Jumpstarting Jobs: The Lost Lesson of the Great Depression

Great Depressions do not have single causes. As John Kenneth Galbraith pointed out in The Great Crash: 1929, a key cause of the 1930s Depression was the severe contraction of consumption, due to a negative wealth effect, lost wages, and a destruction of confidence. The stimulus package was designed to address that problem in today's economic crisis, and the argument among those who acknowledge economic history is whether it is sufficient or correctly targeted.

Thus, the first lesson of the Great Depression was learned--without any Republican support, a massive stimulus was passed. Although it is far too early to judge its effects--it took Reagan 2 years (!) before unemployment began declining from 9.7%, a fact Democrats ought to throw back against Republican complaints the stimulus they opposed but whose money they accept is not working--it is unarguable that the tax cut portion is not increasing consumption but helping middle class families repair their personal balance sheets.

On the other hand, cash-for-clunkers and tax credits for first-time homebuyers demonstrates that short-term benefits can stimulate behaviors desirable for the economy even in devastating economic times.

In that same volume, Galbraith identified another major cause of the Great Depression: the rich hoarding rather than investing their money.

Just as Galbraith observed in1930s, investors and investment funds today are saving and hoarding. Venture capital firms are also hoarding their cash to do follow-on investments in their current portfolio and to protect against inability to raise their next funds.

This "investment deficit" is the forgotten lesson of the Great Depression. To jumpstart jobs, we need to remember it.

Relying upon the success of the two consumer based short-term incentives mentioned above, the best way of doing that is a targeted, 12-month limited, capital gains tax rate of zero for new direct investment in companies with 100% of their workforces in the United States.

The tax reduction should be limited to investments made within 12 months so that capital has to flow quickly in order to qualify. That will spur job growth especially in young or new businesses who have been trimming their plans because of lack of sufficient capital. It should be limited to new direct investment--e.g., newly issued stock or debt by companies--so that the money goes to companies and not other investors who decide to sell their shares. It should be limited to investments in companies that have, and maintain, a 100% US workforce--because the purpose is to grow US jobs.

What is the effect of this proposal on the deficit? Because an investment must be held one-year to qualify for capital gains lower rates, the impact on the deficit in year 1 is zero; indeed, with job growth, the tax revenues from a now-employed worker and the reduction in unemployment payments will provide a net plus to federal revenues.

In year 2 and beyond, the budget impact will be measured by the reduction in revenues due to capital gains taxes not realized from the qualified investments that would have been made anyhow minus the increased revenues from newly-employed workers and the reduction in unemployment payments that no longer have to be paid.

Nor is this is an invitation to reckless investing because there is no benefit of a zero tax on capital gains unless the investment actually produces a gain.

The disastrous Bush Administration dumped in President Obama's lap the most severe economic crisis since the Great Depression of the 1930s. The Obama and Federal Reserve policies have, at least, prevented the crisis from reaching the depths of the 1930s Depression by learning the key lesson that massive government spending and liquidity were required antidotes.

The forgotten lesson of that calamity is the need to reduce hoarding of money by the rich, and to put that cash into investments, in order to trigger new hiring, reduce unemployment and begin a virtuous cycle of new jobs, less unemployment payments and more tax revenues from working people.

The "Jumpstarting Jobs" proposal provides a short-term benefit to trigger an outpouring of new investment that goes directly to companies that have and maintain a 100% US workforce. Additional incentives, such as a tax credit for businesses that hire a US worker, as originally proposed by the President but removed from the stimulus, would provide further encouragement for businesses to use that money for new hires.

Recovering from this crisis requires we learn and act upon all the key lessons of past economic calamities.

Disclosure: I am an investor and partner in a venture capital fund. Most of the fund's money is already invested (in companies with a 100% US workforce that are pushing back the frontiers of medical science) and so would not benefit directly in a major way from this proposal. It would indirectly benefit from an general sustained uptick in the economy especially one that rebuilds the strong middle class we had before Reagan and the Bushes undermined it

 

Comments

[marinara]

Paul Abrams makes a mistake by saying that the upper class, or the rich are hoarding money.

1. they are hoarding debts bundled into securities, much more than they are hoarding cash.
2. It's not so much the rich, but the corporations that are hoarding the debts bundled into securities, and those corporations are also owned by average citizens.

[DuganS1]

"it took Reagan 2 years (!) before unemployment began declining from 9.7%,"

That's because the Federal Reserve purposely continued to increase interest rates until the economy went into recession. The stimulating effect of the Reagan tax cuts weren't close to enough to mitigate the effect of significantly high interest rates. For Obama, interest rates are at their lowest in history and the Fed is monetizing debt, so the wind of the Fed is at his back, not against him like with Reagan. There simply is no comparison there.

[itolduso]

They want Obama to fail more than they want a temporary tax break

[ResidualSelfImage]

Obama isnt fixxing bad trade deals like he promised.
We are third world and will stay there for three years.

[Aaror]

We are third world and will stay there for 20 years.
Thank Bush, Bush, and Reagan for that

[DuganS1]

Reagan was considered to be a bit of a protectionist. NAFTA has not damaged the US economy. The entry of China into the WTO has created significant dislocations in the US economy, however. But the way to fix it, is to help US businesses (cut taxes, investment tax credits, govt health care) and allow union businesses like GM and Chrysler to fail as unions are a major disincentive for companies to invest in the US.

[leduck]

there is a huge difference betweenthe Great Depression and the Great Recession. World oil production was rising during the Great Depression.
However, just prior to the start of the Great Recession, world oil production began to flatten out.
World oil production has been on a plateau since 2005.
Light sweet Crude Production PEAKED in 2005
the difference is being made up by an inctrease in the production of heavy sour crude. But that's just keeping us on the plateau. At some point within the next few years, heavy sour crude will no longer be able to keep us on the plateau and world oil production will begin to fall, and will keep falling permanatly.

then a few decades later, world natural gas production will fall dramtically, followed eventually by world coal production. Prior to PEAK COAL, we will hit PEAK HYDROCARBON, that'll be fun.

[snaggle2th]

The old "paradox of thrift": hard times mean people save and don't spend, meaning aggregate demand falls AND businesses TOO defer investements because ot that- who in their right mind would buy capital goods and increase employment when the markets for output are drying up? No one, they'd wait til the economy turns around and then all pile on when the rebound portend better times ahead. That's why effectively "0"% interest rates have been no stimuli for business borrowing- they'd have to pay that "free" money back and there's no certainty that the customers would exist for the new ventures created.
Yes, that's the critical flaw in all the tax cut and give money to the rich and business arguments that only those can stimulate the economy- they COULD but they WON'T, not until there's a prospect for a profit in it; and until then they'll let their money sit idle, at as little risk as can be had....
You want to "jump start jobs"? Give big money to little people that'll go out and spend it right away on things they need (cash for clunkers, health care, child care, infrastructure- school improvements, bridges, roads, etc.) increase demand NOW and THAT'LL stimulate business more than tax incentives tomorrow....

[Aaror]

Well, we should be revenue neutral about it though, that way the Repubs can get behind it.
Wasn't Ike a Republican? How about we reintroduce Ike's tax plan, and use it to pay for stimulus payments.
The biggest one I would like to see is solar panels and weatherization of every house in the US. We decentralize our power production, reduce CO2 production, and reduce household expenditures!
And of course reducing someones power bill for the rest of their life is like a pay raise, isn't it?

[free speech for all]

There is a fundamental difference between now and 1980 ... huge amounts of personal, corporate, and governmental debt. Borrowing on top of borrowing, borrowing to pay interest on borrowing, printing money to cover borrowing. It's a giant house of cards paid for with a subprime mortgage. I agree with George Soros that the US banking system is insolvent, broke, busted, kaput.

[janejoad]

Oh come now...we all know the rich spend the big money mostly on themselves and the least amount on the cheapest and almost always illegal labor they employ in their households ( except for maybe a private chef).. Read the LA Times and you always see ads for domestics on the westside, where of course, the rich live. The MTA would be out of business if it weren't for all the servants riding west for work. And hey, what about all bling they hide in brown paper bags nowdays? The only time you see them looking like the rest of us is when TMZ catches them at the airport. Hoarding their money...what a crock....as if they don't still buy all the best clothes, jewelry, cars, homes and drugs they can get their hands on. They haven't truly invested in years, think Maddoff. They don't build hospitals, schools and roads, they don't start green businesses that employ American workers, they buy real estate, and not much else that would actually do any good for American workers, except for designers, jewelers, plastic surgeons, dentists, restaurant owners, car dealers, and pilates instructors.