Wednesday, July 23, 2003

Time to Be a Demand Sider-Part III-Some Demand Side Growth Policies-In part II, I posited the possibility that a lack of new products coming into the market may be slowing economic growth; not a lack of products, mind you, but of new products that will get people to add to their market basket. Is there a way to encourage the production of new goods, rather than making existing goods more efficiently? The classic Keynesian response to lax aggregate demand would be to have more government spending, but I think there are more efficient ways to encourage the AD curve along. Here are seven ideas that should help incourage small, innovative companies to create more new playthings (and new serious stuff, too) without feeding Porkasaurus Rex. (1) Be easy on high-tech visas. The more techies we have in the country, the more neat software and hardware we’ll come up with. Given that there is a shortage of good programmers and computer engineers, we should be generous with the H1A visa program. There are a few older engineers in other fields who feel shorted by the upstarts from Bangalore, but we’re better off with more sharp minds than less. (2) Keep the current stock option tax rules. Taxing stock options when given rather than when exercised would harm small start-ups and their employees. If the current value of stock options is taxed as income, it will reduce the take-home pay of the new employees as it increases their taxes. However, the start-up can only realize the tax break from counting the option as an expense when they start earning a profit in the future. This will raise the salary costs of start-ups and slows a sector that comes up with most creative products. (3) Regulatory structures that are open to dynamism. If the rules are too stacked in favor of the status quo, new products that don’t quite fit into current paradigm can be kept off the market by the dinosaurs. (4) If given a choice between cutting capital gains and cutting dividend taxes, go with the capital gains. That helps smaller start-ups who are years away from paying dividends. Dividends are generally paid by older, mature companies who are less likely to be innovative. (5) Allow for individuals to deduct health insurance costs as a non-itemized item and allow for health-buying co-ops. This will allow small firm workers to get their own insurance in pre-tax dollars and level the playing field between larger, older firms with health plans; smaller firms struggle to get insurance for their workers. (6) Tort Reform-New products mean new possibilities for liability lawsuits. The added cost of insurance and the prospect of years of hard work going into the pockets of a lawyer with dreams of seven-figure punitive damages dancing in his head mean many new products never get made. My apologies to the lawyers and law students in the audience, but the economy would function better with a few less class-action lawsuits. Y’all are smart enough to get retrained in more productive disciplines if we make some of you redundant. I’m not an expert in product liability law, but it’s become too easy to bring suit as of late. Tighter requirements of finding liability may leave some injured parties uncompensated, but we’re better off with cheaper products and more products than with a few more rich victims and rich plaintiff’s lawyers (7) Lower trade barriers-If we’re looking to goose demand, don’t complain if some of the demand is for foreign goodies. If the Japanese happen to come up with a great WiFi gizmo, bring it on; they’ll wind up buying something from us in return. Only item 5 might run counter to dynamist principles, but as a package, they would help stimulate small businesses and help bring some new products to market. Note that this doesn't get into an industrial policy and pick which small firms to help, unlike Kerry's platform. This will give small firms of various types an opportunity to prosper and bring new products to market, and help bigger but innovative companies as well.

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