a bank, attracting venture capital or taking a company public, businesses depends on transparent and efficient credit markets to raise the capital necessary to expand the economy and create jobs,” says the Chamber of Commerce’s Center for Capital Markets Competitiveness.
 
While corporate America is sitting on a hoard of its own cash in a still very uncertain, recession-tilting economy, the investment community is holding back trillions of capital.
 
The Wall Street Journal famously declared in an editorial that capital investment “is on strike,” and therein lies the reason for the Obama economy’s prolonged paralysis.
 
The economic policies enacted or now proposed by the Obama administration are the principal culprits.  Obama’s latest jobs scheme seeks to reinstate the 36% and 39.6% top tax rates, impose a 20% tax on capital gains and dividends, slap new taxes and regulatory rules on the financial community, and raise income taxes on small businesses, the economy’s largest job creator.
 
Trillions of dollars in potential venture capital for investment is available, but it’s locked away in stock assets or cash accounts both here and abroad, when it could be used to strengthen the economy and put our people back to work.
 
At the same time, Obama’s big-spending, regulation-happy mandates and policies have created a suffocating business climate in which there is little or no confidence to expand existing businesses and invest in new ones that will create the jobs of tomorrow.
 
One stunning set of statistics illustrates the critical role that disappearing investment has played in the recession:  Between the fourth quarter of 2007 and the recession’s official end two years later, the economy shrank by just 5.1%, but investment expenditures plummeted by a job-crushing 34%.
 
“The subpar recovery has coincided with a historically weak investment recovery,” Harvard economist N. Gregory Mankiw writes in a New York Times analysis about “How to Make Business Want to Invest Again.”
 
Compare Obama’s meek recovery period with the early 1980s, when we had a severe two-year recession that sent national unemployment rate soaring to nearly 11%.

Power of Tax Cuts
 
“That recession ended in the fourth quarter of 1982.  In the subsequent two years, investment spending grew by a total of 54%.  By contrast, in the first two years of this recovery, it grew by half that amount,” Mankiw says.
 
The big difference between the two recessions is that President Ronald Reagan cut income tax rates across the board, and reduced taxes on capital gains that unleashed a flood of new business investments that boosted job creation and drove the unemployment rate down.
 
Of course, there were other factors holding the economy back, such as the housing market, which is still in a depression, but the plunge in business investment has been a critical factor in the Obama economy’s persistent weakness long after previous recessions have sprung back to life.
 
“Over the last two years, nonresidential fixed investment has grown by only 12%, whereas during the two years after the 1982 recession, it grew by 27%,” Mankiw points out.
 
“Similarly, the narrow category of spending on business equipment and software fell more than twice as much in this recession as it did in the 1982 recession, and it has been slower to recover,” he said.

History’s Lesson
 
Top economists at the nation’s largest business groups in Washington told Human Events last week that business investment will expand if business tax rates are reduced permanently, along with taxes on capital.
 
With George W. Bush’s tax cuts due to expire at the end of next year, including a 15% capital gains tax rate, among others, business uncertainty has virtually paralyzed future investment decision-making, business analysts say.
 
“There’s an enormous amount of uncertainty out there.  That makes it difficult for them to plan, and to some extent they’re putting off investments until they see which way the economy is going,” Dorothy Coleman, vice president of tax and domestic economic policy for the National Association of Manufacturers told Human Events.
 
“If Congress does nothing, “business taxes are going to go north of 40%.  Capital gains tax rates could go up to 20%.
 
Dividends could go up to the highest individual tax rate,” Coleman said.
 
“There’s a very active [business] coalition that’s pushing lower tax rates on capital gains and dividends,” she said.
 
After President Clinton signed a Republican-passed bill to cut the capital gains tax rate in 1997, tax revenues rose from $62 billion to $110 billion between 1996 and 1999.  The stock market’s Dow Jones Industrial Average climbed from 7,000 to 10,000 in three years, and venture capital investment shot up from $10 billion in 1996 to $53 billion in 1999.
 
Clinton never talks about the tax cut on investment he signed, but it is widely credited for boosting the economy by an average of 4% per year from 1997 to 2000.
 
The answer to our economic and debt problems is clear and convincing.  Sharply reduce the existing 15% tax on investment for all income brackets, including capital gains and dividends, and then watch this economy take off.

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