Monday, December 22, 2008

Best Description I've Seen for What's Happening in the Capital Markets

From Rich Karlgaard at Forbes:

Capital is on strike now. It is one of the causes of the crash of 2008 and the fourth-quarter mini-depression. [...] It goes on strike when it is attacked or when the rules are unclear.
The solution? Make it more worthwhile to invest money by cutting capital gains. Heritage Institute excerpts from Clive Crook in the FT, Michael Malone in the WSJ and Frederick Smith from FedEx writing in the FT:
  • From Clive Crook:

    It also requires an investment of political capital and a willingness to advocate open domestic markets as the best way to secure long-term US prosperity. The new president has plenty of capital, and if anybody can persuade the public of the virtues of liberal trade, it is Mr Obama. But this is a message that much of the country and most of his political allies are in no mood to hear.

  • From Michael Malone:

    From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators [...] The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. [...] If Mr. Obama is serious about getting the country out of this recession using something more than public make-work projects, he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won't cut it, then at least leave the capital gains tax rate alone.

  • From Frederick Smith:

    Our tax system is particularly onerous for asset-intensive, industrial businesses such as manufacturers and transport companies. For example, Caterpillar, Boeing, FedEx, commercial airlines and carmakers produce goods and services and provide jobs for millions. But to maintain or increase jobs and compete globally, these companies must be able earn an acceptable return on capital expenditure.

    How can we make US companies more competitive and increase their ability to offer good jobs? Two things: accelerate the expensing of capital investment; and reduce the corporate income tax rate.

Of course, not to be outdone, the New York Times has (to put it charitably), misquoted an academic on why capital gains should be taxed (Donald Luskin). Perhaps sadly, the coming administration appears to have little interest in ensuring that dissenting views on a massive spending package for stimulus are heard (Greg Mankiw) though the empirical data suggests that in the very least tax cuts should be considered (Marginal Revolution). In the very least, a more considered approach rather than what appears (at least from a distance) to be absolute panic spending hundreds of billions of dollars in hopes that the carnage will stop, would appear to be too much to hope for. I just hope Americans are prepared for the risk of massive inflation and higher taxes in years to come.

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