A friend of mine says the US economy depends on people buying junk they don’t need with money they don’t have.  He considers it a Ponzi scheme, not a national economy.  I used to argue the point, but the government sure seems to agree with him. Starting in May, the IRS will issue “rebates” to US citizens as an economic stimulus. They hope Americans will run to the store and spend their tax rebate, creating new profits for companies and new jobs for citizens.

At one time, such a plan may have worked, because America made things to sell. But starting in May, those rebate checks are going – more or less – straight to WalMart, which means they are going to do a lot more good for the Chinese economy than for the American economy. Granted, that’s good news for WalMart’s coworkers and shareholders, but I don’t think WalMart alone can lift America out of its current economic malaise. Besides, a recent poll suggests that Americans are so far in debt that most intend to bank the rebate check or apply it to existing debt. If so, we won’t even experience the short-term boost from a spending spree.

I think the economy works best when companies confidently invest in their own growth, instead of greedily milking their cash cows. To achieve a long-term economic stimulus, Congress should revisit Investment Tax Credit programs. Tax credits give companies a dollar for dollar tax reduction for specific kinds of investments, and are used as incentives. 

For example, tax credits could be issued for investments in new machinery, energy efficiency upgrades, pollution controls, and other needed improvements. Unlike the consumer tax rebates, tax credits improve profitability by lowering the risk of investment and innovation. This creates a more lasting impact on the economy, as companies hire more workers to create and deliver new products and services. A more confidently employed workforce spends more freely, completing the economic equation.

There’s no question that much of the rebate money handed out to our strapped-for-cash population will be quickly spent. But then what? The treasury will need more tax revenues, the people will still be strapped for cash, and companies will remain cautious because of lower consumer demand. What do we do then: issue another rebate?

While I’m no cheerleader for “trickle-down” economics or corporate welfare, I do think investment tax credits can be designed intelligently to reward companies for economically beneficial behaviors. I also believe that tax credits for environmentally friendly activities present the ultimate win-win scenario, hiring American workers to implement American technologies to reduce our dependence on oil (foreign or domestic!) while increasing our contribution to a more economically viable global future.