Jumpstarting Jobs: The Lost Lesson of the Great Depression

The "investment deficit" -- the rich hoarding rather than investing their money -- is the forgotten lesson of the Great Depression. To jumpstart jobs, we need to remember it.
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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

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