Top-down empirical evidence from corporate America as of Q4 2010 is showing a robust increase in business sales and earnings, nearing in some cases pre-financial debacle highs. Bottom-up and admittedly anecdotal evidence of how companies are meeting those sales targets is less encouraging.
Unable to offer the dizzying and ultimately disastrous array of credit formerly available just a few short years ago, some companies have resorted to low tech and even pedestrian gimmicks in order to boost sales. Some methods benefit consumers and sellers alike, such as the buy-one-get-one-free policy (BOGO), enabling sellers to dump costly inventories while enabling consumers to stock up on items for future consumption. The BOGO policy is supplanting cheap and abundant credit as a popular method for encouraging consumers to consume today by borrowing from future purchases. What will drive future sales?
Less compelling are the “now you see it now you don’t” discounts that appear certain hours throughout a day, or on the internet but not on the phone, or in print but leave out important caveats that detract from discount offers. Some discounts don’t offer brand confirmation on receipts making consumers wonder if they’re getting what they pay for. Competition is fierce as businesses will do anything get consumers attention.
Unsavory and deceptive approaches to gin up sales further indicate an anxiety and desperation among sellers not seen in recent history. For example, have you noticed lately some of your monthly bills contain superfluous jargon that confuses you? It would seem that some companies hope you pay their bills without reading them, and it’s a fact that others will reward you for joining their automatic payment plans, so you never have to read their bills again. If you’re diligent and actually read your bills you may notice unaccounted charges, and learn that the agreement’s fine print automatically initiates the purchase of an additional service, unless and until you explicitly call them and tell them you don’t want it. Sometimes that service will automatically renew unless it is explicitly terminated. Even when those unexpected charges turn out to be an error, customer service representatives will attempt to sell you something new, even before THEIR error is corrected. Heads they win, tails you lose! Aggressive sell tactics have existed forever, but were once only used by small or fly-by-night purveyors. Now even image conscious corporate giants and household stalwarts heretofore synonymous with good customer service use those tactics. They have become so common that comparing experiences has become a mainstream pastime among many consumers.
It is clear that an economy 70% based on private consumption must expand that sector before meaningful economic recovery can occur. With unemployment chronically high, public and private pension plans under duress for decades to come, new household formation temporarily stalled and the housing sector in the doldrums in the near term, consumer incomes and spending are unlikely to expand much for quite awhile. Corporate America would be well advised to concentrate on offering consumers products and services they desire and need, instead of relying on deception and gimmicks to meet their sales goals.
Tuesday, February 8, 2011
Monday, December 13, 2010
It’s the Economy, not Politics, Stupid!
Many democrats and republicans are wrestling with President Obama’s proposal to extend the Bush tax cuts and other items, each believing their party’s approaches to be superior for solving our immediate and long term economic problems. Even the President enlisted the support of former President Clinton to sell his proposal in an attempt to capitalize on his administration’s prosperity during the mid-to-late 1990s. Republicans point to the Reagan 1980s and to supply-side economics employed at that time as holding the key to our economic prosperity going forward. Of course, republicans claim Clinton’s success should be at least partially attributed to republican influence in congress at that time, just as congressional democrats claim to have reined in Reagan. The fact is that notwithstanding political differences, key economic metrics from those periods are remarkably similar. Each period grew jobs at approximately 2 percent per year; Clinton added more jobs, but GDP grew slightly faster under Reagan.
Each party discounts the role of non-political factors to Clinton’s and Reagan’s success. However, both administrations coincided with a dramatic decline in long term interest rates and stable low inflation. Neither administration had to manage an active war, although Reagan presided over and spent us through the successful completion of the Cold War. Reagan benefited from following the economically turbulent and eventually stagnant 1970s and Clinton benefited from the global technology boom including the proliferation of the internet, probably the most transformational change since the invention of the printing press.
Going forward, many professional economists place limited confidence in democrat-favored government spending as an economic stimulus, and typically point to its failure during the Great Depression and, more recently, during the first two years of the Obama administration. The recently fortified republican congress is aggressively seeking a more supply-side approach, emphasizing tax cuts for small businesses and individuals. The republican view is that putting money in the hands of the private economy will succeed in stimulating the economy where massive public spending could not.
Notwithstanding all the uncertainty about economic policies and the confusion added by all the politics, it should be clear that growing our economy is one of the necessary ingredients to solving our hopefully short-to-medium term economic doldrums and our long term deficit. If the past thirty years of prosperity has shown us anything it’s that policies that stimulate economic growth and employment are ultimately good for stimulating tax revenues.
Each party discounts the role of non-political factors to Clinton’s and Reagan’s success. However, both administrations coincided with a dramatic decline in long term interest rates and stable low inflation. Neither administration had to manage an active war, although Reagan presided over and spent us through the successful completion of the Cold War. Reagan benefited from following the economically turbulent and eventually stagnant 1970s and Clinton benefited from the global technology boom including the proliferation of the internet, probably the most transformational change since the invention of the printing press.
Going forward, many professional economists place limited confidence in democrat-favored government spending as an economic stimulus, and typically point to its failure during the Great Depression and, more recently, during the first two years of the Obama administration. The recently fortified republican congress is aggressively seeking a more supply-side approach, emphasizing tax cuts for small businesses and individuals. The republican view is that putting money in the hands of the private economy will succeed in stimulating the economy where massive public spending could not.
Notwithstanding all the uncertainty about economic policies and the confusion added by all the politics, it should be clear that growing our economy is one of the necessary ingredients to solving our hopefully short-to-medium term economic doldrums and our long term deficit. If the past thirty years of prosperity has shown us anything it’s that policies that stimulate economic growth and employment are ultimately good for stimulating tax revenues.
Saturday, April 10, 2010
Dow Reaches 11,000-- What's Next?
The range of opinion on the future path of the stock market is as wide as ever. Optimistic investment pundits pointing to daily improvements in some economic metrics see opportunity for gains in the short-to-medium term, but hasten to caution that those gains may be short lived as significant market headwinds arriving as early as this fall could derail the market's climb for many years to come. Some are hopeful that those headwinds will mitigate if republicans regain control of congress next November and temper the Obama administration’s anti-growth tax-and-spend economic agenda.
Pessimists acknowledge those daily improvements but believe that the market’s dramatic recovery since March 2009 is primarily the result of temporary government and Federal Reserve intervention that has stabilized the economy and the markets. They believe that the private economy is not yet self-sustaining and cite the persistence of many of the circumstances that caused the great crash last year as gnawing reminders that it is premature to claim victory over our economic woes. Furthermore, they believe the dramatic expansion of debt and deficits among the world’s major governments is a substantial threat to full global economic recovery and long term prosperity. Pessimists concede that congressional gridlock next year could stop the rampant government spending, but hasten to point out that gridlock won’t reduce the already robust government debt and deficit that inevitably higher interest rates will further exacerbate.
The optimists know that bull stock markets begin with seemingly unimportant short term economic improvements, but the pessimists know that market moves also anticipate the long term health of the economy. And, everyone knows that the US economy relies heavily on a US consumer that continues to weaken under the pressure of chronic high unemployment, growing credit restrictions, negative home equity, and bleak prospects for higher taxes, not to mention the negative outlook for both public (social security/Medicare) and private pension systems. Imagine what a spike in oil prices would do to consumer spending, as the situation between Israel and Iran approaches a climax later this year.
Given our economic predicament, it is rather amazing that the market has recovered so far so fast, especially because optimists and pessimists agree that our critical economic challenges are likely to reemerge as issues later this year and fester for many years. If the hard times do start as early as this fall, there is a real risk that a correction could begin as early as next month. Everyone knows that the market typically retreats during summer months, and if investors anticipate bad times ahead, it is more than a possibility that the slightest provocation could cause a major decline sooner rather than later. After all, who wants to be on vacation when the market corrects?
Moreover, one must wonder how the currently cheerleading financial media factors into the market's good fortune lately. The media continues to encourage short term investment even in the face of an imminent, potentially violent market turnabout. When will the media trot out all the so-called doom-and-gloomers? After the correction begins, as they did last time? It would be instructive to balance all the bullish reports with the views of some well informed market bears, BEFORE the downturn actually begins. No one wants to hear their market autopsies AFTER the market starts sliding. The bears have been caged for so long, let's hope the mere media appearances of them do not themselves trigger a market correction.
Pessimists acknowledge those daily improvements but believe that the market’s dramatic recovery since March 2009 is primarily the result of temporary government and Federal Reserve intervention that has stabilized the economy and the markets. They believe that the private economy is not yet self-sustaining and cite the persistence of many of the circumstances that caused the great crash last year as gnawing reminders that it is premature to claim victory over our economic woes. Furthermore, they believe the dramatic expansion of debt and deficits among the world’s major governments is a substantial threat to full global economic recovery and long term prosperity. Pessimists concede that congressional gridlock next year could stop the rampant government spending, but hasten to point out that gridlock won’t reduce the already robust government debt and deficit that inevitably higher interest rates will further exacerbate.
The optimists know that bull stock markets begin with seemingly unimportant short term economic improvements, but the pessimists know that market moves also anticipate the long term health of the economy. And, everyone knows that the US economy relies heavily on a US consumer that continues to weaken under the pressure of chronic high unemployment, growing credit restrictions, negative home equity, and bleak prospects for higher taxes, not to mention the negative outlook for both public (social security/Medicare) and private pension systems. Imagine what a spike in oil prices would do to consumer spending, as the situation between Israel and Iran approaches a climax later this year.
Given our economic predicament, it is rather amazing that the market has recovered so far so fast, especially because optimists and pessimists agree that our critical economic challenges are likely to reemerge as issues later this year and fester for many years. If the hard times do start as early as this fall, there is a real risk that a correction could begin as early as next month. Everyone knows that the market typically retreats during summer months, and if investors anticipate bad times ahead, it is more than a possibility that the slightest provocation could cause a major decline sooner rather than later. After all, who wants to be on vacation when the market corrects?
Moreover, one must wonder how the currently cheerleading financial media factors into the market's good fortune lately. The media continues to encourage short term investment even in the face of an imminent, potentially violent market turnabout. When will the media trot out all the so-called doom-and-gloomers? After the correction begins, as they did last time? It would be instructive to balance all the bullish reports with the views of some well informed market bears, BEFORE the downturn actually begins. No one wants to hear their market autopsies AFTER the market starts sliding. The bears have been caged for so long, let's hope the mere media appearances of them do not themselves trigger a market correction.
Friday, March 19, 2010
When will South Florida Real Estate Recover?
My trusted local realtor, Cathy, presented me with the current conventional wisdom on the question, and answers ranged from extremely optimistic “presently” to extremely pessimistic “the year 2030”. Her answer raised in my mind a few other related questions, most notably, whether the market had yet “bottomed” and what “recovery” actually means. I also wondered about all the factors that would cause each process to occur.
The optimists say the market has already bottomed, and base that conclusion on scant recent data showing a recent up tick in sales activity and prices. Pessimists, however, are less sanguine and think it difficult if not impossible to call a market bottom so long as all the government tinkering with the markets through stimulus programs, such as buyer tax credits, residential loan buying programs, and bank bailouts, continues to gum up the free market clearing process. They think that banks sitting on foreclosed assets are also artificially propping up the market and keeping markets from achieving their true prices. Unless and until those temporary subsidies abate, and all the sellers actually finish selling, calling a market bottom and plotting a recovery trajectory will be premature at best. Eventually, however, even the pessimists believe a bottom will be reached.
Recovery means everything from a modest bounce off the bottom to a return to the all time price highs achieved in 2006. Short term recovery will depend on unemployment rates, currently at an all time high of 12+ percent, wealth levels that ebb and flow with a volatile stock market, and the availability and cost of mortgage financing. With all the talk of a possible double-dip recession, the stock market potentially re-testing March 2009 lows, mortgage interest rates reflecting more stringent underwriting criteria, and Fed interest rate hikes inevitable within the next year, the prospects for recovery seem to be fragile at best.
Longer term recovery will hinge on those factors and some others. Florida population growth has slowed significantly during the past several decades and will continue to slow. In addition, the Obama administration is determined to implement a big government agenda that is pushing public debt and deficits to astronomical levels, and could push interest rates, the US dollar, income taxes and inflation to their most unfavorable levels in ages. None of that will be good for the economy or real estate market recovery, with the possible exception that a weak US dollar may encourage more foreign investment in South Florida real estate.
What is the likely recovery scenario? South Florida’s sky high real estate prices in recent years were part of a national real estate bubble that was borne out of the extraordinary availability of cheap mortgage financing and irresponsibly lax mortgage underwriting standards. Some think those conditions and the extraordinary price level they created are gone forever, but most think they are unlikely to re-emerge for at least a generation. Price recovery to a level three to four times South Florida median income levels would be affordable and sustainable and is probably the most likely price recovery scenario. According to the South Florida residential real estate price index, current median home prices are in an affordable range now and may suggest that indeed a market bottom is imminent. Unfortunately, however, that index may also suggest that further price increases based on local economic dynamics will be slow and modest going forward. (The index shows that South Florida home prices in 2006 reached 170 percent of their year 2000 level, and that even after the dramatic decline in recent years prices are still nearly 50 percent higher than in the year 2000.) What would it take to reach that 2006 high price level? Answer: home price increases would need to average 3 percent yearly for the next two decades in order to reach by 2030 their all time 2006 high.
The optimists say the market has already bottomed, and base that conclusion on scant recent data showing a recent up tick in sales activity and prices. Pessimists, however, are less sanguine and think it difficult if not impossible to call a market bottom so long as all the government tinkering with the markets through stimulus programs, such as buyer tax credits, residential loan buying programs, and bank bailouts, continues to gum up the free market clearing process. They think that banks sitting on foreclosed assets are also artificially propping up the market and keeping markets from achieving their true prices. Unless and until those temporary subsidies abate, and all the sellers actually finish selling, calling a market bottom and plotting a recovery trajectory will be premature at best. Eventually, however, even the pessimists believe a bottom will be reached.
Recovery means everything from a modest bounce off the bottom to a return to the all time price highs achieved in 2006. Short term recovery will depend on unemployment rates, currently at an all time high of 12+ percent, wealth levels that ebb and flow with a volatile stock market, and the availability and cost of mortgage financing. With all the talk of a possible double-dip recession, the stock market potentially re-testing March 2009 lows, mortgage interest rates reflecting more stringent underwriting criteria, and Fed interest rate hikes inevitable within the next year, the prospects for recovery seem to be fragile at best.
Longer term recovery will hinge on those factors and some others. Florida population growth has slowed significantly during the past several decades and will continue to slow. In addition, the Obama administration is determined to implement a big government agenda that is pushing public debt and deficits to astronomical levels, and could push interest rates, the US dollar, income taxes and inflation to their most unfavorable levels in ages. None of that will be good for the economy or real estate market recovery, with the possible exception that a weak US dollar may encourage more foreign investment in South Florida real estate.
What is the likely recovery scenario? South Florida’s sky high real estate prices in recent years were part of a national real estate bubble that was borne out of the extraordinary availability of cheap mortgage financing and irresponsibly lax mortgage underwriting standards. Some think those conditions and the extraordinary price level they created are gone forever, but most think they are unlikely to re-emerge for at least a generation. Price recovery to a level three to four times South Florida median income levels would be affordable and sustainable and is probably the most likely price recovery scenario. According to the South Florida residential real estate price index, current median home prices are in an affordable range now and may suggest that indeed a market bottom is imminent. Unfortunately, however, that index may also suggest that further price increases based on local economic dynamics will be slow and modest going forward. (The index shows that South Florida home prices in 2006 reached 170 percent of their year 2000 level, and that even after the dramatic decline in recent years prices are still nearly 50 percent higher than in the year 2000.) What would it take to reach that 2006 high price level? Answer: home price increases would need to average 3 percent yearly for the next two decades in order to reach by 2030 their all time 2006 high.
Wednesday, March 10, 2010
Healthcare Reform: Some is Better than None
The president and democrats have claimed repeatedly that some healthcare reform is better than none, yet they are on track to virtually guarantee that nothing will change in our healthcare system for the next few years. If Obamacare fails, the president and democrats will have no one to blame but themselves. After many debates and presentations designed to garner support, recent polls clearly show that the vast majority of Americans believe Obamacare will substantially add to our national deficit and debt, severely hamper economic growth, and most importantly, it will not improve the affordability or quality of healthcare for the average American.
The president and democrats appear to have backed themselves into a corner with few good options for advancing their vision for a new healthcare system. They can quit now days short of a congressional vote, a la President Clinton in the 1990s, and risk a repeat of democrats losing big in this year’s elections as they did in 1994. More likely, the president and democrat party leaders will pressure congressional democrats to support Obamacare by using draconian and desperate carrot and stick measures. If Obamacare fails, history tells us that democrats will still lose big next fall. If Obamacare passes, democrats may redeem themselves by November’s election, assuming they can dramatically change the voting public's emphatically negative opinion of the plan and the unsavory process that made it law. That would be a long shot at best. Either way, if democrats lose big in 2010's election, republicans will do everything possible to disrupt implementation of Obamacare, even if it becomes law. If republicans establish a majority in congress you can bet they will do their best to repeal it altogether. Either way, Obamacare is unlikely to become a sustainable viable plan for our healthcare system.
Wouldn’t it be better for the president, the democrats, and the nation, for the president to make a deal with republicans, and capitalize on the 80 percent agreement the president claims both parties have for his plan? Wouldn’t it be better for the president to pass that 80 percent, or whatever percentage a bipartisan group can agree upon, and get a resounding bipartisan endorsement for healthcare reform? The president and democrats could claim victory for long awaited healthcare reform, and have bipartisan support that would ensure its future political viability. It may also restore some of the public's faith in government and potentially create enough good will to encourage bipartisan cooperation for tackling other major problems, such as our faltering economy, and burgeoning debt and deficit. That approach would also give the president an opportunity to call the republicans bluff. If republicans don’t cooperate with such a truly bipartisan approach, then they will prove to be the party of “no.” Also, the president claims that republican congressional majorities have always and will continue to do nothing to reform healthcare, so shouldn’t he use his majorities to get something worthwhile done now?
The president has made it easy for his republican critics by giving them nothing to lose by opposing Obamacare. For example, the president’s refusal to make tort reform part of his plan is the most egregious example of partisan democrat politics and makes Americans less sympathetic to democrat claims of republican political obstructionism. Furthermore, in an otherwise often abstruse debate about healthcare reform, tort reform makes intuitive sense as a way to trim the cost of a hopelessly cost bloated healthcare system.
The president’s all or nothing strategy is likely to yield nothing of enduring value to improve our healthcare system. Replacing comprehensive reform that has limited support with some incremental bipartisan changes would allow the president to succeed at real healthcare reform without potentially decimating our economy or the democrat party.
The president and democrats appear to have backed themselves into a corner with few good options for advancing their vision for a new healthcare system. They can quit now days short of a congressional vote, a la President Clinton in the 1990s, and risk a repeat of democrats losing big in this year’s elections as they did in 1994. More likely, the president and democrat party leaders will pressure congressional democrats to support Obamacare by using draconian and desperate carrot and stick measures. If Obamacare fails, history tells us that democrats will still lose big next fall. If Obamacare passes, democrats may redeem themselves by November’s election, assuming they can dramatically change the voting public's emphatically negative opinion of the plan and the unsavory process that made it law. That would be a long shot at best. Either way, if democrats lose big in 2010's election, republicans will do everything possible to disrupt implementation of Obamacare, even if it becomes law. If republicans establish a majority in congress you can bet they will do their best to repeal it altogether. Either way, Obamacare is unlikely to become a sustainable viable plan for our healthcare system.
Wouldn’t it be better for the president, the democrats, and the nation, for the president to make a deal with republicans, and capitalize on the 80 percent agreement the president claims both parties have for his plan? Wouldn’t it be better for the president to pass that 80 percent, or whatever percentage a bipartisan group can agree upon, and get a resounding bipartisan endorsement for healthcare reform? The president and democrats could claim victory for long awaited healthcare reform, and have bipartisan support that would ensure its future political viability. It may also restore some of the public's faith in government and potentially create enough good will to encourage bipartisan cooperation for tackling other major problems, such as our faltering economy, and burgeoning debt and deficit. That approach would also give the president an opportunity to call the republicans bluff. If republicans don’t cooperate with such a truly bipartisan approach, then they will prove to be the party of “no.” Also, the president claims that republican congressional majorities have always and will continue to do nothing to reform healthcare, so shouldn’t he use his majorities to get something worthwhile done now?
The president has made it easy for his republican critics by giving them nothing to lose by opposing Obamacare. For example, the president’s refusal to make tort reform part of his plan is the most egregious example of partisan democrat politics and makes Americans less sympathetic to democrat claims of republican political obstructionism. Furthermore, in an otherwise often abstruse debate about healthcare reform, tort reform makes intuitive sense as a way to trim the cost of a hopelessly cost bloated healthcare system.
The president’s all or nothing strategy is likely to yield nothing of enduring value to improve our healthcare system. Replacing comprehensive reform that has limited support with some incremental bipartisan changes would allow the president to succeed at real healthcare reform without potentially decimating our economy or the democrat party.
Saturday, February 20, 2010
Florida's Mass Transit Problem is not Mickey Mouse
As a resident of South Florida witness to some of the worst driving in the nation, I am always interested in discussions about bringing public mass transit to Florida, but the proposed Tampa-Orlando high-speed rail seems to be extravagant and irrelevant to some of the real public transportation issues facing Florida at the moment. The Tampa-Orlando high-speed rail link is estimated to cost $3.5 billion and upon completion will likely operate with ongoing subsidies. You can bet the Orlando-Miami link will cost a multiple of that amount and that both links will end up costing a lot more and take a lot longer to build than anyone is projecting today. It always does.
The real question is why are those rail links needed? Are they needed to take national and international visitors coming through Tampa and Miami back and forth to see Mickey? The State of Florida should be addressing the growing mass transit needs of South Florida, a major economic focal point of the State, and should be addressing the already critical needs of a growing, aging senior population.
Mass transit requires high density living and employment patterns to work effectively and economically. The good news is that South Florida, defined as the conurbation of Miami-Dade, Broward and Palm Beach Counties, is about as dense as you will find in Florida. Thirty-percent of Florida’s population, or more than 5.5 million persons, live in those three counties, which amount to about ten percent of Florida’s land area, and equates to a density of more than 1,000 persons per square mile.
South Florida’s senior population (65+ years old) is nearly one million today, and if national forecasts hold true here, it may grow 40% within the next five years. Additionally, today’s 65-year-old has a life expectancy of 84 years. During winter months, more than a million seasonal visitors and tourists add to the region’s senior population. An urgent need clearly exists to provide residents and visitors with a real alternative to driving to meet their daily local travel requirements.
The bad news is that it is unclear whether South Florida’s senior population density of less than 200 persons per square mile can support a viable mass transit system, especially in relatively low dense Palm Beach County where seniors are particularly concentrated and most likely to favor for retirement in the future.
The State of Florida should fast track a plan to solve this serious transportation problem and should consider all options in developing solutions. In addition, emerging transportation and land development plans must be consistent so that future development densities support whatever mass transit solution is ultimately adopted. Solving this important problem will be essential to maintaining the favored status of South Florida as a retirement venue and as one of Florida’s most vibrant economies.
The real question is why are those rail links needed? Are they needed to take national and international visitors coming through Tampa and Miami back and forth to see Mickey? The State of Florida should be addressing the growing mass transit needs of South Florida, a major economic focal point of the State, and should be addressing the already critical needs of a growing, aging senior population.
Mass transit requires high density living and employment patterns to work effectively and economically. The good news is that South Florida, defined as the conurbation of Miami-Dade, Broward and Palm Beach Counties, is about as dense as you will find in Florida. Thirty-percent of Florida’s population, or more than 5.5 million persons, live in those three counties, which amount to about ten percent of Florida’s land area, and equates to a density of more than 1,000 persons per square mile.
South Florida’s senior population (65+ years old) is nearly one million today, and if national forecasts hold true here, it may grow 40% within the next five years. Additionally, today’s 65-year-old has a life expectancy of 84 years. During winter months, more than a million seasonal visitors and tourists add to the region’s senior population. An urgent need clearly exists to provide residents and visitors with a real alternative to driving to meet their daily local travel requirements.
The bad news is that it is unclear whether South Florida’s senior population density of less than 200 persons per square mile can support a viable mass transit system, especially in relatively low dense Palm Beach County where seniors are particularly concentrated and most likely to favor for retirement in the future.
The State of Florida should fast track a plan to solve this serious transportation problem and should consider all options in developing solutions. In addition, emerging transportation and land development plans must be consistent so that future development densities support whatever mass transit solution is ultimately adopted. Solving this important problem will be essential to maintaining the favored status of South Florida as a retirement venue and as one of Florida’s most vibrant economies.
Tuesday, February 16, 2010
US Government Spending Must Fade to Black
Four key numbers—government spending, federal tax revenue, the budget deficit, and national debt- provide important and sobering insight into our current fiscal health. 2010’s raw numbers are dramatic and mind boggling to the point of distraction, but relating them to our $14.3 trillion Gross Domestic Product (GDP) make them relevant, easier to comprehend, and relatable to one another. Those ratios are as follows: government spending/GDP is 28%; federal tax revenue/GDP is 16%; the budget deficit/GDP is 12%; and the national debt/GDP is 85%. Those ratios are horrendous, especially considering, for example, that the European Union requires members to have national debt and budget deficit ratios less than 40% and 3%, respectively, when they join the union, considerably lower than ours at the moment.
The current budget deficit is 12% of GDP (28%-16%); and will add to our national debt. That deficit means that our economy is currently borrowing 45 cents of every dollar it spends, and at that level it should push our national debt to 109% of GDP within a couple of years (85% + [12% x 2]). That would put us in the esteemed company of Greece and well on our way to the disastrous path of Japan.
Arithmetically, there are two major solutions: decrease spending, increase taxes, or do some of each. Politically, the solution is not so easy. The liberals (usually democrats) want to increase taxes, believing that corporations and the wealthy should pay more to meet our needs. The conservatives (usually republicans) want to decrease spending, pointing to government waste and inefficiency and a spending level similar to some of the European socialist governments. They also say that the top 10% of taxpayers already pay more than 70% of all federal taxes, so it is unlikely that further tax increases targeting only the wealthy will yield enough tax revenue to mitigate our fiscal problem.
Obviously, fiscal policymakers would like to tinker with all four numerators of those ratios, but they should also consider policies that might increase the denominator, GDP, which would also help solve the problem. History and the facts seem to favor the conservative strategy of cutting government spending and cutting taxes as effective catalysts for economic growth. Apparently, across-the-board tax cuts worked well for both democrat and republican administrations, under Calvin Coolidge in the 1920s, John Kennedy in the 1960s, Ronald Reagan in the 1980s, and Bill Clinton in the 1990s.
Reducing our future budget deficits will limit our compounding national debt, and should be our immediate objective. However, reducing our national debt should be a very close second objective. When our debt’s interest rates, currently artificially low at 3%, double, triple or worse, the attendant increase in debt payments could cripple our financial system and economy. Rising interest rates will be an inevitable part of the global recovery and it may happen sooner than later. An expanding global demand for capital, global inflation, and a potential reduction in the US credit rating, are among the major factors that could easily cause a dramatic increase in those interest rates and our interest payments. And, as those debt interest payments become a greater proportion of the spending budget they will either crowd out important investment and consumption spending or increase the budget, thereby further expanding our national debt and our fiscal problems. It will come at the expense of our economic growth, productivity and standard of living.
Some expect the government to continue printing money as it and many other governments have done during similar crises in history. This time may be different, however, as the major holders of our debt, especially China, may have something to say about the US deliberately devaluing its debts and their investments. Although inflating out of the problem effectively grows the denominator, GDP, it does so artificially in inflated (not real) terms, and ravages US financial and fixed income assets, such as bank deposits, savings bonds, social security and pension funds. It may also ruin the US dollar. Is that better than a smaller government and reducing government spending?
The current budget deficit is 12% of GDP (28%-16%); and will add to our national debt. That deficit means that our economy is currently borrowing 45 cents of every dollar it spends, and at that level it should push our national debt to 109% of GDP within a couple of years (85% + [12% x 2]). That would put us in the esteemed company of Greece and well on our way to the disastrous path of Japan.
Arithmetically, there are two major solutions: decrease spending, increase taxes, or do some of each. Politically, the solution is not so easy. The liberals (usually democrats) want to increase taxes, believing that corporations and the wealthy should pay more to meet our needs. The conservatives (usually republicans) want to decrease spending, pointing to government waste and inefficiency and a spending level similar to some of the European socialist governments. They also say that the top 10% of taxpayers already pay more than 70% of all federal taxes, so it is unlikely that further tax increases targeting only the wealthy will yield enough tax revenue to mitigate our fiscal problem.
Obviously, fiscal policymakers would like to tinker with all four numerators of those ratios, but they should also consider policies that might increase the denominator, GDP, which would also help solve the problem. History and the facts seem to favor the conservative strategy of cutting government spending and cutting taxes as effective catalysts for economic growth. Apparently, across-the-board tax cuts worked well for both democrat and republican administrations, under Calvin Coolidge in the 1920s, John Kennedy in the 1960s, Ronald Reagan in the 1980s, and Bill Clinton in the 1990s.
Reducing our future budget deficits will limit our compounding national debt, and should be our immediate objective. However, reducing our national debt should be a very close second objective. When our debt’s interest rates, currently artificially low at 3%, double, triple or worse, the attendant increase in debt payments could cripple our financial system and economy. Rising interest rates will be an inevitable part of the global recovery and it may happen sooner than later. An expanding global demand for capital, global inflation, and a potential reduction in the US credit rating, are among the major factors that could easily cause a dramatic increase in those interest rates and our interest payments. And, as those debt interest payments become a greater proportion of the spending budget they will either crowd out important investment and consumption spending or increase the budget, thereby further expanding our national debt and our fiscal problems. It will come at the expense of our economic growth, productivity and standard of living.
Some expect the government to continue printing money as it and many other governments have done during similar crises in history. This time may be different, however, as the major holders of our debt, especially China, may have something to say about the US deliberately devaluing its debts and their investments. Although inflating out of the problem effectively grows the denominator, GDP, it does so artificially in inflated (not real) terms, and ravages US financial and fixed income assets, such as bank deposits, savings bonds, social security and pension funds. It may also ruin the US dollar. Is that better than a smaller government and reducing government spending?
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