Sunday, September 5

Fixing The Economy: Incentives

The Economy's Bumpy RideWe all know the economy is broken in some way. We only have to look at the jobless claims numbers to see that. The bigger question is why?

While there are plenty of theories around, some reasonable and some not, I've got my own and I'm not afraid to share it with you. Don't worry, this isn't going to be political in nature.

So, what's wrong? To put it simply our incentives are out of control. We provide incentives to decision makers that have them take actions that are against our own best interest.

This issue is present at all layers of decision making. Perhaps most striking is the level of payment made to the titans of business and finance. They are given incentive to take massive risk, generate short term gains, and then cash out before the inevitable negative consequences of such risks can come home to roost.

You've heard of the financial crisis, right? Guess who is paying for this mis-incentive? Yeah. You, me and everyone else.

Another area that is related to politics, but not directly political itself, is the process of lobbying. Our officials are given incentive to take actions based on the financial interests of individuals instead of the good of the public. If it was any other way these lobbying firms would not have to spend so much money. It wouldn't take so much convincing if the requests really were good public policy.

Anyhow, before I venture into the political realm, let's talk about fixing things as I originally promised.

In terms of the financial crisis one of the issues that is discussed is the fact that big business is finding it easy to raise cash and they are then sitting on it. So, they have wheelbarrows of cash ready and waiting but they aren't using it -- they aren't buying things and using them to generate jobs.

So, since my premise is that we have the wrong incentives, how can we change this? What about providing a tax break for companies that make capital investments within our borders? You know -- invest in plant, property and equipment and get a large tax break.

I know, the dreaded tax break. How can we afford tax breaks? Well, if we were to have large companies starting new projects then we would be hiring people to manufacture and assemble the items purchased. As long as this is the case we would find that the tax breaks are less costly than not creating quality jobs for our friends and neighbors.

However, it's also important that we don't sit around giving tax breaks to companies when the costs are not balanced by their effect on unemployment. We should scale the breaks back over time. They could be decreased by some percentage annually (e.g. 20% each year for 5 years) or they could be directly related to the national unemployment rate.

The idea is to give incentives to big business, those that have the money, to put it to productive use and create jobs. It's the lack of jobs and the lack of consumer confidence that is holding back the economy. So, we need to give the right incentives to decision makers so that they will change their individual actions and together help fix it.

Individually, we can also help. Yes, really.

How many of us are so anxious to get out of the grocery store with our goods that we'll use the self-serve checkout machines? Well, great, but you do realize you are helping the store fire it's cashiers? I'm not suggesting we all sacrifice conveniences but during tough times we may want to think carefully about our own habits and look for ways to make decisions that support local jobs.

If we can find ways to align our actions with our own long term well being, perhaps represented by low unemployment rates and economic stability, then we'll all be much better off. This applies to both the largest economic players as well as each of us individually.


As part of his emerging program to jolt the economic recovery from its stall, President Obama will call this week for allowing businesses to deduct from their taxes through 2011 the full value of new equipment purchase, from computers to utility generators, to increase demand for goods and create jobs.

The upfront deduction would allow businesses of all sizes to keep more money now and would give large corporations, many of which are sitting on cash because of uncertainty about the economy, an incentive to spend and invest.

Courtesy CNBC dated 07-Sep-2010

Well, now it looks like my idea will sink or swim in the light of public scrutiny. While I did originally outline these thoughts on CNBC's comment system over the last couple weeks I didn't really think the Pres was listening! ;)

Note: Image above lifted from this post on the QiRanger Adventures blog.

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Diane said...

I'm really grateful I have been living frugally for many years. I used to joke that I had some kind of "depression era" gene that made me save resources. Sometimes I would hang onto things I didn't really need, like twist ties, for example. Then about 3 years ago, the construction industry collapsed and my husband lost his job. The skills I've learned over the years made it not so painful, but I imagine a lot of people are in shock when these kinds of things happen to them.

I find it really nice to not have to spend my life being a slave to money. Because we need less stuff, we are able to get by on less and enjoy a simpler lifestyle.

Jodie said...

Fixing economy, that's a hard task, no doubt about it but we can do this if we are really devoted to the problem and its fixing, I hope it will happen soon because we really need a stable change now.