It’s Jobs, Stupid!

If there was ever any doubt about what has held the economy down for the past two years, just look at the recent mid-term election results for your answers.  Unemployed people have the time and desire to vote, and they do not often vote for the group in charge when they lost their jobs.

The Fed announced this week its $600 billion plan to lower interest rates even further over the next 8 months by buying $75 billion a month in treasuries.  Note to Mr. Bernanke, lower rates will not stimulate demand in this economy.  Don’t believe me.  Just look at the last two year’s economic scorecard.  What the economy needs is demand stimulus, not lower rates.

The best way to stimulate demand is to re-introduce the Investment Tax Credit (“ITC”) because the ITC incentives businesses to buy equipment.  The demand for new equipment results in factories hiring more people to meet demand.  The newly hired workers spend their paychecks on goods and services relieving the pent up demand for deferred purchases while unemployed, or worried about their current employment.  Will ITC stimulate demand?

Remember the “cash for clunkers” plan from a year ago?  That program gave people a tax credit they could monetize at the dealer if they traded in their old car for a new one.  What happened?  Car sales skyrocketed out of the doldrums.  That is exactly what would happen if the government brought back the ITC for businesses.  Only the ITC would bolster demand for all types of equipment, not just cars.  The result would be a broad-based increase in demand.  That triggers sales taxes, new payroll taxes from the re-employed and maybe even gives people the confidence to buy or sell a house.

Next year when the newly elected Congressmen and women go off to Washington, I hope they read their economic history books and support the return of the ITC.  It is the only tool at the government’s disposal that will stimulate demand and lower unemployment.  Even lower interest rates surely will not.

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avatar Posted by on Nov 6 2010 Filed under Economics. You can follow any responses to this entry through the RSS 2.0. Responses are currently closed, but you can trackback from your own site.

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