Stimulate What is Needed

Economic growth is like any other type of growth, it operates in fits and starts.  But recent efforts to stimulate the economy, at least as it's seen in Washington and the 50 state capitals, appears to be viewed as simply adding or protecting government jobs.  Then, they tell us, the discredited Keynesian multiplier will help us get over the hump, and a governmental Tinkerbell will sprinkle fairy dust on all of us.  Of course she will.

To provide true economic stimulus and job growth, new private enterprises, with the potential for real success, must be receive initial funding, and encouraged to grow into moderate sized businesses.  That's where most of the needed job growth will occur, and that's where future tax revenues will be generated.  But it must be self-sustaining.  No government job ever created is self-sustaining.  None.  Ever. 

My wife is an avid gardener and we were talking about the situation in the economy and she came up with a brilliant analogy.  She said that, as a gardener, she plants seeds, and those seeds germinate and grow, and produce flowers or fruit, and more seeds, for more plants that can germinate and grow and so on, and so on.   But, she said, the government functions like a gardener who buys cut flowers and sticks them in the ground, but each day they have to go get more cut flowers to replace the ones that have wilted.  Their way is never self-sustaining, nor will it ever result in an increased yield.

Now, for all my right-of-center friends, and even my so-far-right-they-pipe-in-sunshine friends, I am not suggesting that we allow any government agency or czar or elected officials to pick what seeds are planted.   In the first place, they are utterly clueless about what is commercially feasible.  In the second, any sort of economic stimulus that is imposed from the top down is destined for failure.  And finally, any governmental "stimulus", as we have recently seen, is ripe with the potential for corruption.

However, there is a way to encourage investment in new, emerging companies, that would cost the taxpayer little to nothing.

Individual venture capital firms are extremely knowledgeable in their selected areas of commerce, and are adept at evaluating which embryonic firms are likely to grow and be successful.  They are also investing their own money, not taxpayer money, so picking successful business is much more immediate and important to them than it could ever be to any elected official or bureaucrat.

So suppose we set up a system of taxation similar to that which governs capital gains on our homes.  For example, if we buy a house for $250,000, and then sell that same home in the future for $350,000, normal capital gain rules would result in taxes being levied on the $100,000 gain.   But if within a specified, limited time period you purchased another house, for $350,001 or more, the capital gain would be deferred.  This deferral continues no matter how many houses are bought and then sold later at a gain.  If we reach age 55, sell the house and move into a smaller condo, a significant portion of any earlier gains is treated as tax-exempt.  Certainly seems to be a way to provide incentive to avoid cashing in these capital gains, doesn't it?

Why not set up a similar system for venture capital?  If a venture capital firm raises cash for investment in start-up companies by means of a public offering of stock, and that investment results in the start-up becoming successful and self-sustaining, why not allow for some method of tax deferral so that the gain can be invested in other embryonic ventures?  By letting the venture capital firm sell off it's investment in Start-Up Enterprises, Inc., the gain could be invested in New Company Corporation with normal capital gains tax deferred.  As long as the venture capital corporation is fully invested, no capital gains would be levied.  The entire capital amount available would be fully invested to insure that the taxes on any capital gains or losses are deferred.  And for the investor, if the shares of the venture capital firm are held until after age 55, for instance, a significant portion of any gain would be treated as tax exempt.

Of course these investments would only be legitimate if they were made in companies that were not traded publicly when the investment was made, were not wholly owned subsidiaries of existing firms, and so on, but the necessary safeguards are not impossible or overly burdensome.  To qualify for the roll-over exemption, the venture capital firm would be required to repurchase stock from investors at the nominal book value and treat the shares as treasury stock for sale to future investors at a later date.

This system would allow the smaller investor to participate in the initial investment in a future Microsoft.  It would generate millions, if not billions, in capital for investment, real investment, that would result in gains in jobs, gains in GDP, and certainly gains in the stability of the national economy.  The addition of thousands of new, emerging companies would moderate the systemic risk to an economy which results from being dominated by several enormous organizations.  Look at the idiocy surrounding the Big Three auto makers if a better argument is needed.

That is how you "invest" in jobs. 

Not by bailing out states or municipalities to insure that government bureaucrats continue coasting to retirement undisturbed by the need to find gainful, productive employment.  Doing that only insures that you have to do it again during the next budget cycle. 

Not by allowing academic Czars to pick the "winners".  The key word there is academic, not real world, and bureaucrats are influenced not by the realistic estimation of the success of the start-up, but by factors which have little or no place in the evaluation.  Investing in a new idea, just because that new idea comes from a favored constituency or the member of a disadvantaged minority is ludicrous. 

Not by allowing members of Congress to treat such "investments" as earmarks.  How many ways can we define corruption?  How about breach of trust? Or bribery? Or venality?  Look at the track record of Congress just in the area of earmarks that impact the DOD if you think that they could possible make objective decisions about where money should be invested.

Free market capitalism is the only path that will generate self-sustaining job growth, not only for us, but for our children and grandchildren.  And free market capitalism is investing by private individuals for private gain. 

No government at any time has ever known how to "invest" in anything.  Never have.  Never will.  But venture capitalists have a pretty good track record.  Why not stimulate them?