Economy

Bottom-Up Growth through Small Business, Banking

Most other candidates focus (almost entirely) on taxation as central to economic development.  While taxes might have been all-important in the early days of our (Reaganomic) transition from a Keynesian manufacturing economy into a consumer-dominated Supply Side practice of capitalism, low tax rates for those large companies are dwarfed now (in importance) by very low interest rates on their debt instruments. 

In the current global economic environment our Supply Side players are uniquely able to avoid U.S. corporate income taxes by capturing profit margins inside low-tax jurisdictions which means their underlying cost-of-capital is currently astoundingly low (due to deflationary pressures).  So they are fine.  However, they will only be able to deliver a 1%-2% GDP rate of growth for the U.S. economy – even when fully recovered – just as the mature Japanese economy has endured for the past 20 years.  And 1-2% growth is simply not enough. 

We need to return to the 4.5% we enjoyed before 1970.    

To promote the development and rapid expansion of our American economy, therefore, small business entities should recapture the profitable opportunities that always exist within the mid-level of the industrial food chain. 

Such operations have moved overseas into developing economies where the entrepreneurial capitalists in those countries have easy access to financial credit … in large part because they control their own small banks. 

Of course, Americans might put themselves into that same position through a rapid increase in the number of minimum scale Credit Unions within the U.S.

All economic costs can be broken into material, labor and overhead.  Material is available to everyone in the global marketplace and transportation is cheap.  Labor-intense operations can be launched overseas by domestic U.S. companies whenever the unit volume crosses a certain threshold and labor costs dominate factory cost. 

The overhead of working capital leveraged by debt instruments, however, is a barrier to entry for small companies as they expand into larger, more competitive markets where the players are assumed to have access to bank funding to underwrite rapid growth beyond what current-period retained earnings would support.  That’s why they call this game Financial Capitalism.   

But our politicians really don’t seem to understand capitalism very well.  They fall back on the classic position that tax breaks alone will stimulate economic expansion.  The flaw in that argument is that tax breaks might have been effective in 1982 when Supply Side was just starting to compete with the Japanese Keiretsu practice of capitalism, while our bank interest rates were still high due to lingering inflation and the fact that our banks had nowhere else to earn a lot of money. 

Ronald Reagan came to power in 1980 after an entire decade of Stagflation, but a great deal has changed in 30 years.

The small companies we need to promote in 2010 are always sheltered from income taxes during the rapid growth of their early years. 

Tax rates mean almost nothing to entrepreneurs launching new businesses that may or may not ever earn enough money even to survive … let alone to worry about being taxed. 

Our politicians are completely off target when they focus the US economic recovery on lowering corporate income tax rates.  In the real world it simply doesn’t work that way. 

Instead, this problem is mostly about our practice of banking:

  • Economic expansion must be bottom-up and led by small business entities.
  • Financial capitalism assumes the availability of bank-created leverage for such companies to be competitive.
  • Our practice of banking should be downsized into smaller institutions that directly serve small business clients.