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Where the recovery will come from

This was in Wonkbook, but I want to emphasize it again:

Profits have surged 62 percent from the start of 2009 to mid-2010, according to the Commerce Department. That is faster than any other year and a half in the Fabulous ’50s, the Go-Go ’60s or the booms under presidents Ronald Reagan and Bill Clinton.

There are a bunch of political points you can make on this. One that I've made before is that it's a pretty pro-business performance from an anti-business president. Doug Holtz-Eakin, continuing his transformation from respect economist to political operative, takes it in the other direction and wonders whether this gives the White House a sad. “Obama sounds a lot like he wants corporations to be less profitable," Holtz-Eakin told Politico.

But the economic point is that this is where recovery will come from. Businesses have money to spend. They just need a reason to spend it. And there is only one reason they will accept: If they spend that money -- if they invest in more workers and more plants and more advertisements -- they will make more money in return.

One way to do that is to increase demand in the economy. A payroll-tax holiday, for instance, would get workers to spend some money, and that would mean the people who produce the stuff they want to buy will have to make more of it. Another way to influence that equation is to increase inflation and decrease the return of safe investments like Treasuries so that it's less profitable to just leave that money sitting around. It would be nice to believe the next Congress is thinking seriously about this, but there's not much evidence of it yet.

By Ezra Klein  | October 29, 2010; 9:35 AM ET
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Wonkbook: Bernanke backs fiscal stimulus; corporate profits at record highs; Volcker rule battle

Next: GDP growth not good enough in Q3


some bright news before election day!

right across from this post, on the sidebar, it said that scientists estimate tens of billions of earthsize planets in the milky way.
that helps to put the urgency of all our momentary concerns, in the right perspective:-)

Posted by: jkaren | October 29, 2010 10:22 AM | Report abuse

So what proportion of those surging profits are in the financial industry?

Posted by: paul314 | October 29, 2010 10:31 AM | Report abuse

The tax and resource allocation discussion is an important one: understanding the basics -- for example, that payroll taxes and income taxes are distinct concepts, as are taxes at federal, state, and local levels -- is critical to an understanding of the overall problem. While government (particularly federal government) spending problems can't be overlooked, there seems to be growing consensus regarding tax and resource allocation problems.

Underscoring a segment from Pearlstein's column cited in Wonkbook, the games allowed by current corporate income tax statutes seem unfair to "companies or individuals who don't have the tax lawyers or Washington lobbyists necessary to play such games. Nor [is] there any recognition that such games damage the U.S. economy by misallocating capital, distorting business decisions and reducing government revenue at a time of escalating deficits."

Pearlstein powerfully concludes that "Up to now, the refrain from the corporate sector has been almost exclusively, 'What's good for business is good for America.' Are there no leaders left in the boardroom who still believe it works the other way around?" Even David Brooks seems to echo the sentiment: "The problem is not that America lacks resources. The problem is that they are misallocated."

Interesting how the word "misallocate" appears in both writers' columns! If the discussion remains focused and factual, there might actually be a practical resolution to the issues.

Posted by: rmgregory | October 29, 2010 10:35 AM | Report abuse

Oh Lord!

Congress does not need to work on increasing inflation so as to push people out of Treasuries! The Fed has that nasty little project well in mind....

How is a Payroll tax holiday going to reduce the deficit and help folks feel like the future isn't going to be a giant wave of tax increases - either outright or behind the scenes via a declining dollar?

The fact is that the recovery will come in spite of efforts by Congress to hurry it along.

Posted by: RedBird27 | October 29, 2010 10:53 AM | Report abuse

I seriously part company with Ezra here. Temporary tax cuts will not generate enough demand that justifies hiring and expansion by US firms, and reductions in social security taxes would be a dangerous political game to play. I'll admit only that it probably would be better than nothing, and certainly better than tax cuts to the top two percent. But too much of the tax cut would go to short-term actions that wouldn't lead to a lot of US corporate expansion (e.g., paying down debt, rebuilding savings, and buying imports). Meanwhile, a large chunk of income tax revenues would have to go to Social Security.

To justify hiring and expansion, US firms need new contracts to provide goods and services. Infrastructure spending (broadly defined to include computer hardware, highways, building renovations, energy efficiency upgrades, fiber optic lines, repairing/replacing military vehicles, and more) would be a good place to start. Unfortunately, I don't know that Obama and the next Congress will agree to do anything at all.

Posted by: pjro | October 29, 2010 11:22 AM | Report abuse

Most new expansions get a lot of 'oompf', if you will, from housing. Lots of other activity is based on the housing sector.

By prolonging the housing crash by vain attempts to prop it up (and misdirecting resources to a sector which needs to contract), we weaken and delay the recovery.

If we had simply let housing bottom earlier, housing might now (or soon) be in a strong recovery, which would drag up activity in related sectors. Excess inventories would have been worked off by lower prices, and the need for new housing units would have driven the next cycle. People would be buying furniture, real estate agents and lawyers would have more to do, retail outlets would be built next to new subdivisions, etc.

Posted by: justin84 | October 29, 2010 12:51 PM | Report abuse

I was watching CNN the other day and they were showing clips from a Congressional debate (I can't remember which one, sorry). The Republican said something like: "You don't understand business. I have a background in business so I know how business works. Businesses need to have cash flow, because when they have cash flow, the first thing they always do is start hiring workers. So let's give more tax cuts to businesses, etc. and the hiring will start again."

What I wanted to scream at the TV is that corporations' profits have exploded over the last year and they still aren't hiring. So maybe this truism is less than true. There's a demand side to the equation as well.

Posted by: vvf2 | October 29, 2010 1:24 PM | Report abuse

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