It's the Economy, Stupid!
© David Burton 2009
It's the Economy, Stupid! |
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A number of problems face the citizens of the United States: The war against Muslim extremists, the environment, energy, unemployment, the stock market, mortgage foreclosures, bank failures, etc. But, the fundamental cause of many if not most of these problems concerns one issue. As was famously repeated by James Carville during Bill Clinton's 1992 presidential campaign - "It's the economy, stupid!" The Federal Debt and the Deficit ". . . national unemployment remains stuck in double digits. Living standards are sinking . . . There's no room in the private sector to boost Washington's already insatiable tax extraction . . . Federal, state and local governments employ 25 million Americans, heavily unionized outside the military, with no political dynamic that allows much downsizing. . . . In projecting the stabilization of government finances years hence, the Administration is depending on a traditional private-sector rebound to rebuild some of the lost output and tax receipts. It's counting on an odd couple: low interest rates and low inflation, despite the dollar's crash. Just as crucial for rosy growth and tax-receipt projections, Obamanomics assumes that the top marginal tax rates will rise - hammering one of the most sensitive drivers of the private-sector incentive structure - but with no subsequent decline in work effort, innovation or growth rates." "Even under this unlikely modeling the Administration's projections show marketable national debt growing to $17 trillion by 2019 (versus $5.8 trillion at the end of the Bush Administration and $7 trillion now). Under more realistic assumptions - slower growth, rising interest rates and moderate growth in government spending - debt would surge to $21 trillion by 2019. Neither total includes the government's promises for Social Security and Medicare (unfunded present value liability is $100 trillion per their trustees)." "Reconciling this grim picture with innate optimism is hard. To make the current path work small businesses would have to invest and hire, despite high taxes and a Washington-imposed credit crunch. Unions would need to accept pay cuts and reduced benefits in order to gain jobs in this slow-growth environment. The voting public would have to accept lower domestic living standards in order to absorb dollar weakness into their real wages. Washington would have to cut spending enough to give investors hope that the debt and dollar were sustainable. Far-fetched.” [emphasis mine] (Ref. 1.) Under the leadership of president Barack Obama and the Democratic controlled Congress, The federal deficit is growing at an alarming rate. Even moderate Democrats are concerned. "Even without a new health care entitlement, the federal deficit is expected to hit 11% of gross domestic product {GDP} by the end of this year {2009}. That's up from 1.8% in 2007 {and amounts to a growth rate of over 600%}. The interest tab {that we as taxpayers have to pay} will climb to 2.6% of GDP from 2% in 2007 . . . " "Economist Ray C. Fair of Yale University estimates that without big changes in policy, the national debt will rise to 75% of GDP by 2020 from 50% now {That's an alarming 50% increase in the national debt}, while interest expenses will rise to 4.3% of GDP." “A permanent tax increase equal to 4% of GDP, or $500 billion a year, would keep the debt-to-GDP ratio in 2020 at 47% {instead of the projected 75% ratio with no tax increase} but cost $3 trillion in economic output over that period." (Ref. 2.) That's a highly undesirable consequence. Currently, "The national debt is $12 trillion. The White House estimates the government will have to borrow an additional $3.5 trillion over the next three years. Debt held by the public is projected to rise from about 41% of gross domestic product last year {2008} to 82% in 2019 (not counting what the Treasury owes to Social Security)." That's a whopping 100% increase in the public debt! While the administration projects an annual deficit of 3 percent of GDP by 2019 which might be manageable, it bases this projection on extremely optimistic assumptions, i.e., "GDP growth of 3.2 percent in 2011 and averaging 4.3 percent annually for 2012-2014. The assumptions are not helped by economy wrecking cap-and-trade schemes and budget-busting health care reform." (Ref. 3.) It should be noted that the historical rate of GDP growth over the eight years from 2000 to 2007 was only 2.4% (Ref. 4.), nowhere near the administration's optimistic projections of 3.2% in 2011 and 4.3% for 2012-2014. Over the past 30 years, GDP growth rate has exceeded 4% only 7 times. (Ref. 5.) More Government? President Obama's "current 2009-2010 budget, approved by the House, begins with a 2008 debt of $5.8 trillion and plans for an $11 trillion debt in 2012. While he might be cutting the deficit in half (after almost tripling it), he is almost doubling the national debt." Obama continues to champion "more government spending, all the while conveying the belief that if only we have more government we could make it all better." "Most . . . Americans, . . . especially small-business owners, do not believe that more government is the answer; they believe that more government is the problem." [emphasis, mine] (Ref. 6.) "The soaring deficits have raised worries about the willingness of foreigners to keep purchasing Treasury debt." The Chinese are now the largest foreign owners of U.S. Treasury securities and have expressed concerns about the size of our runaway deficits. Critics contend that the Obama administration does not have a credible plan to address future deficits. "Private economists worry the country could face the grim prospect of seeing interest rates soar in future years and the dollar weaken as foreigners dump their U.S. holdings." The current deficit imbalance has "added to a flood of red ink already accumulated through the recession and massive spending needed to stabilize the banking system." (Ref. 7.) Our economy is suffering because of an overabundance of government spending. The current administration attempts to solve all of its problems with increased spending - as a result, the federal debt and the taxes we all pay go up. Government Regulations Our economy is strangled by burdensome regulations, the paperwork needed to comply with these regulations, and the cost to the economy of the regulatory agencies and their staffs that are required to interpret and enforce these regulations. Great Britain offers an example of the effects of oppressive government regulations. ". . . in Prime Minister Margaret Thatcher's time there was the serious possibility of Britain's being able to abolish its income tax and pay off its entire national debt." "But now, after more than a decade of New Labour's being in power, the British econmy is in ruins. . . . The national debt has risen to a three-decade high of 49% of GDP and is increasing rapidly. The budget deficit is also at a historic high and deepening." (Ref. 8.) The economic and social programs of Britain's New Labour party are not unlike those of the current Democratic administration. "The chief problem facing British businesses is the maze of oppresive government regulations New Labour has signed into law. These laws particularly affect conditions of employment - the right to hire and fire; safety and health in the workplace; maternity leave, which now applies to men as well as women; and countless other aspects of work. According to one calculation, New Labour has created more than 20,000 new offenses, most of which apply to industry and commerce. It has also created 1.25 million public-sector jobs, mainly in inspectorates and in supervisory positions to ensure that companies observe the new regulations or, if they don't, are punished. These are well-paid, tenured jobs with excellent pensions, which helps explain why public finances {are} in deep deficit. . . ." "For an employer to provide a job now entails such detailed and onerous legal responsibilities that many who have created small businesses are afraid to expand to the point at which they must conform to employment law." (Ref. 8.) Small Business Small businesses here in the States face many of the same problems as their British counterparts. Large companies can afford the legal departments, human resource departments and the other resources needed to comply with government imposed regulations. Small businesses often cannot. Consequently, they fail to grow or simply go out of business. Since small businesses are considered to be the major source of job growth, if there is no small business growth, unemployment remains high and the overall economy suffers. President Obama seems to understand this but does not act accordingly. He has announced that "small business will get some much needed tax breaks, including a one-year elimination of the capital gains tax on new investments in small business stock. . . . How does a one-year tax cut do anything?" (Ref. 9.) Investors and businessmen need a stable environment before they are willing to risk their toil and their money. A one-year tax break does not constitute a stable environment. Major contributors to recovery from the current recession will be small businesses. They create the majority of new jobs which get American workers off the unemployment rolls and which generate the new products and services that get the economy moving. What does the House version of the health care bill do to help small businesses fill this vital role? It proposes to pay part of the cost of the health care bill "by putting {a} 5.4 percent 'surcharge' on capital gains and dividends - at the same time the Bush tax cuts expire, raising the capital gains tax from 15 percent to 20 percent and now to 25.4 percent." "The cap{ital} gains tax increase that would hit on Jan. 1, 2011 would be a 69 percent hike and would fall hardest on our biggest economic driver - small business." (Ref. 10.) As it is, corporate income taxes in the United States are "the second highest in the developed world." (Ref. 11.) Talk about killing the goose that lays the golden eggs! Lower Taxes Instead of focusing on eliminating previous tax cuts, the solution to maintaining a strong and expanding economy should be on stimulating the economy by continuing to lower the tax rates. “Our corporate tax rates are second highest in the developed world, penalizing job creation and investment.” “The capital gains tax was lowered to 15% in 2003” But it’s not indexed for inflation and Democrats are proposing to hike the tax rates. Instead, we should be lowering or inflation-indexing the capital gains tax. “The uncertainty in U.S. tax rates and the scheduled tax rate increases have been reason enough for investors to prefer foreign investments.” Just what the American economy needs - a flight of capital to foreign markets similar to the flight of American dollars to foreign oil producing countries. “While many other countries are making clear their plans and techniques to cut {tax} rates,” Democrats in Congress are focused on which taxes to increase. (Ref. 12.) “A powerful shot in the arm would be to make permanent - and indeed, deepen - the tax cuts on dividends and interest that expire in 2010. Reduce the levy on dividends and capital gains from 15% to 10% and you’d see a sharp boost in equity markets, as well as in consumer and business confidence. Business capital outlays would boom, as would entrepreneurial startups.” Someone said that if you give a family some fish, they will have food for one day, but if you provide them with fishing gear, they will have food indefinitely. Increase taxes on the "rich" and the “non-rich” will have a few more dollars in their pockets for a while. Reduce taxes to increase capital spending so that new and better paying jobs will be created and the “non-rich” will have more dollars in their pockets indefinitely. Unfortunately, “Congressional Democrats instinctively oppose things that actually facilitate progress.” They continually strive for that socialistic utopia where everyone is equal and there is no such thing as the rich and the “non-rich.” (Ref. 13.) The current Democratic administration, along with their Congressional Democratic followers, want social equality by making everyone "non-rich". History teaches but liberal Democrats fail to understand that “Tax rebates {and tax give-aways to the middle and lower classes} don’t stimulate the economy. Cutting tax rates does. Simply put, low tax rates encourage new wealth creation. Tax rebates {tax give-aways} merely redistribute existing wealth.” “. . . after the 2003 tax rate reductions, business investment surged, the stock market leaped 32%, and the economy created 5.3 million new jobs. Overall economic growth doubled.” (Ref. 14.) A significant historical lesson occurred more than 70 years ago. “During the Great Depression, Congress raised taxes sharply in the Revenue Act of 1932. The top rate went from 25 percent to 63 percent. As a result, the real Gross Domestic Product dropped by 133 percent and unemployment rose from 15.9 percent to 23.6 percent.” (Ref. 15.) The general consensus has been that the policies of the American government after the stock market crash in 1929 in raising tax rates and imposing protectionist trade barriers through the Smoot-Hawley tariff bill which raised tariff rates to unprecedented heights turned a recession into the Great Depression and prolonged the economic disaster for several more years than would have been the case if tax rates had not been increased and trade barriers had not been not set up. “It is obvious that increasing capital gains taxes . . . would send a signal to investors to keep their money under the mattress. Who would buy stock knowing that the tax on any profits . . . is going up sharply?” "In a strong economy, Obama’s proposed tax increases would raise questions. In a weak economy, they portend a catastrophe. It would be like bleeding a sick patient, the medicine of 200 years ago, depriving him of blood even as he needs more, not less, circulating through his arteries.” (Ref. 15.) Federal Give-Aways The federal government under the Obama administration has been providing a blizzard of stimulus money in an attempt to bolster the economy and reduce unemployment. The positive results of these programs are dubious. Unemployment has continued to climb in spite of stimulus funding. At the same time, the federal deficit has risen precipitously. The effects of the various stimulus programs appear to be questionable at best. "Staring at a nasty 10 percent jobless rate," President Obama has said that "more government spending is needed to drive down the jobless rate." To get the economy moving, "Congress approved a $787 billion economic stimulus package that helped drive up the nation's debt." (Ref. 16.) "The $787 billion stimulus package has undoubtedly prompted the creation of some jobs somewhere and has clearly saved the jobs of many members of the public employee unions that gave so generously to Obama's campaigns." (Ref. 17.) To expand and "improve" health care, the President and his Democratic controlled Congress are debating a $1 trillion health care reform package. This country simply cannot afford ObamaCare, particularly at this point in time. ”The federal budget deficit has surged to an all-time high of $1.42 trillion. ... The imbalance for the budget year ended Sept. 30 more than tripled last year's record. The Obama administration projects deficits will total $9.1 trillion over the next decade ... As a portion of the economy, the budget deficit stood at 10 percent, the highest since World War II." Failure to curb runaway deficits could trigger a financial train wreck that would push interest rates and inflation higher, and send the dollar crashing if foreigners suddenly started dumping their holdings of Treasury securities." (Ref. 18. ) Why have President Obama and congressional Democratic leaders chosen to make expensive health care legislation a priority at a time when the nation is facing a 10.2% unemployment rate? "Most Americans do not own cars or trucks worth $24,000, yet that's how much American taxpayers spent to subsidize each new vehicle sold because of the Cash for Clunkers program, according to auto industry analysts at Edmunds.com" "As many Clunker critics predicted, people who were planning to buy a new car or truck merely moved up their purchase to take advantage of the taxpayer-funded rebates. That has reduced sales that would otherwise be occurring now." (Ref. 19.) "The upshot {was} an artificial spike in auto sales. . . . So for the $3 billion we spent on Cash for Clunkers, the net result is - nothing." "Actually, it's worse than nothing. The $3 billion was borrowed, which means we will be paying for it for years to come." (Ref. 19.) And what about those of us who didn't turn in a clunker for a cash rebate? We get nothing but an increase in our taxes while others get up to a $4,000 rebate - not very fair or equitable. Consistency, Stability and Some Degree of Certainty For the economy to recover and move forward, business must have some confidence that the government's policies will be both fair and consistent. Business does not perceive the Obama administration's policies to be predictably consistent or fair in terms of business objectives. Businesses foresee more government "regulation of yet-to-be-determined complexity." (Ref. 20.) As a result, business is not on a hiring spree and business is not pouring money into new investments and growth. Can government actions get the United States out of the current recession and reinvigorate the economy? History does not encourage such a point of view. Many would justifiably argue that government policies create our economic woes and supposedly corrective actions by the government only exacerbate the problem or delay recovery from economic downturns and recessions. Government Interference Dr. Charles Ormsby has attributed the prime causes of the current economic crisis to federal policies that ruined the housing market by: "First, federal insistence {by Barney Frank and then president Bill Clinton, along with their liberal Democratic cohorts} that Fannie Mae and Freddie Mac provide a guaranteed market for mortgages to low income borrowers. By 2005, 52% of Freddie's and Fannie's loans consisted of such high-risk lending. Second, Changes in the Community Reinvestment Act in 1995 dictated elevated levels of high-risk 'investments' by banks in low-income communities. This dictum was enforced by the Federal Reserve. Third, the resulting real estate boom was supercharged by the Federal Reserve's low interest rates (a repeat of the Federal Reserve policy that caused the Great Depression)." (Ref. 21.) Dr. Ormsby goes on to advocate the elimination of, or at least, the minimization of, government interference in economic decision making. He states the following: "In a free market, economic decisions are made by those with their own assets at risk or by people who, because of their past track record of good decison making, are entrusted by others to make decisions on their behalf." "In a free market, decision making powers are continuously adjusted and re-assigned based on the abilities and track records of all participants . . . At any given time the allocation of decision making authority is imperfect, but adjustments are continually made to improve it." (Ref. 21.) On the other hand, "Government decision makers spend their time in government buildings isolated from the issues faced by those actually designing, producing, transporting and selling goods and services." ". . . they are not rewarded based on the economic merits of their decisions. Instead, they are rewarded based on the political impact of their actions.” "Policies at the highest level are bought and paid for by special interests: unions, ethnic groups, and business interests; all of which are looking to distort economic decision making to their advantage." "The cure, in a nutshell, is to eliminate government interference in economic decision making." (Ref. 21.) State run economies in Communist Russia and China have failed because economic decisions were made by government bureaucrats rather than capitalist business people. Both Russia and China are shifting to free market economies. The results have been, to say the least, very positive. "In the end, a sound economic system steers available labor and capital to the production of the goods and services most desired by consumers and does so as efficiently as possible." (Ref. 21. "In her book The Forgotten Man, Amity Shlaes wrote that the 1937-38 'depression within the Depression' occurred when capital went on strike. President Roosevelt's willingness to 'try anything' . . . had businesses and their backers so confused over FDR's rules that they simply withdrew." "This is the risk of President Obama's willingness to 'do what it takes.' Those words sound positive and action-oriented. They really mean 'anything can happen.' . . . Nobody knows for sure what will happen. Government is sorting it out day by day." CEOs and investors hate uncertainty and CEOs and investors are understandably "nervous about deploying capital for growth." (Ref. 20.) Meanwhile, the economy continues to stagnate. Reduce Spending ". . . it's easy to spot the job-killing planks of the Obama platform. The prospect of higher taxes on high earners after the Bush tax cuts expire in 2010 is one. The surtax on high earners in the health care bill the House passed is another. The cap-and-trade bill passed by the House is another. With all this in prospect, why would people choose to make job-creating investments?" For the American economy to resume the pre-recession growth pattern of the past two decades, the rapid increase in government spending must come to a halt. On December 10, 2009, "the House . . . passed a huge spending measure with major boosts for domestic agencies, foreign aid and more than 5,000 back-home projects sought by lawmakers." "The 1,088-page $1.1 trillion measure would provide $447 billion in operating budgets for 10 Cabinet departments, awarding increases averaging almost 10 percent?" "The measure follows February's $787 billion economic stimulus and a $410 billion measure in March." (Ref. 22.). Does any of this sound like the current administration has any real intention of reining in government spending? Can we also afford to add in the cost of the proposed ObamaCare health reform? Conclusions:
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| 18 December 2009 {Article 64; Undecided_14} |