Its the economy, its always about the economy

Happy Memorial Day!


A great big thanks to the veterans who have fought and died to give us the great country we have. From the Revolution, Civil War (War of Northern Aggression to some), WWI, WWII, Korea, Viet Nam, and all the Middle Eastern wars since, and continuing as we speak. It is easy to forget their sacrifice since we have never experienced war, real war for years on end, in our own back yards. The closest we have ever come to knowing the horror of war up close and personal was Pearl Harbor and the attack on the Twin Towers and Pentagon. Our service men and women have given us that great gift. As Mr. Lincoln said, “the world will little note nor long remember what we say here, but it can never forget what they did here”.

Memorial Day traditionally marks the start of the summer season in the USA. Yes, summer is upon us and we are left thinking about what is happening and what will happen during the hot months ahead.

The way too long election season is beginning. President Obama has the advantage of being guaranteed his party nomination to run for a second term while the opposition hasn’t a clue who to run against him. It gives him a head start.

It will take a really top notch candidate to make this a credible horse race. If the Republicans can find one, they do have the economy on their side (although I don’t think they have a lock on the vault of knowledge when it comes to fixing the economy). Jimmy Carter (D),and George H. W. Bush (#41) (R) both lost re-election because the economy was in the tank.

So what will the sitting President try to do? He will certainly try to create a plausible argument that the worst is behind us and that we are on the road to recovery. You will hear things like, I inherited this mess and while it was grim, my policies have helped us stop the free fall and get on track toward recovery. We have a lot of hard work ahead but I can see a light at the end of the tunnel. Four years from now we will be in a much better position than we are today because of the policies and practices I have installed and will continue to implement when I am re-elected.

The question we all have to decide for ourselves would be “Is he correct?” Or are we really no better off that we were in 2008. “Did he inherit a train wreck or did the Congressional focus on Health Care allow the train to wreck before they reacted to it?” Could the disaster been better and more timely handled? Is the USA in a better position in the world than we were in 2008?

Those are questions for voters to decide. What I think I know is this:

1. Housing sales continue to be flat with new housing being well below 2009 and down from even 2010 despite record low interest rates for mortgages.

2. On the consumer front (roughly 70% of the economy) we are seeing steady growth year over year of about 3%, so some growth in the economy is happening. Unfortunately imports are growing faster than exports so we are creating jobs but they are not here. Here, we are seeing more than 400,000 people apply for unemployment each week. That is fully 100,000 more than before the financial crisis began. That could translate into an unemployment rate climbing to 9.3% by year end. Friday, June 3rd, the next department of labor announcement is due. That will confirm my expectations … or be a pleasant surprise. Capacity utilization, that is the percentage of production that factories are currently running has remained at about 76%. Lack of growth in utilization signifies no job growth. Inventories are flat and there is no sign that anyone is confident in the future, at least confident enough to invest money in building more inventory. Perhaps we need to re-run the movie “Field of Dreams”. You know, build it and they will come.

3. Remaining on the consumer front, we have modest growth even in the face of continuing unemployment. We are seeing consumer debt rising again, albeit at a much slower pace than pre-crisis rates. That cannot be sustained without income growth and high unemployment dampens wage growth. So we have another concerning pattern developing.



So what to do?

Well, we can tax the rich and those corporations that are making so much money, some say. We can do that but taxing the rich, even a lot, isn’t going to be more than bucket full of money in the ocean of red ink. Corporations are legal constructs. They don’t really exist anywhere but on a piece of paper. If we tax them, they raise prices. So we basically tax ourselves more. But they don’t vote so they make an easy scapegoat. It amounts to the political equivalent of the shell game. Where is the pea?

Corporation profits, while quite healthy, are growing at a much slower rate than they did in 2009 and 2010. This means the stock market could see them as fully valued, and the stock market (and your 401(k) retirement money) may not see much growth going forward.



Cut spending some say. Also a good idea but the budget has relatively little discretionary spending in it. Most of the budget is entitlement programs (Social Security/Medicare) and military. Since we are still involved in wars in Iraq, Afghanistan and now Libya, there doesn’t seem to be much chance of cutting that either.

So what is the solution? I was once told that when you find yourself in a hole, the first step is to stop digging. We need to simply freeze spending at current levels or if you favor spending reductions let’s freeze spending at 2009 levels, for everything, for two years, longer if necessary. Then let’s raise taxes in a way that is fair and equitable. Then let’s start leveling the playing field by taxing imports to allow local US companies to increase their market share (and employment). The resulting increase in employment will result in an increase in tax revenue and pretty soon, who knows, we may once again have a budget surplus like we did not so long ago.

As the campaign season progresses, think about these issues and listen carefully to the candidates. Test their promises and slogans against logic. Sound bites can sound good but don’t take them at face value. Do your homework. If you don’t you will live under the government you deserve.