Blogs » Politcs Plus » Myths and our economic recovery



I'm still disappointed because we don't have answers for our current economic situation. The proposals we hear are 180°opposite of one another. Since they are that far apart, it makes it nearly impossible to come up with a compromise. The Federal reserve Chairman Ben Bernanke is throwing his arm's up in the air, saying that he will not support a third round of quantitative easing, because inflation is starting to rise. That's one of the reasons the markets are falling; they now have to make it on their own. The administration will not ask for another stimulus, and all the republicans want to bring to the table are massive spending cuts. The answer remains a combination of tax increases, spending cuts, defense cuts, and entitlement and tax reform. The republicans have to find a solution that will pass the senate and the democrats have to find one that will pass the House of Representatives. That's supposed to be the beauty of divided government.

The baby boomers are working longer because the financial crisis wiped out a lot of their 401Ks and the housing crisis lowered the value of their homes. Graduating students of today not only have to contend with the baby boomers, but they still have to compete with unemployed graduates of 2008-2010. Unless we find an answer for creating more jobs; we cannot have serious talks about reforming the entitlements. The talks have to start and end with jobs. Since we're not decreasing in population, we need about 150,000 workers added to the work force each month just to sustain our growth and about 250,000 to grow.

The government can only create an environment that is favorable to job growth but the rest is left to the private sector. However, ask the man on the street about the 9.1% that are unemployed and they will blame the government for all their spending. The private sector sees more value in buying equipment than investing in workers and the expenses associated with that. The government could lower the payroll tax companies have to match, speed up depreciation write-offs, and offer incentives, but they won't match the savings they get in sending the jobs overseas, where payroll, environmental, and regulations add more to their bottom line According to Catherine Rampell of the New York Times, since the recovery began, the economy is producing as much as it was before the downturn but employers are using seven million fewer workers doing that. Companies spent 2% on hiring employees and 26% on equipment and software.

I couldn't believe what I heard when Bill Kristol of Fox News Sunday, said "“corporations have a ton of cash” and the Republican Party’s desire to slash corporate tax rates was a mistake. It's not that difficult to understand that these companies will not hire until purchase orders require them to do so. The inventory won't jump off the shelf if 14 million people are out of the job and another 10 million have given up. The working consumer is still paying off old debts and saving more, leaving them with less disposable money to spend. The rest of the world is worried about the fed increasing the money supply(qualitative easing) and inflation because most of that money ended in the stock markets enriching the top 25% of the population while 50% of the population continues to struggle just to stay afloat. That 50% couldn't come up with $2000 in 30 days, unless they sold some of their possessions.

I think that we need to stop worrying about the national debt because it won't be paid off in our lifetime and without short term deficits, we cannot grow. We do have to reform the entitlements but not immediately. We should also know by now, that discretionary spending is only a small percentage of GDP. I don't see how we can starve our way to prosperity, and if you see a plan that depends on a 5% growth, we can tell that person that it has only happened two times, (Once under Reagan and under Clinton) and it came after tax increases.

I agreed with Alan Greenspan when he said “having a debt ceiling makes no sense." We're hopefully going to pass it this year and in the years after, but I say hopefully because the freshman Tea Party folks scare me. We pass yearly budgets, so that should take care of any arguments we have about spending more than we make. Remember, the "debt ceiling is just a promise to pay the debts we incur."

I read an interesting article, this week titled “Don’t Hold Your Breath" by Rana Foroohar. The author detailed five of the most destructive myths and why we need to figure out a different path to grow.

1. This is a temporary blip, and then it's full steam ahead.

The McKinsey Global Institute estimate that this recovery will take the full five years. It's going to take 187,000 jobs a month to arrive at a healthy 5% unemployment by 2020.

2. We can buy our way out of this.

The risk-reward ratio of a third stimulus isn't good besides China is not in the mood to lend us more money. When the Fed purchased the T- bills to make home buying affordable by keeping interest rates low; it didn't help much since the homeowners didn't have jobs to make payments.

3. The private sector will make it all better.

American companies generated $1.6 trillion in profit in the last quarter of 2010. Will they use this profit for retraining or hiring? They would think twice before doing that because it's much more profitable to build their next factory in Brazil, India or China. The next 70 million middle class workers will come from those emerging markets. Nobel's laureate, Michael Spence, said in the periods 1990-2008 American companies that did businesses in global markets including manufacturers, banks, exporters, energy firms and financial Services contributed almost nothing to job growth. The firms that contributed to job growth were the healthcare companies, government agencies, retailers and hotels. Unfortunately, these jobs are lower paid and lower skilled. Michael Spence said that it is a myth that businesses are simply waiting for more economic and regulatory certainty to invest back home. One only has to look at the German model where they kept their highly compensated and skilled workers and the labor unions while they continued to make costly quality products.

4. We'll pack up and move to new jobs.

There is a myth that if you build jobs, people will come. Today, many people can't move because they are underwater on their homes. In the 1980s one out of every five families moved every year but now only one in 10 does. It's no longer just dad's job that's keeping a family afloat. There are 3 million job openings but the label requirements don't line up well. That doesn't make sense for unemployed auto workers in Michigan to sell their undervalued homes and move to North Dakota where homes are cheaper and unemployment is 5%.

5. Entrepreneurs are the foundation of the economy.

I admit that I bought that line hook line and sinker. Entrepreneurship may have been our greatest strengths back in the 1980s but since then; the financial sector has sucked up all the talent. The likelihood of another Silicone Valley is not likely without government grants because the old means of maxing out credit cards or taking home-equity loans are no longer available.

Where to start

I believe the words" tax increases" should be redefined because I'm sure the American people won't be in totally agreement with Grover Noquits's interpretation. I don't think people in the middle class will be too angry if a millionaire's tax deduction for his vacation home is eliminated or dropping their itemized deduction rate from 39% to 28%. I don't see why hedge fund managers don't pay their tax as ordinary income on their 1040 instead of the lower capital gains' rate. I could go with along with lowering the corporate tax rate (knowing it would increase the deficit), but I would have a couple of stipulations. I would cut out all their loopholes, and tax incentives; especially if the majority of their workforce are stationed overseas....If you think we don't need tax increases, then show me how massive spending cuts, without any tax increases, will lead to new jobs and growth,

It's not all doom and gloom because once you separate fact from fiction; then you can go to the root of the matter. I like the administration's idea of a partnership between the public and private sector. The administration will tout a “Infrastructure Bank" where it will partner with the private sector. It's an old 2007 idea that was initiated by Christopher Dodd and Chuck Hagel. The Infrastructure Banks would be an independent body of the Federal government like F.D.I.C., with the authority to appropriate funds for infrastructure. This would eliminate pork barrel projects. The only role that the Federal government would play is to issue government bonds backed by the full faith and credit of the United States Government. It might be a way to lure some of the cash the Fortune 500 companies are hoarding. It's a way for the private sector to make more money, create jobs, fix the crumbling infrastructure at today's prices, and it circulates all that money in the United States of America.