At this point, it is clear that the American economy is not doing well. After a severe recession, we usually have a strong bounce back to growth. The return to growth began last fall, but it never had great strength and it is getting weaker with each new statistic that is released. So far, we have had a recession without any substantial recovery. Unless the trends change, we may find the economy back in recession before the end of the year. So, here is the big question: how do we get ourselves out of this mess?
There are all the usual answers: Obama and most of the Obamacrats think that more government spending to "prime the pump" is the answer. Many Republicans think tax cuts will do the trick. Others have cures that range from a return of the gold standard to more nationalization of major industries. It seems to me that it is time to take a pragmatic approach and look for what has worked and jettison what has not worked.
First, we need to recognize that monetary policy has taken us about as far as it can. Since the beginning of the recession, the Fed has cut interest rates to record lows. Short term rates are close to zero. Long term rates are also amazingly low. I think it is safe to say that no one is refraining from economic activity because of the high cost of money. There is also a more than adequate money supply. In the first part of the recession, the Fed raised the money supply at very high rates. While that has stopped, there is no dearth of cash. Indeed, the money supply is so large that there has been substantial fear that once the economy gets going again, this could lead to rampant inflation. There are other moves that the fed can make that could affect segments of the economy; one example is the purchase of mortgage backed agency debt that the Fed undertook and from which it is now exiting. This prevented the lockup of the mortgage market, but that work is essentially completed.
Second, fiscal policy has not been very successful thus far. The main engine in fiscal policy since Obama took office has been a great increase in government spending. Both the stimulus and the federal budget have shoveled money out to all sorts of projects and groups. There was a kick to the economy from just that cash flowing into it, but the cost has been enormous and the kick very small. Now that the flow is ebbing, the debt burden remains, but the increase to the economy is disappearing. It seems a fair conclusion that under the Obama methodology, any increase to the economy can be maintained only by pour out money from the federal government on a continuous and unsustainable basis. The few bright spots in the dismal history of the Obama efforts have been programs like Cash for Clunkers that drew hundreds of thousands of buyers into the car market to take advantage of the deals. The tax credit for home buyers is a similar program. Both of these programs, however, have had little effect on continuing results in the relevant markets. The auto industry saw a marked fall off after the expiration of the Clunkers program; it seems that most of the sales which the program inspired were simply ones brought forward from later months to coincide with the program dates. Home sales have also plunged once the tax credit expired. In short, the Obama programs have not worked.
Third, the question remains what would work? To determine this, one needs to look at where the economy is weak. Consumer spending is a major driver of the economy. It has not been strong, but it has not plunged. Buyers are not on strike; they are just being more careful, more frugal. Necessities are being purchased at normal levels; it is the big ticket items that are weak. This is the direct result of the weak economy. Home purchases require consumers to have more than just a bigger paycheck; they require the buyer to feel secure enough about the future that they are willing to undertake the ongoing burden of a thirty year mortgage. Even auto purchases require the buyer to feel secure enough to undertake a five year car loan. With high unemployment and the dearth of new jobs, many folks simply cannot consider these purchases at this time. That hesitancy reverberates through the economy.
So how do we restore hope to the people? Curiously, to get hope, we need change. There has to be a change that will lead the folks to believe again that better days are coming. Even with no change other than one of perceptions, we could get an increase in home sales as well as increase for other big ticket items. The ripples from thos purchases would join to form a wave of progress for the economy.
To improve confidence, we need to attack unemployment. This more than most is an indicator that affects people's behavior. So job creation is the priority.
Job creation is best done in the private sector. Additional government employees do not produce anything; they are simply additional mouths that the economy must feed from its excess.
Private sector jobs are best created by increased investment. A new plant or a new piece of equipment requires workers to operate it. It lasts for years and those new jobs remain in place during that time. A billion dollars invested in equipment means job creation for twenty years. A billion dollars given to government workers means jobs in place until that money runs out. further, the multiplier for investment is much higher than it is for an item like a government worker. Each dollar spent on buying new equipment means that another firm is selling that equipment and still another is installing it. Those companies may need further investment to be able to carry out this work. In other words, If each dollar of government salary leads to another 25 cents of economic activity, each dollar of investment leads to something like two dollars more of further activity. (These numbers are for illustration purposes only -- the actual numbers are the subject of enormous debate. It is beyond reasonable debate, however, that investment has a higher multiplier that government payrolls.) So increasing investment is the best way to go.
Has Obama done anything so far to affect investment? The answer is clearly yes, but, on balance, he has done more to stifle investment than to increase it. First, Obama has increase uncertainty with his myriad of radical proposals. The Cap and Trade bill that passed the House is a good example. Were that bill to become law, energy prices across the economy would soar. Right now, however, no one knows by how much or in what way that cost increase would occur; there is no version of the bill that the White House has adopted, but conflicting versions in Congress. A rise in energy prices makes many potential investments less profitable and therefore less likely. When the rise in energy prices is expected but the extent unknown, it makes such investments even more risky -- after all, a change in the law or regulations could render a seemingly profitable investment into a loser, and the company making the investment would have no control whatsoever over the outcome. that is a good reason to hold up on investing. Obamacare and the Wall Street "reform" bill are two other examples of this phenomenon. Every business has to concern itself with health insurance costs for workers. Even now, after the passage of Obamacare, no one seems to have any understanding of what the final cost will be. We will first need to see the thousands of pages of regulations that have yet to be written. The cost for a new employee could soar on this alone. Again, this halts many marginal investments since the uncertainty makes them less likely to succeed.
Second, Obama has promoted many measures that are unfriendly to business. His position of the tax rates for next year is one which will suck billion of dollars out of the economy, disproportionately from small business owners. With a higher tax burden to consider, a small business owner may find his proposed investment less likely to be profitable and therefore less likely to proceed. Obama has also promoted measures like card check, a boon to unionization of currently non-union workplaces. Here again, this is a measure to raise costs and difficulties for all business, large and small. More uncertainty and fear is the result.
So how does one help investment if the Obama methods do not work. Two obvious proposals come to mind: first, one blocks the Obama proposals once and for all. This will be achieved if, in November, the GOP takes control of one house of Congress. If the Republicans remain true to their professed principles after that election, none of the remaining Obama programs will have a chance. Business owners know this and will have much more certainty as we move forward into the future. Second, there need to be proposals that push business investment. These include the following: 1) Targeted federal tax cuts that promote investment. Examples include investment tax credits for new plant and equipment which is purchase in the US and used in the US. These credits should not be wasted on purchases from other countries or for investments abroad. A two year special 25% investment tax credit would do more for jobs than the entire Obama stimulus at a small fraction of the cost. 2) Extension of the Bush tax cuts. The key here is not to have just some of these extended. 3) Reorganization of parts of the tax code. First, the alternative minimum tax needs to go. It was passed to get less than two hundred taxpayers into the system over thirty years ago; it now affects tens of millions each year. It also costs billions of dollars each year for taxpayers to attempt to deal with its intricacies. One possible outcome would be to set the AMT minimum at 1 million dollars; that would restore it to its original purpose of hitting only the ultra rich. the million dollar cut off should be indexed for inflation as well, and there should be language that no one with gross income of less than one million dollars need show any effort to comply with the tax (thereby avoiding the bulk of the costs imposed on taxpayers to try to comply with the AMT.) Second, tax provisions that allow deductions against income in the US for activity outside the US should be removed. If companies want to move jobs overseas, that is there right, but US taxpayers should not subsidize those moves. There are many other changes needed in the tax code as well. 4) Obamacare needs to be repealed and replaced with plans that allow private efforts to control costs. Healthcare costs are out of control, a situation made much worse by Obamacare. US businesses should not be facing the uncertainty and enormous costs that obamacare is thrusting onto them. A replacement system should be one that requires the existence of plans that cover preexisting conditions (although not requiring that of every plan), allows for competition among carriers to get lower prices, reduces the level of unnecessry testing and procedures caused by the legal system, subsidizes those US citizens who have difficulty paying for coverage, and removes the waste and fraud out of the Medicare and Medicaid system.
All of this sounds like something much more than it really is. It is something that can actually be achieved if congress and the president would work together to try to achieve it. My guess is that we need a new Congress and President, however, before that day will come.
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