February 1, 2011

Even China

Time for Private Sector Stimulus in America.
 Reports are out on China's next Five Year Plan. What China, it seems, intends to do are couple of very sensible things:
  1. Direct it's State Controlled Corporations to pay out a Bigger portion of their profits as Dividends.
  2. Direct Companies to improve worker compensations.
China has recognized that its massive savings rate comes about from an income distribution where many get to keep way, way more they can spend. Indeed the Chinese macro savings rate today is a whopping (some would say, ridiculous) 45%! As a result, the mass of people, especially worker population, just don't have the income to comfortably consume even Chinese products, never mind imports. As a result, independent of whether or not the Chinese Yuan is undervalued-by-fiat: as opined by many Economists and countries that find themselves outpriced by Chinese exporters, China ends up with a massive Current Account Surplus.

What China seeks to do is to even out two imbalances in one stroke - the Domestic income imbalance and the imbalance/unsustainability on its External Account. The hope is that some of the improved income of the Chinese people will get spent on imported products, so China's Worldwide exports will be better matched with increased imports, and will not be seen as a nuisance by others anymore.

The above is a great step, and deserves to be praised. The question is whether other countries will similarly realize that it's time to look at the acute income imbalances that they themselves have, and their affect towards their economic stagnation. For instance in the United States, companies are sitting on a stockpile of retained earnings of about $2 trillion. There is a need to put in place policy that encourages that it either be invested into production or distribution (that employs people) or paid out as Dividend. The Corporate Tax Code needs to be reworked imbibing each of the following:
  1. Dividend Payouts be deductible when working out taxable profits of a Company.
  2. Earnings retained for more than 2 years be flat taxed at a signifiacnt rate (say, 20%).
  3. Only individual employee compensation upto $500,000 (including bonus) be tax deductible.
  4. Executive Compensation be regulated and linked to the profit generated by the Company and the general compesation levels in the Company, NOT decided by Board of Directors that owe their positions (and perks) to the Executive Management.
Enough Supply Side Stimuluses - they have long reached zero returns, whether you pump directly to Companies or into Big Fin.

It is Time for Private Sector Demand side Stimulus into the Economy,....Just Like China.

1 comment:

  1. Yes! I like the principle that we should use policy to guide the economy. A simple notion, but often rejected these days.

    I like your recognition of the fact that an excessive accumulation of savings is not a good thing.

    And I like the boldness of your suggestions. (My suggestions are usually limited to the direction that policy must take.)