Friday, July 16, 2010

Economic Malaise :My view on the current economic climate

A Panic, an oil shock, and an election

We had a panic in 2008. Banks stop lending to businesses, individuals and to each other. Financial institutions had to write down huge amounts of loans and take on heavy losses and then bailouts ensued. Also we had an oil shock just before the panic. Remember $147 crude oil and $4 gas? This entire economic calamity occurred during a presidential election between an unknown young gifted speaker (Barack Obama) and an old experience war hero (John McCain). John McCain had a slim chance to win the election, all Barack Obama had to say was “John McCain is republican, Bush was a republican (I know your tired of Bush?), republicans drove the economy into a ditch. Vote for me because I’m not him”.

It didn’t help that the McCain ran a terrible campaign that was completely unfocused but at the end of the day Barack Obama had good cards and he played them well.
Barack Obama won the presidency but, I had concerns about his views on the economy. I knew he never ran a business, never worked outside of politics in the private sector or had any background in economics or finance. It seemed to me, that he held the outdated economic views of the 1970’s i.e. high taxes, high federal spending, trade restriction and command/ control regulation. This world has passed away and it flat out doesn’t work. In today’s world capital flows quick and easy and it goes where it’s treated best. 1970’s economics doesn’t attract capital; it scares the hell out of it.

A Really Ugly Job Market

Everyone knew Barack Obama was going to be elected during an economic maelstrom, but political pundits these days asked us to have sympathy for the tough situation he’s in. I think that is nonsense. He volunteered for this job and thought high enough of himself (too high if you ask me) that he can do the job. I don’t feel sorry for him. I feel sorry for those who are unemployed. The unemployment rate currently sits at 9.5% (Bureau of Labor Statistics) but we had one of the longest stretches of high unemployment in decades. Unemployment has been over 9% for 14 months the longest stretch of unemployment at this high a rate since March of 1982- September 83 (19 months). Additionally there are 14.6 million people who are out of work, 45% of them have been unemployed for 27 weeks or longer.

We also have underemployment rates at 16%(under employment is total unemployed plus those marginally attached to the labor force, plus those who have part time jobs for economic reasons i.e. over skilled worker in a low skill jobs) High Unemployment of this length and high under employment leads to the eroding and outdating of these workers skills. Furthermore, the civilian labor force (all Americans eligible to work who are at least 16 years, who are not institutionalized or in the military) has decreased the last two months by 322k in May and by 682k in June after having an upward trend since January. People have stopped looking for work, a very troubling sign.

Cash is King and Uncertainty is the word around town

Many businesses especially publicly traded companies are sitting on cash. Rich Karlgaard publisher of Forbes Magazine says companies are sitting on 1.2 trillion dollars. ( I’ve heard numbers as high as 2 trillion dollars. Why? Many companies are uncertain about the future of America economy. Taxes are slated to go up in 2011. Federal taxes on income, capital gains, and dividends are slated to go up. The health care bill and financial reform bill gives unprecedented powers to regulators and bureaucrats. This doesn’t instill confidence in markets or the business community when don’t know what these folk endowed with new powers are actually going to do. I think these bills will raise the cost of labor and raise the cost of regulatory compliance and raise the cost of financing expansion. People invest when there reasonable certainty about regulation, taxes and the cost of money. This is not the case today.

Economic Malaise

Back in the day President Jimmy Carter told the Nation that we suffered from a “crisis of confidence” its fair to say after the “panic of 2008” and the “Great Recession” we are now have a “crisis of confidence act 2” According to the June WSJ/NBC poll President Obama came into office with an approval rating on the economy of 56% and a disapproval rating of 31%, a net 25% approval. As of June 23 the same poll has his approval on the economy at 46% and disapproval at 50%, a net of -4% disapproval rating. This is a significant drop showing that investor class, business community and regular folks are losing confidence in this administration on economic issues.

Policy Prescriptions

The Stimulus package was a failure. Transfer payments (money to individuals through federal programs i.e. welfare, food stamps, etc), money sent to states (whose budgets are busted mainly by huge expenditures to public sector workers through high salaries generous health benefits, unfunded pension plans and Medicaid) and weak tax credits doesn’t lead to job creation. We need to get private investment and job creation going, so here are some ideas I’d advocate. I’d like to see the corporate tax rate cut. America has the second highest corporate tax rate in the industrialized world at 35%. Many business leaders including FedEx CEO Fred Smith site this high tax rate as a killer of job creation in America. I think a reduction in payroll taxes with a commensurate increase in the gasoline tax is appropriate. It would encourage more work, allow people to keep more of their own money, to save, invest or get their finances in order and the gas tax would disincentive gas consumption and it wont raise the deficit.

I would support extending unemployment benefits. These benefits don’t produce jobs. However, people are having a tough time, so on humanitarian grounds not economic grounds I’d like to see it extended until employment picks up. Full expensing on capital expenditures, streaming of regulations on business would spur private investment and lower regulatory compliance cost and signing trade treaties with Panama, South Korea, and Columbia would open American businesses to new markets. Some of these policy proposal would raise the deficit but not in a crazy way. The return we’d get on these proposals in terms of investment and real job creation would be worth it both in the short and long term. Mr. President it is time for some free enterprise policies to get our ailing economy going.

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