Why Neither Government Stimulus nor Tax Cuts Alone Will Work
There appear to be two schools of thought about how to kick-start the economy. One side argues that the government needs to create a market for goods and services in the absence of consumer demand. The other side argues to give tax cuts to business owners so that they will invest their new found capital to hire new employees and buy capital equipment to make and sell more products. Both are right, and both are needed right now.
The government can’t indefinitely play the role of the consumer, and no rationale business hires new employees or invests in capital equipment in the absence of market demand. In order to kick-start the economy government must first spend to create market demand and businesses must then have access to capital and meet this demand by hiring new employees and investing in capital equipment. A robust and diversified economy emerges once employees and businesses have both things to buy and money in their pockets to spend.
For example, if federal and state governments made it their policy to only buy cars and trucks with high minimum fuel efficiency, but within the range of today’s hybrid and electric ‘green’ alternatives, this would presumably create market demand from some of the automotive industry’s biggest fleet customers. If these governments then also provided tax incentives and loans to those companies who chose to invest to meet this demand, this could start a ‘virtuous cycle’ that could kick-start the economy while also reducing the trade deficit and strengthening national security by directly reducing the importation of foreign oil.
This is certainly not a new idea, but it could be put in place today by federal, state and local governments with just changes to procurement and tax policies. And this same approach could be replicated with respect to government building requirements, energy supply requirements, device energy consumption requirements, etc.
What is needed is leadership. We need the will to change procurement, tax and loan policies to achieve an important national security objective. Survival.