Wingers often argue that by reducing taxes on businesses we would boost the economy because they would have more money to invest and that would spur demand. The problem is that right now, businesses are seeing an increase in profits but they won't be investing.
Cost Cuts Lift Profits but Hinder Economy
By MARK WHITEHOUSE and TIMOTHY AEPPEL
OCTOBER 13, 2009
Wall Street Journal
U.S. stocks notched new 52-week highs again on Monday, thanks to corporate America showing better-than-expected profits.
In an ominous sign for the economy, much of the profit is being eked out through cost cuts. Executives say they are hesitant to reinvest such profits into their businesses. With large portions of their factories, fleets and warehouses sitting idle, some say they probably won't see reason to do so for a year or more.
That means job growth and any significant rise in business spending could be a long time coming. That creates a chicken-and-egg problem at a time when the unemployment rate is already nearly 10%: Without more jobs, U.S. consumers will have a hard time increasing their spending; but without that spending, businesses might see little reason to start hiring.
Already, the economy is being starved of investment it needs to nurture growth. Net private investment, which includes spending on everything from machine tools to new houses, minus depreciation, fell to 0.1% of gross domestic product in the second quarter of 2009, according to the latest government data. That's the lowest level since at least 1947.
Keynes great insight was to realize that without sufficient demand, there's no incentive for the private sector to invest and that's why the government must pick up the slack through deficit spending.
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