Tuesday, June 16, 2009

What's Wrong with Private Sector Investment?

In the 2008 campaigns, in the recent legislative session and in Congress there has been a lot of discussion about stimulating the economy. Interestingly enough, almost all of the conversation was confined to either mitigating the impacts of the recession on the unemployed, or massive government spending on infrastructure. Stimulating private sector investment was rarely if ever mentioned.

Early on the Obama administration considered and the State Senate passed legislation to provide sizable tax credit for job creation during a limited time period. The whole idea was to provide an economic advantage to invest now versus waiting for a year or two. This would start moving the economy forward now and move us out of the recession into recovery when such assistance would no longer be needed. The Obama proposal was dropped and Sen. Kilmer's job tax credit bill died in the House.

In the past Democratic administrations have looked at one or two year limited investment tax credits where companies could get 10-20% credits from federal taxes for each dollar they put in new investments. The state of Washington could have gotten much bigger bang for buck for forgiving sales and B&O tax credits for new investments for that short time period as well. Sales taxes at nearly10% could be a make it or break it question for some investors. Another time limited approach would be to temporarily suspend regulations or expediting permitting for all projects that begin in the next two years.

Instead, all of the effort was on the demand side of the equation. Policies to increase unemployment benefits or create job by building public projects were designed to increase consumer spending.

What was missing were trade, tax and regulatory policies designed to provide an incentive for private sector investors to step off the sidelines and back into the real economy. There are a couple of reasons why this makes sense.

First of all, stimulus comes from both consumer spending and in business spending on new investments. The latter has a greater long term effect by inducing spending now that will benefit the economy in the long run. Secondly, private sector in key export industries creates new jobs from sales to consumer and businesses overseas. This has the added effect of lowering interest rates via the trade deficit but also improves our position in the global economy in the long run.

Some remarkable progress was made in helping stimulate investments in clean energy and the green economy. This could very well become the next big wave to drive the economy forward. But Washington has competitive advantage in many other industries that we cannot afford to ignore.

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