Monday, September 26, 2011

The country has two current problems. First we have too much debt and the budget deficit keeps expanding with no end in sight. Second the economy is weak and unemployment is too high. Monetary policy has done all it possibly can to avoid a deeper recession than we currently have. Any further monetary policy steps are just rearranging the deck chairs. The next step is for fiscal policy (Congress) to address these problems.

The solution to either of these issues will by definition make the other problem worse. The question facing policy makers is it possible to stimulate the economy without increasing the deficit. (NO) or can we cut the deficit without hurting economic growth (again NO). Congress needs to pick its’ poison and try to craft a consistent approach. We are already seeing the effect of Federal, state and local government spending cutbacks as the economy heads toward a double dip. Neither of these problems exists in a vacuum. Each side of the aisle needs to acknowledge that both of these issues are a concern and there must be a compromise to get started on a solution that is good for the country.

Personally I find it difficult to address the deficit first because suppression of the economy could lead to a deflation scenario which would be very difficult to correct. I believe we need to stimulate the economy and hope that increased economic activity will allow us to pay down our debt. Increases in income, business spending and tax receipts are necessary to give us the breathing room we need to put our fiscal house in order.

The only other issue for Congress is to“stop threatening to shut down the government” over every little thing. Grow up, shut up and get to work.

Monday, September 19, 2011

Ronald Regan was elected in 1980. He immediately implemented an economic agenda that consisted of less regulation of the financial industry, tax breaks for the wealthy and massive increases in government spending. This led directly to the Mike Milken / Drexel junk bond scams, the destruction of the saving and loan industry and the stock market crash of 1987. The economy and the taxpayer paid a heavy price for these reckless policies. The US had to make good on all the CD’s issues by the S & L’s and the country had a ten year recession in the housing industry.

George W Bush was elected in 2000. He immediately implemented an economic agenda that consisted of less regulation of the financial industry, tax breaks for the wealthy and massive increases in government spending.  This led directly to the subprime housing disaster, the almost destruction of the world financial industry and the credit market meltdown of 2008. In 2008 we found out that Bear Stearns, Lehman Brothers, Merrill Lynch, Countrywide, Washington Mutual, Wachovia, and AIG to name just the larger companies were insolvent and went out of business. The country is now mired in a ten year recession (if we are lucky)

Today John Boehner and Eric Cantor are advocating an economic agenda that consisted of less regulation of the financial industry and tax breaks for the wealth. They are giving lip service to less government spending but one suspects it’s is only because they don’t have control of the entire government yet. Recent history leads to the unavoidable conclusion that neither party shows much spending discipline unless they are out of power.

Stop the madness. Is it too much to ask that an elected Representative from Ohio will care more for the workers in his home state than the hedge fund managers in the Hamptons? Apparently it is.

Monday, September 12, 2011

The early part of the 20th century saw the “Progressive” movement in the US. Men like Robert Lafollette and Louis Brandeis were it most notably adherents. As I understand their philosophy the Progressives thought that if society is to make progress it must address its problems. In the early part of the 20th century this focused on the social disruptions caused by the industrial revolution. Today one of the issues that must be addressed is the high cost of health care and the effect this has on our economy, consumer spending, job creation and general economic well being of the US economy.  As every business owner knows the cost of health care has been rising between 15 and 30% per year for the last fifteen to twenty years. Business’ response is to push more of this cost onto the employees. This means that an increasing part of discretionary income is being used to pay insurance companies, drug companies and doctors.
Every year business waits in dread fear for the insurance renewal quote from their health insurance company. Every business wants to keep this as low as possible because the increase in premiums will pressure business costs and employee expectations in re compensation. The medical profession, tort bar, drug and insurance companies seem to be happy with the current system but it cannot go on forever.
There is intense debate about the Obama administration’s recent health care reform plan. From the standpoint of the business owner I don’t know whether this will be a good or bad plan but at least someone has started to try to address the issue. As a country we can no longer pretend that this is not a pressing issue. To date the only plan we have had is to force people without health coverage to the ER, prohibit hospitals from denying care and ignore the fact that the more charity care the hospitals provide the greater tax on those of us who have insurance. Congress can no longer act as if nobody has to pay for this service. Insurance rates and hospital rates have to rise to cover this care and we all pay.
As more of our discretionary spending goes to pay for the one specific area (health care) the less is available for other areas of consumer activity. You cannot leave health care out of the national discussion about economic recovery.

Tuesday, September 6, 2011

Hurricane Irene / Stimulus Package

One of the side effects of the recent hurricane on the east coast will be the economic consequences. On the national level there is a debate about fiscal policy and the deficit. One party wants to keep revenue the same (no tax increase for anyone) and reduce spending. The other party wants to increase revenue (tax the wealthy) and stimulate the economy with a jobs or infrastructure spending package. The first group maintains that the over spending of the last decade is the greatest threat to the long term economy and must be reined in this second. The other side contends that with massive unemployment we need to get people to work to stimulate the economy first and the subsequent growth will create the additional revenue to reduce our borrowings in the long run. This is why Hurricane Irene becomes so interesting.
The storm caused enormous damage from North Carolina to Vermont. The near term economic effect will be to increase spending at the state level to repair bridges, roads and other infrastructure. The states will be forced to borrow and increase their budget gaps in the immediate future to fund this. The second part will be increased jobs for electricians, carpenters, plumbers as people need to repair their homes and businesses. The money for this will come from insurance companies which serve as a proxy for the wealthiest Americans. Insurance companies have saved or stored money in their investment portfolio and the size of the claims following the storm will recycle their savings to people who must spend the money immediately. The storm will force investment money into the economy at a fairly rapid rate. This will enable us to measure whether the stimulus theory is valid or whether the deficit reduction party is right.
Over the next ten to twelve months look to the economies of the affected states as to retail sales (Lowes, Home Depot, etc), state tax receipts both income and sales, and housing activity one year from now.