Stimulating Investment

July 23, 2010

I continue to get remarkably positive feedback about the joint NCF-AEI conference on U.S. regulatory policy and free enterprise from a few weeks ago.  The discussion among scholars and those in the business community was particularly fruitful since it connected data-driven, academic research with testimony from men and women working to build new business opportunities. The themes explored that day have taken on a new urgency as the debate in Washington heats up about a new stimulus measure, expiring tax cuts, the potential for regulation of greenhouse gases by the EPA and more.

One point that emerged clearly from that conference is that uncertainty about regulatory, tax, and other policies is harmful to investment and capital formation. My colleague Allan Meltzer of Carnegie Mellon University echoed this point in testimony on Capitol Hill this week.  “Our current situation can be improved by reducing uncertainty and stimulating business investment,” he said before the House Financial Services Committee. “I emphasize investment because the United States must invest more to produce exports.  Past experience suggests that reducing the corporate tax rate is an effective stimulus to investment.

Arthur Okun, Chairman of President Lyndon Johnson's Council of Economic Advisers and a main architect of the Kennedy-Johnson tax program, analyzed the components after he left office.  He concluded that the corporate tax cut was the most effective part of the program.  Later work confirmed his conclusion.”  As the Kennedy-Johnson program suggests, there are (or at least should be) potential bi-partisan responses to the current economic picture. Republicans would be smart to take a page from those two Democrats’ playbook, as both parties look for sensible policies to move the country forward.