Fixing the Market: Raising Capital
Apr 03, 2012
Many of us forget that a global competition for profit begins with a global competition for investment capital – a.k.a. a global competition for money.
Investment capital is the fuel for economic growth and prosperity. It creates jobs, raises wages and standards of living. It is the solution to poverty, unemployment, and stagnant economies. Needless to say, countries with the most competitive capital policies tend to raise the most money and enjoy most the fruits that it produces.
So how do governments go about attracting capital to grow their economies and facilitate prosperity for their constituency?
The purpose of all investment is to make money with money commensurate with the associated risks. In other words, investors don’t invest willy-nilly but with specific purpose, aimed at markets with the greatest potential and the best possibilities of success.
Taxes reduce business profits and make it harder for investors to earn returns on their investments (ROI). America currently has the highest corporate tax rate on earth and current central governance is campaigning to increase it. That’s not competitive.
Lower tax rates are an incentive to take-on additional risks. Simply put, investors looking to maximize profits find little reason to place investments that aren’t worth the risks. Investors are looking to get richer first and foremost – and most don’t mind paying a government tax to support a stable market environment. Taxes are the price of success, indeed – but it must be at competitive rates or they will lose the competition and fall behind.
During high risk times and stagnant markets low tax rates are a great incentive to get skeptical businesses and investors to place capital at risk to expand enterprise. That’s what America needs right now.
A country that cannot raise enough capital to expand industry to a point that produces an acceptable unemployment rate has somehow discouraged investment. For the last ten or fifteen years the U.S. government has added tens of thousands of pages of laws and regulations to the code – from No Child Left Behind to Sarbanes-Oxley, from HARP to TARP, and ObamaCare to Dodd-Frank – there’s too much junk clogging the system to produce vibrant economic growth.
Regulatory burdens make it more difficult and more expensive for businesses to operate and generate profits – a.k.a. returns on investment. This limits employment opportunities and economic potential. Investors don’t like this much, needless to say, and therefore shy away from markets that are regulatory nightmares.
In a nutshell, the harder it is to make money the less investors are willing to invest. Make it easier for businesses to make money and investors will invest more money in those businesses – especially if they also have incentives to invest (i.e. lower capital gains taxes.)
Easing regulatory burdens is a great way to encourage businesses and investors to place additional capital at risk to expand markets.
Though it is true that enterprise suffers with higher taxes and regulatory burdens no one suffers more than workers and the unemployed – consumers one and all. In order to revitalize a market a country must rejuvenate its consumer base.
Lackluster economic condition creates dependency on government – the polar opposite of the American ideal. Government programs like unemployment pay consumers very little, many times just a fraction of what they once earned, which constrains a market and its potential. This is a dreadful market condition because it is consumers that provide businesses with profits and investors with returns on investment, which is included in the prices that they pay for goods in retail markets.
For this reason, a vibrant consumer base and spending pattern is a required element in attracting investment capital. For decades on end Japan, a culture of savers, lay economically stagnant and unable to attract investment capital or lend money with 0% interest rates because its consumers wouldn’t consume. Consumers, not government, must spend an economy to prosperity. (Ask the Japanese – who by the way have just lowered their corporate tax rates leaving American alone at the top of the list.)
Nothing empowers consumers to do this more than returning to work, increased wages and the long-term prospects of career growth and opportunity. Consumers too are driven by profit and potential. They too need incentive and encouragement. But their greatest asset is something that government cannot provide. It is their ambition for success and financial independence -- the American Dream.
And nothing raises capital like it.