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?
- 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.
- 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.
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
- 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.
- A Few Things You Need to Know About the U.S. Economy (xkorpion.wordpress.com)
- Don’t Look Now but the National Debt Could be $23 Trillion by 2021 (xkorpion.wordpress.com)
- Making Sense of Mixed Economic Signals: Part 1 (insightadvisor.wordpress.com)
- Obama’s Mouthpiece: No Threat of Double-DipObama’s Former Obama Economic Adviser: Threat of Double Dip Is 1 in 3 (minx.cc)
- Macro Update: U.S. inflation still low? (tradingfloor.com)
- Focus Turns Back to Fed on Economy (nytimes.com)
- The Problem is Too Much Debt – Wall Street Pit (news.google.com)
- The Reserve considered pushing up rates aright (petermartin.com.au)
Thomas Friedman wrote a very interesting op-ed piece in the New York Times recently entitled “Superbroke, Superfrugal, Superpower?” He hit on all my hot buttons about the profound consequences of America’s diminishing competitiveness in the world and why we must turn that around fast. He talked about the role of America as the world’s sole superpower and why there is no logical replacement for us on the world stage today. He talked about the need to set priorities and make choices that live into our values.
That really is what this election year is all about isn’t it? Setting priorities and making choices about what we want our country to be like for our children. The economy suks and so does our attitude about how it’s going. But this testing of our values and resolve may prove to be just what we needed to wake up to the slow slide we have been on for some time.
This is not a commentary on either the Democrats in power today or the Republicans who were and may be again. We had grown complacent. We bought into a globalization theme that has sapped our strategic strengths and we spent too much time apologizing for America’s successes. We fought wars no one else would fight and we saved—or tried to save—countries that the world might have been better off without.
But something happened to us as a result of this great recession. We woke up! Sat up and said wait a minute, we don’t like what is happening to America. This is not about blaming someone for the problem—it is about fixing it.
That’s where we are now and all of our politicians are rightfully running scared because we want change WE can believe in. And that does not mean going backward either. It means we are ready for a fresh start and are in the midst of defining what that requires and who best to lead us back to competitive advantage. The TEA party movement is the political equivalent of an IED unleashing America’s pent up anger and frustration wreaking havoc when it goes off but causing us to play smarter defense and then take offensive action to deal with our real problems.
Thomas Jefferson would love this volatility and “little bit of rebellion” alive in America today. He saw the ability of the people to shout “Wait a Minute” as the singular best feature of the system of checks and balances embodied in the Constitution.
If what we want as Americans is to ‘get our groove back’ economically, politically, globally we need more than income redistribution through stimulus spending we have today or the Republican alternative of redistribution of essentially shifting America’s economic engine overseas through complex financial transactions and tax manipulation that make Wall Street rich but create little value except in the “flip and churn” of transactions.
This is the Thomas Jefferson rebellion our political class on both sides of the aisles fears. It is that we are coming to take back America seeing its promise as more than the sum of its debts. We are ready for change, but we want it our way this time.
Principles of an Insurgent Recovery
- STOP SPENDING MONEY WE DO NOT HAVE. Calls for additional stimulus spending are landing with a thud because the previous rounds have not produced a satisfying effect. The uncertainty created by the impact of rising spending and deficits has business sitting on its cash and biding time instead of investing, hiring and growing the economy faster.
- SHOW ME THE ROADMAP. Business wants to see where the economy is going and what the government will do—and how much it will cost. When that is known they can decide whether to invest in America or not. What everyone wants is certainty in uncertain times. Not everything can be fixed quickly, we know. But we want as few surprises as possible and we need to know the Government has adult supervision.
- GET OUT OF MY WAY SO I CAN GROW MY BUSINESS. The cumulative costs of ObamaCare, higher tax rates, regulatory costs in finance, energy, environment, health, state taxes to cover deficits and the fear of looming inflation are job killers. The best way to restore confidence is to create an economic and political foundation that encourages economic growth—that rising tide lifts all boats.
How to Get from Here to There
This is the hard part isn’t it? And the added problem is we mistrust both parties with majorities because they tend to revert to their worst instead of looking out for our best interests. So my formula for getting our groove back includes the following:
- VOTERS TO POLITICIANS: A POX ON BOTH PARTIES. WORK TOGETHER OR ELSE! We should elect as many non-incumbents who seem reasonable not ideological as we can this November. Congress needs more Main street people and fewer professional politicians. Throw out the leadership of both parties and start over. Elect a Republican majority in the House but with many insurgent TEA party members to give the old guard fits. Retain Democrat control of the Senate but not 60 votes so they must compromise. The President is entitled to propose his agenda but majority control of both houses by either party just leads to too many opportunities for bad behavior when we want checks and balances to require both parties to work together or face our wrath in 2012.
- VOTERS POLICY ROADMAP FOR WASHINGTON: GET IT DONE OR ELSE! Here is what we want a bipartisan effort to deliver for us by the 2012 election:
WE WANT A FAIR, FLAT TAX SYSTEM. We want it simple, easy to understand, no loopholes, few deductions and no need for an army of accountants and lawyers. We want everyone to pay something. No alternative minimum tax, no double taxation, low capital gains tax, and corporate rates lower than competing countries. The goal is to turn America into an investment magnet for the world to jumpstart investment, entrepreneurship and job creation.
ROLL FEDERAL SPENDING LEVELS BACK TO 2008. Un-appropriate all unspent stimulus money using it to reduce the deficit. Stop spending money we don’t have and reset the budget base to pre-stimulus levels across the board—and we mean it! Force a zero-based competition for available new spending and a public vote on the ranking of priorities. Ban all earmarks. Give the President line item veto authority or impounding authority to manage spending to revenue. We want this done before the 2012 election.
FIX ENTITLEMENT SPENDING. Repeal ObamaCare entirely and substitute reforms aimed at introducing interstate competition into healthcare and lowering costs by the 2012 election. Make individual healthcare premiums tax deductible just as group plan premiums to create a level playing field for coverage. Means test other entitlements so the resources are spent on those most in need and put other cost savings or reform ideas on the table by 2012 election to be decided after that election for long term reforms.
When we get these things back on track we’ll focus on our global leadership role during the 2012 election. Listen up Congress, what part of get this done don’t you understand?
There ends the rant. Damn, that felt good.