Working Papers

Executive Journal > Strategy > Virtuous and Vicious Economic Cycles Theory

Policy White Paper

(V1.0) April 16, 2005     (working paper)

Executive White Paper
By Med Jones,
International Institute of Management

1) What is Virtuous and Vicious Economic Cycles Theory?

  • Over the long term, if government revenues continue to be more than expenditures (surplus), then the economic health of the country improves, because the government can afford to invest in development projects such as research and development, education and infrastructure. With more income, the government can also afford lower taxes, thereby increasing corporate profits and attracting more foreign investors, resulting in more economic activities, creating more jobs and enlarging consumer spending and government revenues despite income tax cuts. It is what I call a virtuous economic cycle.

  • Over the long term, if government revenues continue to be less than the expenditures (deficit), then the economic health of the country worsens because this will result in accumulated debt. An increasing government debt will result in higher interest payments, and less money available for socioeconomic development. To pay for the debt, the government will have to raise taxes, which will reduce the competitive position of the country in the global economy and chase investors away resulting in less economic activities and more job losses. In order to avoid higher unemployment and social instability, the government has to raise more debt to fund spending and welfare support by raising the interest rate which will increase the cost of money, reduce corporate profits and slow economic investments, thus resulting in more job losses and reduced government revenues, despite income tax increases. It is what I call a vicious economic cycle.

2) What is the Application of Virtuous and Vicious Economic Cycles Theory?

  • Use it to assess economic health status and identify debt (private, national, foreign), taxes tipping points of economic recessions and growth cycles?

  • How to balance between government spending, debt and taxes? How to use theory to create a tax policy and government budget framework?

  • How tax revenues can be used to increase competitiveness instead of burdening the businesses and slowing the economy? The allocation of government spending for investing in growth industries vs. spending for welfare?

  • How government and private sector innovation can replace the need for increasing taxes?

  • Can the government reduce taxes and at the same time increase its revenues? How?

  • Is a sales tax policy better than income tax policy? What is the impact on the economy and how they affect each cycle?

  • What global, external and internal policies, actions, and events enforce each economic cycle?

  • How to use theory as a socioeconomic policy reform tool?

  • How to influence the cycle via the introduction or change in internal and external forces, such as innovation, financing, human capital and other economic production factors?

  • How to apply the concept in microeconomics context to help develop competitive national industries and companies?

  • How to reverse a vicious economic cycle?

  • How to sustain a virtuous economic cycle?

  • How to measure the momentum of each cycle?

  • How the size of an economic sector or industry, such as real estate, finance, and technology can impact the economy? In which cycle direction and to what degree?

  • What is the impact of the formation and busting of asset bubble on each economic cycle?

  • Is China entering a virtuous economic cycle?

  • Is the U.S. entering vicious economic cycle with its increasing investment, trade and budget deficits?

  • How is the expansion of the European Union affecting their economic growth and decline cycles? How is the demographic growth rate and composition affecting taxes, welfare and the competitiveness of EU businesses? How is the increase in consumer base and production bases helping the virtuous cycle? How are the debt and tax policies of some of the EU countries hurting the virtuous economic cycle?

3) The "Balance of Powers" Theory or the "Balanced Stakeholders Economic Development" Theory

  • The Balance of Powers (BOP) or Balanced Stakeholders Economic Development (BSED) Theory: A critic of capitalists and socialists economic theories. Is there an optimum balance between private and public interest? How to balance between self-interest and the society? How social interests can help individual interests and vice versa? Finding a framework to resolve the conflict of interest.

  • Who is better at energizing the virtuous economic cycle? The government officials or the private sector?

  • How the partnership and alignment of interests between private and public sectors is critical to sustaining the virtuous economic cycle? How the misbalance of power between the government and private sector can result in enforcing the forces of the vicious economic cycle? Case studies of how elites of nations contributed to the growth and decline of their national empires.

  • The myths of free market theory? Case studies of how lack of regulation can be as bad as over-regulation?

  • How imposing higher taxes on the wealthy can be as bad as ignoring the socioeconomic development of the lower economic classes? Should the government be responsible for the distribution of wealth or be limited to facilitating the growth of all economic classes? How to validate the position that the government role should be to prevent the abuse of the poor by the rich and the rich by the poor? Are there alternative methods to eliminate economic growth barriers to lower income population? A case study in microfinance and the role of the government "Good Bank"?

  • Can we attain a sustainable balanced economic growth? How social development can enforce or hinder economic development and vice versa? The need for a new socioeconomic development framework (GNW vs. GNP)?

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