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Economic Recovery: at least 2 years off PDF Print E-mail
Saturday, 03 October 2009 16:32

The news is giddy - green shoots in the economy, it's turning around, we've stopped the slide, things will get better.  Our President says so, Rep. Pelosi and Sen. Reid assure us it's the case, and the media faithfully tell us over and over again: we have no concerns, the economy is starting to run again.  All sounds wonderful except for one little fact: they're all wrong.



The reality is that unemployment is continuing to accelerate.  It is only by numerical slight-of-hand that unemployment is below 10% (for example, the number of people taking early retirement at 62 - when you can start collecting Social Security - is at an all time high, meaning they are "technically" not unemployed, but of course resulting in the cash-flow deficits of Social Security a decade before it was expected).  Personal bankruptcies are at record levels, business failures are accelerating, and employment projections by companies are continuing to decline.



Amid this, we hear from the "wise leaders" in Washington DC that the solution is yet more Government spending.  We simply are not spending enough!  A deficit of $1.6 trillion is not enough, having over $1.1 trillion in targeted "stimulus" spending simply is a drop in the bucket.  It must be increased by a factor of 3 or 4 or 5 to get the economy humming.

But the problem with Government spending is thus: it does NOT reflect what the electorate wants to spend their own personal money on.  Much like we see from the "cash for clunkers", it will simply temporarily distort the market.  For example, GM and Chrysler had wonderful sales in August, only to see sales crash by 50% in September.  All the program did was drag sales which would happen in subsequent months forward into August.  Sales of new autos will be slower for the next 4-6 months as the demand that would have been spent over those months was pulled into August, and is now gone.  A one-time kick in exchange for a long-term pull is never a good thing.


Government tends to spend on big infrastructure projects, and that is what the Administration and it's supports are calling to increase.  However, those are the very industries that have been gradually shrinking within the US as efficiencies in production and declining demand have led those companies to move into other sectors of the economy.  Government spending back on the infrastructure side would grow that sector; however, once Government spending stopped or shrank there would be no other demand to keep that sector alive.  You get a temporary spike with no sustained recovery.


What is the solution?  To get US citizens investing their own money in the industries and sectors they believe in, and will patronize.  Right now, there is approximately $4 trillion sitting in money market accounts, and liquid assets like gold and silver, not leveraged into the economy, simply out of fear of what is happening and what the Administration may do.  Note this amount is FOUR TIMES what the Administration has spent on stimulus so far!


What is needed is to get that money invested in the economy, rather than just commodities or long-term savings.  I propose that two actions will free that money and add a direct, long-term, sustainable and desired boost to the economy:


1. Repeal the capital gains tax.  Permanently.  Right now, if you risk your money and you win, the Government will take a share of your rewards.  The capital gains tax is slated to increase in 2010.  Rather than letting it happen, I propose eliminating it.  Give the results of taking risk in stimulating the economy to the risk-takers.


2.  Repeal the corporate tax.  Permanently.  Right now, success by a company is taxed at a rate of 39.6%; for every dollar of profit a company makes, they give nearly 40 cents to the Government.  This leads to many machinations of business to avoid the tax, including spending on items of dubious need, simply to reduce the annual tax bill.  Additionally, because interest on savings is subject to the same tax rate, it is a disincentive to hold the profits year-over-year for large purchases.


These two changes would provide a very large impetus to free up the money sitting, waiting for something to happen.  It would reward businesses to make as much profit and economic activity as possible, which means employment.  And it would necessarily be in sectors that the general consumers desire to patronize, strengthening those sectors which have the most support.


However, given the current leanings of the President and those in power in Congress, I know this will fall on deaf ears as it does not provide additional power to the Government, actually lets people keep what they earn, and eliminates the Government's influence in much of the economy.  So we will sit, struggle along for a few more years until the rest of the world - already much of it pulling out of the recession - gets enough traction to yank our own stuck economy out of this financial mud pit.

Last Updated on Thursday, 23 September 2010 22:39