It seems to me…
“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” ~ Milton Friedman.
Economists pronounced the U.S. economic recession as having ended in June 2009; since then we have been experiencing slow recovery. Corporate profits, the stock market – all are at record or pre-recession levels. Only unemployment and home prices remain weak, both of which finally also are showing signs of positive improvement. Employment recover was predicted to be slow based on past recovery projections and to take about five years. It therefore is recovering about as projected (though politicians never can admit this). We can anticipate this aspect of recovery, while not entirely satisfactory, should continue as projected if our infrastructure likewise is improved and should fully recover unless negatively impacted by sequestering or the continuing European recessionary spiral.
While jobs are being created resulting in slow unemployment level declines, it has been insufficient to produce wage increases corresponding to inflation. This results in economic growth difficulty since 70 percent of U.S. economic growth is based on consumer spending. Most economists believe unemployment must be less than 7 percent prior to any general wage increases. Current trends indicate we should reach this point within the next 6 -12 months.
Recoveries following economic downturns tend to be relatively lengthy. The typical reaction to debt overhang is for everyone to attempt to repair their personal balance sheets resulting in spending reductions and little economic growth. Prior to the start of the recent recession, the average U.S. household-debt burden had steadily increased for six decades to about 129 percent of disposable household income. Since then, according to McKinsey’s global deleveraging scorecard[i], U.S. debt load has decreased 11 percent (the U.K. is down about 6 percent; Spain 4 percent).
Bursting of the housing market bubble during the recession had a larger than typical economic impact since much of the middle-class wealth and debt is associated with home ownership. Negative home equity adversely affects home maintenance and improvement expenditures by about 30 percent. A high percentage of job losses at U.S. corporations were attributable to lower consumer spending due to high household debt.
Given consumer debt reduction and higher home prices, U.S. unemployment should recover at a higher rate than exhibited over the past several years but that recovery, as previously indicated, remains dependent upon several additional factors. U.S. recovery will remain partially ependent upon similar recovery in Europe as the U.S. and European Union have the largest bilateral trade relationship in the world. Currently weak U.S. currency should work to the U.S.’s advantage. The U.S. also must enact policies encouraging private and public investment in education, research, manufacturing, and infrastructure (roads, rail, bridges, and ports).
While there are a number of other potential threats to continued economic recovery, the most significant current concern must be Sequestering. As a result of the Joint Select Committee on Deficit Reduction inability – the Super Committee – to come to agreement on reducing the deficit in January 2013, the Budget Control Act of 2011 (BCA) mandates that Congress sequester $1.2 trillion in spending over 10 years, meaning an immediate 9 percent cut in federal discretionary spending. This problem directly resulted from two major tax reductions under President GW Bush, the
- Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the
- Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).
These reductions significantly lowered the marginal tax rates for nearly all U.S. taxpayers but especially the wealthy (though there is significant disagreement between the Conservatives and Liberals concerning the overall effect of these reductions). Regardless, the U.S. went from having a budget surplus prior to the reductions to a significant deficit. Two unfunded wars also affected budget allocations.
Those President GW Bush tax reductions had sunset provisions and would have expired at the end of 2010 but were extended after a bitter political debate for two additional years as part of a larger tax and economic package. That extension will expire this December unless Congress can agree on a budget compromise.
Rather than allowing the reductions to expire, Conservatives have chosen to use the deficits as an excuse to reduce or eliminate programs they find objectionable such as welfare or medical assistance. Republicans are demanding a balanced budget along with further tax reductions and increased funding for defense; Democrats want slight tax increases on anyone with an income over $250,000/year, elimination of subsidies to oil companies, and additional budget reductions over several years. As of now, a compromise seems highly unlikely and probably will not be resolved until following the upcoming election.
Surprisingly, recent polls show that a solid majority of Americans — between 60 and 70 percent — favor higher taxes on the wealthy to help pay down the national debt and finance other priorities. While it seems Republicans are out of touch with the majority of Americans, it remains to be seen if this translates into votes in the election. Unfortunately, if Republicans can continue to sabotage President Obama’s economic improvement efforts, they have a high probability of defeating him for reelection even though that option negatively affects the nation’s recovery.
The $787 billion economic stimulus package approved by Congress in February 2009 was too small to have any significant impact on the U.S. economy following the effects of GW Bush’s economic policies. While now would be a good time for an additional stimulus, Republican’s are unwilling to approve any measure that might aid President Obama’s reelection — regardless of how beneficial it might be to our country.
Isn’t it better to pursue policies likely to result in deficit reductions through GDP increases (along with budget limitations) even if they lead to increased short-term deficits? With the cost of borrowing at an all-time low, an additional stimulus to fund infrastructure and research should not only reduce unemployment and balance the budget but also restore national competitiveness and provide a foundation for future growth.
That’s what I think, what about you?