Government Imposed Uncertainties Hurt Economic Growth!

July 7, 2011

G’Day!

In nearly every analysis or survey of why business and financial institutions are not currently hiring or investing in America, the primary reason given is “uncertainties”. While dealing with economic uncertainties is a normal part of business decisions, the Obama Administration and Democrats in Congress have created additional administrative and legislative uncertainties that are unnecessary and detrimental to growth. Removal, or at minimum temporary suspension, of these government obstacles to investment, growth, and job creation would allow business and financial institutions to get America moving again.

Summarized below are the current government-sponsored complications that are discouraging job creation, capital investment, and the economic growth that we would expect from business during a normal expansion. I apologize in advance for its length but the issues are important and merit nominal analysis. Please review the information below and ask yourself, “If I were a business manager or a banker, would I risk my own money to expand, startup a new business, or make loans in this restrictive and uncertain regulatory environment?”

Fiscal Deficit & Debt Crisis: These two related issues are by far our greatest overall national risk! Fortunately we have a very comprehensive, rational, and bipartisan solution available, which was initially sponsored by President Obama. It is the Bowles-Simpson Debt Reduction Commission Report, “The Moment of Truth”. Unfortunately, President Obama and Congress have ignored this proposal since its completion. I have extensively discussed and still support this positive and bipartisan solution, (see “Bowles & Simpson Have it Right!” “Obama Ignores Bowles-Simpson Debt Reduction Commission – Again?” and “Is Obama Really Serious about Debt Reduction?”). The commission’s report, which was approved by a majority of 61% of the bipartisan members, has languished in obscurity since it was completed and presented to President Obama early this year. The recommendations from the commission cover all the necessary aspects of an implementable comprehensive solution to the our fiscal and debt crises including significant tax reform, reductions in discretionary and defense spending, and entitlement reforms including Social Security. For reasons that are a mystery to me, neither Congress nor the President appears to be considering this report in their current discussions. The President and the Democrats are not only totally ignoring a rational solution but have been fighting for months to avoid even minimal reductions from the inflated federal budget spending of the last 2-3 years. How can anyone expect financial institutions or business firms to act positively with these uncertainties hanging over them?

Taxes: As repeatedly discussed in previous articles, both corporate and individual income tax reform is essential for economic growth and investment in our country (see “Fiscal & Debt Crises – Tax Reform Essential!”). We need to raise additional federal revenues by lowering tax rates (especially corporate tax rates), eliminating loopholes, subsidies, and unnecessary “tax expenditures”, broadening the tax base to include more taxpayers, and simplifying the tax code. Currently at 35%, corporate tax rates in America are among the highest in the developed world (corporate taxes in China are 25%, Russia 20%, Germany 15%, and Ireland 12.5%) and foreign profits are penalized if returned to the US. This is ridiculous and encourages job creation and investment overseas, not in the US!

Regarding broadening the tax base, over 51% of US families currently pay no income taxes but receive the benefits paid by taxes from the rest of us, especially the much maligned “wealthy” (who already pay 76% of total income tax revenues). The current Obama proposal is to add more taxes on the “Rich” by rescinding the “Bush Tax Cuts” sooner than they are scheduled to expire. Simple math demonstrates that the “Rich” don’t have enough income to pay for the current and projected Obama deficits. This is nothing but political demagoguery and class warfare in preparation for the next election and is neither rational nor a serious solution to our long-term government overspending problems. If we are to solve our deficit and debt crises, broadening the tax base can and must be accomplished.

In “Fiscal & Debt Crises – Tax Reform Essential!” noted above, I have outlined three overall reform alternatives: 1) Retain but simplify our current “Progressive tax system, 2) Adopt a “Flat Tax” (one tax rate for all), and/or 3) Adopt a “Fair Tax” (a consumption or “VAT” tax). I personally prefer implementation of the “Fair Tax” either alone or in conjunction with one of the other two alternatives.  However, any one or a rational combination of these alternatives will accomplish the necessary tax reform goals and stimulate economic growth. All have detailed proposals available to our government, which are currently being ignored. The current extension of the “Bush Tax Cuts” expires at the end of 2012. Would you hire new employees or invest in your business, if you didn’t know what your taxes would be in eighteen months?

Obamacare: Virtually all independent analysis indicates that implementation of the 2000+ pages of Obamacare will ADD not reduce healthcare costs and will probably result in a single payer government-controlled healthcare system with restricted options and limited services. Small businesses, the job growth engine of our economy, are particularly at risk. At last count, approximately 1450 organizations, including many unions, have been given Obama Administration waivers against required implementation of Obamacare because of the higher costs it demands. Equally importantly, no one really knows all the implications, costs, or unintended consequences of the legislation because the Obama Administration is still writing the rules. In two separate articles, I suggested market-based solutions to our healthcare issues, “How to Solve Healthcare Part I” and “How to Solve Healthcare Part II”. I lived and worked in England for the better part of ten years and can assure you government-run healthcare is costly (through taxation), inefficient, slow, and limited in providing medical services. Think long and hard before you support such a system in the US. Again, if you were a business manager and were faced with the higher costs, more administration, and uncertainties associated about healthcare rules that are still being written by the administration, would you add to your payroll costs by hiring new employees?

Dodd-Frank Financial Regulation: Like Obamacare, this legislation is lengthy, complicated and potentially expensive for the financial services industry and ultimately consumers. No one really knows all the implications or additional regulations of the legislation because they are still being written by the administration and will create many unintended consequences for consumers and the industry. The Act is perhaps the most significant change in financial regulation since FDR. It represents major changes to all financial regulatory agencies and affects most of the nation’s financial industry. Major new agencies have been created: Financial Stability Oversight Council, the Office of Financial Research, and the Bureau of Consumer Financial Protection. Perhaps the most controversial provision is the creation of the potentially big and expensive “Bureau of Consumer Financial Protection” within the Federal Reserve System (FRS). Very importantly, even though the new Bureau is placed within the FRS, it operates INDEPENDENTLY. The FRS is PROHIBITED from interfering with matters before the Director, directing any employee of the Bureau, modifying the functions and responsibilities of the Bureau or impeding an order of the Bureau. With virtually unlimited power and authority to act independently, without oversight, the agency can do whatever it deems appropriate supposedly to protect consumers! WOW! Have we become a potential police state regarding “consumer protection”! What ever happened to “Caveat Emptor” (let the buyer beware) and personal responsibility? Is the government going to protect us from everything and if so, how? How many new public-sector union employees will this take? What will it cost? Ultimately, businesses and consumers will end up paying for this new unlimited-power bureau with sweeping authority to do “whatever it deems appropriate to protect consumers”. This is a scary development and creates endless uncertainties as the bureau writes its new regulations. More government madness and not good for job creation (except in the government)!

Additionally, the “Durbin Amendment” gives the power to regulate debit card interchange fees (prices) to the FRS. Effectively this eliminates free markets for debit cards and allows price fixing by the FRS, which was acted on by the FRS this week!

This is not a good trend for freedoms or free markets and bodes poorly for the other uncertain regulations to follow. If you were a banker faced with these uncertainties and risks, what would you do?

Energy & Environmental Policy: An intelligent national energy policy is vital to support economic growth and minimize the very real and present dangers of disruptions in our essential imports of foreign supplies. This policy must include and recognize America’s economic necessities, national security concerns, and the time required and costs necessary for conversion from any current source to any new technologies without creating growth constrains. It must include ALL possible sources of domestic energy generation including fossil fuels (oil, natural gas, coal), nuclear, as well as green energy sources (wind, solar, biotech).

Obama has no apparent energy policy other than promoting the green energy sources to ostensibly support his “global warming” environmental agenda. This action is happening at a time when more and more evidence is challenging and refuting not only “global warming” theory but also CO2 as a causative agent, and at a time when energy demands and prices for fossil fuels are increasing with NO serious alternatives in sight for decades! Further, the dependency and risks from imports of fossil fuels to the US are staggering and the economic and national security consequences of a stoppage of these imports would be catastrophic for our nation. Obama’s administration is actively working against virtually every effort to explore and develop domestic sources of fossil fuels. Offshore drilling in the continental shelf and interior of the US is being severely restricted even though thousands (perhaps hundreds of thousands) of good jobs could be created by actively pursuing known domestic reserves. Specifically, exploration and development of fossil fuel sources are being stifled by a lack of permits from the Administration and delays forced on development by environmentalists such as the EPA’s recent stoppage of Shell Oil’s permit to drill and develop a 27 billion barrel reserve in the Arctic Ocean off the coast of Alaska. (see “Obama Administration Attacks American Business Again!”)

The EPA is also trying to circumvent Congress’ refusal to pass “Cap and Trade” legislation by “backdooring” the regulations as new rules issued directly from the agency. Also, the EPA has proposed two new “clean coal” regulations regarding the use of coal in power plants that may result in “hundreds of thousands of coal industry jobs lost” and an estimated increase in the cost of coal produced electrical power by 11-23%. It is further estimated by a trade group that, in addition to the above jobs lost, the new regulations will cost the coal industry approximately $180 billion. For information, coal-fired power plants account for approximately half America’s energy supply.

I am not opposed to environmental protection or pursuit of green energy sources but, like many, am not convinced that global warming is actually occurring, and if so, is caused by humans or CO2. A rational and balanced national energy policy is needed. Restricting our domestic economy growth at a time of increasing global competition and increasing our dependency on foreign imports from a very volatile area of the world for the sake of a still unproven theory does not seem to me to be wise. It only creates more costs and uncertainties for our country and harms job growth, especially in the energy sector.

Pro-Union, Anti-Business Activism: The pro-union anti-business biases of the current administration are well documented and are detrimental to job creation, capital investment, and economic growth in America. Obama’s endless campaign speeches to unions, the stream of union activists to the White House, and repeated class warfare attacks on the “wealthy” are sufficient evidence of these biases.

Perhaps the most flagrant current example is the National Labor Relations Board’s (NLRB) anti-business, anti-free market, and pro-union (not pro-labor) socialist attack on the Boeing Corporation and “Right-to-Work” States (see “Attack on American Business by Obama “packed” NLRB!” and “Obama “packed” NLRB Continues Attack on Boeing & Free Markets!”). Under Obama, the NLRB has become a pro-union activist body and is now deliberately attacking job creation and investment in America by attempting to stop Boeing, America’s #1 exporter, from final implementation of the firm’s new “Dreamliner” factory in Charleston, South Carolina. South Carolina is one of 22 “Right-to-Work” States, which don’t require (or prevent) hiring union workers. To date, Boeing has already invested approximately $1 billion and hired approximately 1000 workers in South Carolina. Boeing directly employs over 160,000 workers, and is indirectly responsible for approximately another 1.2 million jobs. Apparently to the NLRB, the only “good” American jobs are union jobs.

For years during and subsequent to the Bush Presidency, union activists and Democrats in Congress have prevented the passage of Free Trade Agreements with South Korea, Columbia, and Panama, which are favorable to American business, American exports, American consumers, and will create American jobs. The unions have delayed passage because imported goods coming into the country at lower prices will displace some workers. Really! This is the global free market at work, expands economic growth, creates wealth and jobs, and benefits all consumers who are provided with more product choices at cheaper prices. Finally, this week the Senate is holding hearings on these bills and hopefully, after years of delays and economic losses, will be passed and signed by the President. Just another uncertainty caused by government interference in the marketplace that has hurt job growth and consumers.

With these pro-union anti-business biases at the very top of our political leadership and government, is it any wonder that business is hesitant to hire and banks to loan?

Conclusion: Government needs to get out of the way! (see “Big Government IS Our Problem”) The above issues and the uncertainties they have imposed on our economy are indications of where Obama’s and the Democrat’s policies are leading us. Socialism and central planning don’t work – just ask the former Soviet Union or India. Free markets and individual freedoms do work! Obama is increasingly turning our nation into a centrally-controlled socialist welfare state with significant pro-union, anti-business biases and uncertainties that hurt us all. These policies are not the foundation of freedoms upon which our country was created and which made America great. It’s time to return to individual liberties, free markets, sound fiscal and monetary policy, and limited government. It is time to take back our country!

The Old Guy PhD

 


Yes, We CAN Grow the Economy & Create Jobs

June 10, 2011

G’Day!

Obama and the Democrats have tried and failed with virtually every centrally controlled socialist alternative to stimulate the economy and create jobs. The only jobs they have really created are in government. The so-called recovery is the weakest in decades and may be about to “double dip”. Big collectivist government solutions have failed miserably (see “Big Government IS Our Problem!”). Obama and the Democrats only answer to this failure has been to blame it all on Bush. They claim that without their $4 trillion dollar taxpayer & debt funded stimulus, nationalization of businesses, increased healthcare regulations and spending, increased financial regulations, and extreme monetary easing by the Federal Reserve, it could be worse. The only thing that worked has been TARP and that was enacted under President Bush! It is time for government to stop regulating, remove the uncertainties facing business, get out of the way, and let the free market and capitalism work. You do not create jobs by taking wealth from those that generate it, siphon off government administration and oversight, and redistribute less of it back into the economy.

Economic growth and job creation is about free markets, minimum regulations, incentives, and opportunities in the private sector. Government doesn’t create jobs; the private sector creates jobs. Government also doesn’t create opportunities but it can discourage or prevent them (think energy policy) and it can and does distort the market through politically motivated subsidies or tax deductions for selected industries. If taxation and regulations are minimized to the level necessary to support the essential role of government as defined in our Constitution, business will take advantage of whatever opportunities are available in the marketplace and the economy will grow. Unfortunately, the Obama administration and the Democrats in Congress do not understand this. They apparently believe that a few “elites” (themselves) in government are smarter than the millions of consumers and business managers throughout the global economy. They have imposed on American business a climate of increasing regulatory restrictions, increasing healthcare costs, high business taxes, and increasing uncertainty as to what they will do next. In this centrally controlled environment, it is no surprise that American businesses are not currently hiring or investing in our country. The regulations and costs just in Obamacare and the Dodd-Frank Financial Regulations Act are particularly harmful and businesses are wisely waiting to see what the government will force on them next.

So what needs to be done to create jobs and get our economy back on track? At least six actions could and should to be taken: 1) Stop/Minimize non-essential regulations, 2) Have a business-friendly government, 3) Reduce tax rates, especially on business, through tax reform, 4) Enact an energy policy that encourages rather than discourages development of domestic sources of traditional energy, 5) Fix the fiscal and debt crises by cutting government spending, revising entitlements, and increasing tax revenues through tax reform, 6) Pass the three pending Free Trade bills and expand them to include other trading partners.

First, a moratorium on new regulations should be declared and all regulations associated with Obamacare and Dodd-Frank (especially the Consumer Protection Agency) halted until after the next election in 2012. The uncertainty overhang from these two bills alone is stifling hiring and investment by business. Ultimately, all regulations, both existing and new, should have a “sunset clause” that requires our government to formally reaffirm their need at pre-set intervals, perhaps every ten years. This would insure that outdated or unnecessary laws do not become permanent.

Second, President Obama needs to realize that his collectivist socialist policies don’t work and become truly business-friendly. It is no secret that the current administration is pro-union, pro-environmentalist, and anti-business as evidenced by numerous actions by himself and the Administration’s Departments and Agencies. The pro-union/anti-Constitution actions by the NLRB against Boeing in South Carolina (see “Attack on American Business by Obama “packed” NLRB!”) and the many actions of environmentalists against any form of energy development (drilling in the Gulf of Mexico, Shell Oil off the coast of Alaska (see “Obama Administration Attacks American Business Again!”) are not conducive to economic growth and job creation. This week the issue of an energy pipeline from Canada to Texas has also come under attack by environmentalists. These and other obviously pro-union and environmentally biased activities against businesses (and some States) should be halted and free markets given an opportunity to function.

Third, tax reform is essential to both economic growth and reduction in the deficit (see “Fiscal & Debt Crises – Tax Reform essential!”). As the referenced article indicates, there are several excellent proposals available and Republican presidential candidate, Tim Pawlenty, just added another this week. All are pro-growth and pro-job creation and all will work by providing incentives for private sector investment IN THIS COUNTRY, not abroad. Naturally, the Democrats, who believe in centralist government solutions and not in free markets, are generally opposed to all of them. Perhaps the easiest, most immediate, and most beneficial tax reform is to reduce (or eliminate) corporate tax rates to a level equal to or less than the major nations with whom we compete and simultaneously eliminate the politically motivated subsidies and deductions that distort the market. Currently US corporate taxes at 35% are highest in the developed world and actually represent double taxation on income, first at corporate level and again at personal level, when distributed as dividends. Additionally, the high US corporate tax rates discourage US based international companies from repatriating foreign profits back into the US because, if returned, they are taxed at the higher US tax rate. Our current tax policy encourages investment abroad and discourages repatriation of profits back into America. This is a job killer, not a job creator. Is our government crazy?

Fourth, enact a domestic energy policy that encourages rather than attacks development of domestic sources for traditional energy. This will create thousands of good jobs in our economy and reduce our dependence on foreign energy supply. For far too long we have allowed the environmentalists to dictate policy and stagnate domestic energy growth. Every rational person knows America will be dependent on fossil fuels for decades. Yes, development of alternative energy forms and technology is important but there is no chance “green energy” is going to be a replacement for traditional energy sources, including nuclear power, any time soon. It is madness to exclude active development of domestic fossil fuel sources and nuclear power from our alternatives just to satisfy a few environmentalists with unproven science and questionable computer projections. If “green energy” was a viable economic solution, we would not need a policy or subsidies to support it. Also, independent of the longer-term cost benefits from domestic production, the extremely high and increasing risk of supply from the foreign sources is a very dangerous national security concern. The Middle East is in turmoil and no one knows how it will turn out. Without domestic alternatives, American could find itself with an energy disaster, which could seriously endanger our economy. We must actively develop domestic energy to create jobs in America, sustain our economy, and reduce our global supply risk.

Fifth, resolve our short and long term deficit and debt crises. We must get government spending and the dual debt and deficit crises under control (see “Bowles & Simpson Have it Right!”, “Obama Ignores Bowles-Simpson Debt Reduction Commission – Again!”, “Is Obama Really Serious about Debt Reduction?”). Our Government is too big, too oppressive, and exercises too much control over the American people and business. The current policies are sucking money from business and taxpayers, adding more public sector union layers of government control, stifling business growth, and reducing America’s ability to grow and prosper. As stated above, in a free market economy with protection for the freedom of individuals and businesses, the private sector creates jobs. Since his election, Obama has expanded the size and scope of government control far beyond the level any freedom-minded citizen would have imagined possible. Simultaneously, Obama has also increased our federal deficit by $4 trillion and increased our national Debt by approximately 40% to $14.3 trillion. Relative to GDP the size of government has increased from approximately 20% of GDP to over 25.5% of GDP, a 5% increase in the size of government relative to our economy in less than three years. Without correction, our deficit next year is expected to be another $1.6 trillion and in ten years our national debt will grow to a staggering $22 trillion! Does anyone think this makes sense? My article last week, “Is Our Government Broken? – Redux!”, provides more information on this critical issue.

Sixth, pass the Free Trade Agreements for South Korea, Columbia, and Panama. These proposals go back to the Bush Administration and should be easy to pass. I believe nearly everyone including the President and many Democrats support them. As usual, politics is holding them up. Free trade works and provides value through additional products and services at lower costs to all American consumers. Only unions are opposed to free trade because, in the short term, it may reduce union jobs in non-competitive industries. Over 200 years ago, Adam Smith established the unchallenged principle that the wealth of a nation was based on the goods and services available to its citizens. Free trade allows this to work for the benefit of all consumers. It’s time for the unions to realize this and support what’s good for the nation over what’s good for the union.

Yes, we CAN solve our problems, if we have the political will to do so. This country was founded and prospered on the principles of individual freedom, free markets, sound fiscal and monetary policy, and limited government. Let’s get back to our foundations and demand that our elected representatives in government get to work.

The Old Guy PhD