Follow The Scarcity

Clayton M. Christensen has the beginning of an interesting article here. Unfortunately, he trails off at the end with only a few platitudes about solving the problem he’s pointed out.

We can use capital with abandon now, because it’s abundant and cheap. But we can no longer waste education, subsidizing it in fields that offer few jobs. Optimizing return on capital will generate less growth than optimizing return on education.

His point–and it’s a very good one, though not a complete picture of what’s wrong with our economy–is that optimizing capital usage is the wrong approach now. Capital is plentiful; what’s scarce is skilled workers. Expend capital, optimize worker training.

The only suggestions he offers for doing that, though, are to lower taxes on the rich, and some vague complaints about indiscriminate financial aid. I can do better than that, so I will.

Christensen suggests reducing the (already very low) capital gains tax over time, to encourage long term investments.

We should instead make capital gains regressive over time, based upon how long the capital is invested in a company. Taxes on short-term investments should continue to be taxed at personal income rates. But the rate should be reduced the longer the investment is held — so that, for example, tax rates on investments held for five years might be zero — and rates on investments held for eight years might be negative.

He doesn’t say at what level he would start the capital gains tax (currently 15% on investments held for at least one year). I would start it at 30%, then reduce it by three percentiles per year after that, so after holding it for ten years any profits from your investment would be tax-free. That would accomplish Christensen’s stated goal of encouraging long-term investment, while also discouraging short term investment (carrot and stick, rather than just the carrot he offers).

If the government is to be in the business of directing students into degree plans and training programs, I would offer a student loan repayment program for students going into certain fields. Every year, the selected fields would be re-evaluated, based on the projected needs of the economy five years hence.

These things would be a nice supplement to my economic reform plan.

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