Are Profits Hurting Capitalism?snip
...............What if a government instead embarks on an austerity program? Income growth will stall, and household wages and business profits may fall.
That result might not sound bad for the United States, since lower wages and prices would make American goods more competitive abroad. But falling incomes make it even harder for people to make payments on outstanding loans. And if defaults and bankruptcies cascade through the financial system, credit becomes tighter still. Ultimately, there is a danger that deflation — falling wages and prices — will snowball into a depression.
So instead of pursuing budget retrenchment, policymakers need to create incentives for corporations to reinvest their profits in business operations. One way to do this would be to impose an aggressive tax on retained earnings that are not reinvested within two years. Another approach would be a tax on the turnover of corporate financial investments that would raise the cost of speculating with profits, rather than putting them into the business.
At the same time, the federal government must continue to encourage investment in the economy — ideally by creating incentives for investments in national priorities, like new energy technologies.
The entrepreneurial pursuit of profitable growth has been the vital engine of prosperity since the Industrial Revolution. Yet corporate executives are being rewarded for myopia and speculation, undermining the very operation of capitalism. We need tax and regulatory policies to counter this destructive development, along with wider recognition that government deficits, when they counteract corporate savings, are necessary and salutary.
http://www.nytimes.com/2010/07/06/opinion/06smith.html?_r=1