State of Innovation

Patents and Innovation Economics

Public vs. Private Action: Jobs Bill

The Obama administration is proposing a jobs bill or stimulus II bill. The fundamental question is whether the government should create jobs directly or pursue policies that allow private companies to increase employment. If the government were to spend its entire budget on jobs, it could only spend $3.5 trillion. If you eliminate “mandatory spending” which includes Social Security, Medicare, Medicaid, and interest expenses then you are left with only $1.3 trillion. This is essentially the amount of the projected deficit for 2010. Public action could result in $1.3 trillion spending on jobs at best. This spending is unsustainable since it is based exclusively on borrowed money.

 How much money could be invested in jobs if the U.S. were to pursue policies that encourage investment in job producing enterprises? The U.S. has a $14.0 trillion economy. If you assume that the U.S. earns 10% on capital, then there is $140 trillion in capital in the U.S. The U.S. represents 20% of the world economy, so there is at least $700 trillion in capital in the world. If the U.S. were to pursue policies that encouraged private investment in the economy, then it would not be surprising if it attracted 1% of the worldwide capital or $7.0 trillion. This would dwarf the $1.3 trillion that the government could spend on jobs. Private investment would create self sustaining jobs unlike government spending. In addition, the government would save the $1.3 trillion it would have otherwise spent so the country would be $8.3 trillion better off. These numbers are not exact but it clearly illustrates the point that private action is much more powerful than public action.

What policies would encourage this avalanche of private investment? The right policies would encourage investment in technology, since the only reason we are wealthier now than in the past is because of our level of technology. New technologies are capable of exponentially increasing our standard of living and create high quality, high pay jobs. The top three policies that would encourage private investment in new technologies are: 1) strengthening our patent laws (intellectual property), 2) repealing Sarbanes Oxley, and 3) repealing the capital gains tax. Patent laws are the method of obtaining title to technology. If a company cannot own its technology, then investors and inventors are unlike to invest in developing new technologies. Property rights (patents) are critical to attracting investment. Sarbanes Oxley makes it almost impossible for companies to go public. Access to public markets is critical for investors to monetize their returns. Capital gains reduce the return to investors and are a form of double taxation. The higher the capital gains the lower the level of investment.

Private action is significantly more effective at creating jobs and stimulating the economy. We need policies that encourage investment in technology, because advances in technology are the only way we increase real per capita income. These policies include strengthening our patent laws and repealing Sarbanes Oxley and capital gains taxes.

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February 10, 2010 - Posted by | Uncategorized | , , , , ,

1 Comment »

  1. […] This post was Twitted by Hallingip […]

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