View Full Version : Economics America is fast becoming a banana republic

The Mad Crapper
01-21-2010, 09:20 AM
Society's Producers Are Under Attack
By Steve Borowski

Laura D'Andrea Tyson, former Chairman of the Council of Economic Advisors under President Clinton, recently praised the virtues of additional massive government spending with an editorial entitled "Jobs Now, Deficit Reduction Later". Never mind the deficit. Time for that later. We need jobs now! Job creation is all the rage.

The theme rings throughout Washington and the media as a talking point for Congress and the Obama administration. Spend now, pay later. Green jobs here. Tax credits there. Government micro management run amok. Problem is, they're misguided and we as a society will be forced to pay the price.

Under the not so thinly disguised veil of economic "justice" (code for redistribution), this administration and leaders in Congress have created a toxic environment where precisely those individuals in our society who have the ability and willingness to create employment for others - the dreaded "wealthy" - simply refuse to do so. And it's easy to understand why.

The producers in our society, a distinct minority, are under attack. What government bureaucrats, academics and many in the media fail to understand (or refuse to accept) is that intelligent, capable people - those who build businesses and create employment for others - are anticipatory in nature. Businesses, markets, governments (some, not all), and entire sectors of the global economy are all anticipatory in nature.

It's understandable that if a proprietor of a small business is concerned about his or her economic future, they are naturally more conservative with their capital and the manner with which that capital is deployed. It's human nature.

If you believe your taxes will soon skyrocket under the cloak of redistribution, you conserve. If you believe that energy costs are about to increase due to specious legislation such as "Cap and Trade", you hesitate to invest in plant and equipment. If you see a government beholden to labor unions and a President intent on "turning the country purple" with pending legislation such as the oddly named "Employee Free Choice Act", you naturally have concerns over future labor costs.

Increased concern means fewer employees. Too much concern causes businesses to take a hard look at their current staff. If you see the regulatory pendulum swing so far in the restrictive direction that it puts your business at an increasingly competitive disadvantage, you do your best to simply maintain the status quo.

Why consider expansion when the prudent thing to do is wait? If you anticipate government dominance of health care, you take a wait and see attitude on employee benefits. If you see massive government deficits as far as the eye can see which will throttle the economic vitality of this country and the lives of Americans for generations to come, you simply stop investment in the future. If you see a reluctance to rein in frivolous lawsuits with any meaningful tort reform in the name of political expediency, you manage your business in an overly cautious manner out of concern that you could be the target of one of those suits.

We've recently heard rumblings of a "war tax". We've heard the possibility of no limit on Social Security taxes. We've heard of a punitive surtax on upper incomes to offset "health care for all". Now we're hearing of an additional Medicare surtax. All of this has a negative effect on investment. And it has a negative effect on innovation.

If you see the potential for hyperinflation and a continued marginalization of the dollar, you play defense. You don't play offense. You don't spend. You don't hire. You certainly don't put capital at risk. You hold on to your company and what you have for dear life until the storm hopefully passes. You make do with less. Unfortunately, that's the situation we're faced with today.

Government policy intended to penalize the targeted upper income earners in the name of social reform in turn ends up penalizing those who can least afford it. Regrettably, once again, the law of unintended consequences.

Government created taxpayer financed public sector jobs are not the answer. Far from it. In an environment where approximately 80% of private sector job creation comes from small to medium sized businesses, now is the time for sound economic policy to trump the great society social architects of "progressive" big government.

And it's not simply job creation. Those very people who have the ability to create private sector jobs are also the same segment of our society who control a disproportionate share of discretionary spending as well as a large portion of charitable contributions. It's a vicious cycle. One doesn't continue without the other.

The current fallacy in government is that we need to spend our way out of this recession. This is naïve, amateurish and dead wrong. The only way we as a country are going to extricate ourselves from this economic free fall is to grow our way out of it.

Washington needs to step back, take a deep breath, and for once make policy decisions that are in the best interests of the United States and not simply consolidation of power for a particular political party. The danger of not doing so is too great.

Will that happen any time soon? I'm not holding my breath. The amateurs in Washington are making short-term political decisions that are disastrous in nature, the effects of which will have negative repercussions on this society for generations to come - all in the name of political power.

We recently learned that private sector experience in the Obama Administration is at its lowest level in over a century. It shows. The speed and magnitude with which our society is being damaged is truly stunning. As Warren Buffet recently stated, we're in imminent danger of becoming a banana republic.

Steve Borowski is a co-founder of an investment firm that employs 53 people who collectively return tens of millions to the economy annually.



The Mad Crapper
01-21-2010, 10:39 AM
I'll just put all these articles in this one thread (for posterity and as an awesome reference source)...

Unlike previous recessions, the current downturn was not caused by Federal Reserve tightening and therefore couldn't be reversed by lowering interest rates. President Obama was correct to conclude that boosting economic activity required a fiscal stimulus.

Unfortunately, despite the talented team of economists in the administration, most of the president's economic policies have done little to help the problem. And indeed, many of these policies have created even more problems than they solved.

For starters, the president allowed congressional Democrats to design the $787 billion stimulus package. The result was an unnecessarily large increase in the national debt for a very modest rise in gross domestic product, with too much emphasis on redistributing income and preserving public-sector jobs and not enough on raising economic activity. Only about one-fourth of the nearly $800 billion will be used for government spending that adds directly to GDP. In contrast, the funds given to households will be largely saved or used to pay down existing debts. And the dollars that went to state governments relieved pressure to use their "rainy day" funds or levy temporary tax increases.

The flaw in the stimulus package wasn't, as some say, that it was too small. It was that it was poorly targeted. Instead, Congress and the president could have gotten more stimulus from accelerating the repairing and replacing of equipment in the civilian and defense sectors. Long-term reductions in marginal tax rates of the type used by Presidents Kennedy and Reagan would also have been better than temporary tax cuts that have no positive incentive effects.

Other programs by the administration have had similar failings. "Cash for clunkers," for instance, was successful in raising auto buying and gave a temporary boost to GDP, since two-thirds of the third-quarter GDP rise was motor-vehicle production. The credit for first-time home buyers also gave a temporary boost to the housing market. But both programs just borrowed demand from the future.

In health care, President Obama has focused his efforts on adding some 30 million lower-income individuals to the Medicaid rolls or giving them means-tested insurance subsidies—a plan that may fail after Tuesday's special election in Massachusetts undid the Democrats' 60-seat supermajority in the Senate.

Because the new health law would require insurance companies to ignore pre-existing medical conditions, millions of middle-income individuals would have a strong incentive to drop their current coverage, pay a small fine for being uninsured and buy insurance only when they need expensive care.

If that occurred, then Congress would want to completely revise the health-care legislation, pushing the country closer to publicly financed insurance for all. Perhaps that was not unintended.

The Home Front
Local banks around the country have cut back business lending because they fear future losses on existing real-estate loans. The administration's plan to prevent mortgage defaults by helping millions of homeowners reduce their monthly mortgage payments fizzled down to helping just a few hundred thousand. Moreover, nothing was done to reduce the incentive to default among the 15 million homeowners whose mortgages now exceed the value of their homes. And nothing has been done to deal with the $1.5 trillion of distressed commercial real-estate loans that will have to be rolled over during the next five years.

The administration's plan to induce local banks to sell impaired loans to nonbank investors so that they could start lending again was well intentioned. But it failed, despite generous proposed subsidies, because banks don't want to reduce their accounting capital.

Although solving the banking and real-estate problem is key to recovery, the president's focus on his health legislation and the public's concern about future deficits appears to have stopped him from dealing with these problems.

A Legacy of Debt
The enormous increase in budget deficits and in the national debt is one of the most worrying aspects of the Obama administration's first year. The Medicaid expansion and health-insurance subsidies would add nearly $1 trillion to the national debt over the next decade. Only by combining this spending with increased taxes and an implausible promise to cut Medicare outlays by $500 billion could the legislation be officially "scored" as a net reduction in the national debt.

The International Monetary Fund estimates that annual U.S. budget deficits will be about 7% of GDP from 2012 through the end of the decade. Such deficits would absorb virtually all of the nation's household and business saving, thus reducing the funds available for business investment and housing construction that are needed to raise productivity and our standard of living. It will also keep the U.S. dependent on inflows of funds from the rest of the world.

—Dr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor of economics at Harvard University.