Stimulating suggestions for Obama

If you were the chief financial advisor to President Barack Obama, what specific action would you suggest he take to help stimulate the economy?

That was the question my daughter’s economics professor had assigned.

With a perplexed looked on her face, my daughter came to me. Being a person never too shy to share my opinion, I offered a few suggestions.

Investment is what drives economies. However, the current economic climate has many investors on the sidelines and others investing capital in a manner reminiscent of a school of fish swimming in unison from one direction to another in reaction to the slightest move.

In order to maintain steady growth, sidelined capital must once again be put to work and put to work in a long-term fashion.

The way to do this in a capitalist society is through incentives.

When a person invests in a business, the money they put up is considered their basis. When a person sells that business, the basis is subtracted from the sales price. The difference is considered capital gains.

One of my suggestions is for the president to support a 50 percent reduction in the capital gains tax for direct business investment that is invested before the end of 2009 and held for five years.

This investment would result in more jobs and the purchase of more equipment – stimulating the economy.

A loss in tax revenue would not be felt for five years, since that would be the required length of investment for the incentive. However, taxes generated from the increased employment would easily offset the loss.

After Hurricane Katrina, the federal government offered a tax incentive for business investment within the storm affected area. A business making capital improvements, such as the construction of a new building or the purchase of new equipment, within three years after the storm could deduct half of the total cost of the investment in the first year – something that might have previously taken 20 years.

The result was a boom in new construction, a boom that benefited the Tri-parish area in 2006 and 2007. Such an incentive nationwide for capital improvements could start a wave of new construction in America – further stimulating the economy.

These suggestions are in contrast to the current policy of government spending. However, increased government spending almost always results in printing more money – creating inflation and increasing interest rates. This can hurt the economy in the long run.

I explained to my daughter that, in my opinion, increasing business investment could stimulate the economy better than government spending and without the need to print more money.

She listened very attentively and then researched my suggestions, refined them and completed her assignment … she got an “A.”