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The economic reports are grim, growth has stalled and the US is again at the edge of recession.  The debt deal that wasn’t has proven to be ‘business as usual’ from our elected leaders now more fearful about their own reelection prospects than ours.

IRS data  from the annual Statistics of Income tables that were released this week tells us U.S. incomes fell again in 2009, with total income down 15.2% in real terms since 2007. The data showed a drop in the number of taxpayers reporting any earnings from a job — down 4.2 million from 2007.  Think about that for a moment, every 33rd household that had work in 2007 had no work in 2009.

Average income fell in 2009 to $54,283, down $3,516, or 6.1% in real terms compared with 2008. Since 2007, average income is down $8,588 or 13.7%. Average income in 2009 fell to 1997 levels when it was $54,265 in 2009 dollars, just $18 less than in 2009.

We know the reality we face. 

The US debt has driven us to the brink.  The debt levels are made worse by reckless spending and entitlements we can no longer afford.  The high unemployment levels mean fewer workers paying taxes, spending and investing.  Business is hoarding cash due to the uncertainty about the economy, uncertainty about taxes, uncertainty about regulation and uncertainty about whether making a business bet at home is better or worse than making one abroad.  Even a casual look at earnings reports tells us the answer.  Much of business earnings growth is coming from overseas markets better positioned today than the US to deal with the current problems, but equally or more exposed to volatility and bad outcomes if the situation in the US gets worse.

Things are likely to get worse before they get better.

Since our fundamental problem is high debt levels we can’t use deficit spending to “stimulate” the economy to create jobs, make investments and restore confidence.  Our politicians tried that option in a spending binge that rewarded politically correct causes and did little for the economy.  The value of the dollar has fallen significantly thus raising the price of oil and other global commodities and creating an inflationary spike around the world.  The tools left for the Federal Reserve are limited.  They don’t want to raise interest rates because that would only make matters worse.  They could ‘buy back’ US debt but that would be inflationary.  They could retire the US Treasury bonds the Fed has purchased but doing so risks pushing the economy into recession by slowing growth.

What are our Options?

1. Inflation.  Our greatest fear is actually the most likely reality.  The Fed has kept interest rates low but they can’t go any lower and the size of our debt means we sooner than later will have to pay higher interest rates to keep the system going until we find a solution.  Remember we faced this same situation in the 1970’s when rabid inflation savaged the economy.  Interest rates were the tool of choice Fed Chairman Paul Volker used to break the back of inflation and restore balance.  But raising rates today will only explode the size of the US debt and could make matters worse.  But when politicians are unwilling to act, inflation is the cruelest tax of all. So pay off your credit cards, you are going to need cash to pay for food.
2. Freeze Federal Spending!  I know this sounds simple and is what each of us has been required to do, but our government seems unable to quit spending, quit adding regulations that drive up our cost or discourage investment and job growth, quit promising new entitlements.  The debt deal that wasn’t proves the charade.  We need a break because the government is sucking the oxygen out of the economy. The most dramatic break would be a true and genuine freeze in Federal spending to current year actual levels.  No more fuzzy math! If such a spending freeze would be enacted it might stimulate confidence.  But we’re going to have to hold down REAL spending and then do more by weeding out the ineffective programs in order to redeploy the savings to higher priority programs and services.  This is triage!  It will be painful but it is essential.  One plan discussed would freeze spending at current year levels and then each year cut 1% more until the budget is balanced.  It would take 6-8 years but we would be a leaner, smarter, more self sufficient country. A plan like this would do wonders or confidence and quit digging the hole deeper.
3. Domestic Energy Production.  We spend billions importing oil and other energy products when we have domestic energy resources that our environmental regulations and political correctness prevents us from using.  This must stop.  Reducing oil imports would help moderate inflation, reduce our balance of payments, increase domestic jobs growth and investment and recycle the money in the US instead of OPEC.  If ever there was a time to change this dynamic of foreign dependence it is now. If you think this will not work look at north Dakota and more recently Pennsylvania.
4. Corporate Tax Rates, Repatriating Earnings and Capital Gains.  The way to coax business into spending its hoard of cash is to make it more profitable to invest money at home in America than to go overseas.  Getting to this outcome requires setting aside the class warfare political rhetoric by cutting corporate tax rates not just to competitive global levels but lower than that to suck money back into the country from overseas.  The current tax on repatriated earnings should be ended as should capital gains taxes.  These actions make it more expensive to hoard cash than to spend it productively especially if the risk of inflation rises.
5. Regulatory Balancing of Interests. Our regulatory agencies are out of control.  None of them have a duty to balance their regulatory policy zeal with their impacts on the economy.  This must stop.  Congress should pass a mandatory requirement for regulatory balance that says every regulation must be reasonable and equitably balance environmental and other interests against the public interest in economic growth, job creation and global competitiveness.  Regulation that cost the public interest more than the benefits—as objectively scored by an independent third party—are not, by definition, reasonable.  Congress should be required to vote up or down on every regulation within 90 days of its submittal before it can go into effect or it dies.  Business would be able to challenge regulations in court based upon reasonableness just as environmental groups can challenge agencies to act.
6. Stabilize Housing.  The home mortgage mess was a big part of creating this economic problem and it is still holding us back.  Today perhaps 50% of American mortgages are underwater as home prices have fallen.  Banks and mortgage lenders including Fannie and Freddie made this mess and are not doing enough fast enough to fix it.  Banks have been loath to make mortgage modifications and most of the Federal assistance programs actually required homeowners to go into default in order to get any help.  State AGs (all politicians up to their eyeballs in the mess) are suing banks over Mortgage backed securities and  loan practices.  Everyone is going to take losses in cleaning up his mess.  We need a better shared loss or modifications strategy to help clear the market, restore confidence and avoid further unintended consequences as we dig out of the mess:
   1. Offer fixed rate loan modifications for all adjustable rate notes now.  If inflation is coming and adjustable rate notes that were the cause of so many problems rise our housing crisis compounds.  Loan to value ratios make refinancing to fixed rates impossible in this market. Economic stability will be seriously undermined by rising inflation in mortgage rates.  Offering a fixed rate for adjustable notes would mitigate that risk.  If you don’t take the deal, you can take your chances on inflation.
   2. Facilitate short sales.  It takes too long for short sale approval.  Set specific rules that banks must follow to enable buyers and sellers to enter into presumptive approve of short sale requests within specific parameters and require banks to approve or reject other short sale requests within days—not months.
   3. Principal Reduction now for capital gain sharing upon sale.  When a home is more than say 25% underwater banks should be required to offer a swap reducing principal now in exchange for a share of capital gains not exceeding 50% when the property is sold or refinanced.  To be eligible homeowners must not default or the deal goes away.  The goal is to keep homeowners in their homes and keep them paying and get the housing market stabilized.
   4. Fed Housing Resolution Trust.  Why can’t the Fed use some of the assets of Fannie and Freddie or some of the US Treasuries it has been buying to insure this faster transition to a stabilized housing market while writing off some of the debt it has bought or insured anyway in the MBSs to help clear the market.

Actions such as these would help restore confidence, focus our efforts on real solutions to the problems we face in getting back to growth and demonstrate that we are resolved to doing so.

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