The debate about the debt ceiling has been the hot topic over the past few weeks. The standoff appears to be unwillingness by Republicans to increase the debt ceiling without major budget cuts and spending reforms. They contend that the Recession will get worse if we don’t tackle some major budget reforms now. I agree in principle, but the economic disaster that is all but certain to occur if the debt ceiling is not increased will definitely have a monstrous effect on our economy, something Democrats are quick to point out.
I always find it best, when discussing how to fix the economy, to look at the hard numbers.
According to the Federal Reserve Bank, the Great Recession has, in fact, ended. Since the 3rd quarter of 2009, the U.S. economy has been growing, albeit slowly. Average growth since the end of the recession has been around 2.1% - proof that economic activity is positive, but not enough to spur significant job growth.
Barring any unexpected foreign policy developments, the economy will be THE issue voters will consider during the 2012 election cycle. With unemployment currently at 9.1%, President Obama will have a tough time getting re-elected if things don’t improve, and improve quickly.
To figure out where we should go from here, it is important to look back at what we have done already to fix the economy. Thus far, the U.S. government has spent about $2 Trillion dollars to prop up the economy. This includes the Troubled Asset Relief Program (TARP), The American Recovery & Reinvestment Act (stimulus), the auto industry bailout, the extension of the Bush era tax rates, and other specific bailouts and interest rate cuts by the Federal Reserve. All told, the economy stopped hemorrhaging jobs and positive GDP growth began shortly after most of these things were enacted – around June 2009.
The question now: What do we do next? Though there is positive economic activity right now, 2.1% growth will not be enough to support significant job creation. It is estimated that America lost nearly 8.5 million jobs during the recession. Current economic growth rates have been supporting roughly 150,000 new jobs per month. At that rate, it will take nearly 5 years to replace all of those jobs. Also, the rapid loss of access to capital and credit, as a result of skittish investors and more stringent lending practices by financial institutions, has made it more difficult for companies to hire people.
Economists appear split on what to do now. Some are calling for more stimulus spending – somewhere between $500 – 900 Billion in infrastructure investment. Some are calling for broad-based corporate tax holiday in order to spur job creation. Some advocate a middle-road with a little of both. Some argue that no additional stimulus is needed, instead emphasizing on reforming the tax code and reforming large government entitlement programs to stabilize the budget and bring down the debt, which they say will stabilize the markets.
Depending on your political stripes, these plans are either the “silver bullet” or the “death knell” of our economic future. Personally, I believe each idea has merit, but considerations must be made for the long term stability of our economy, and the effects of deficit spending on the world.
If we go the “stimulus” route, and spend another trillion dollars on infrastructure, proponents claim that the economic activity from the building of roads, rail, bridges, power plants, airports, etc., will have the net effect of getting private industry an incentive to hire. Build a new road, and businesses will open along it. Build a new rail station and it will foster new development in the areas around it. Essentially: If You Build It, They Will Come.
The corporate tax holiday – a suggestion recently championed at the New Hampshire Republican Debate by former Senator Rick Santorum (R-PN) – would essentially allow all business entities in the U.S. to not pay any corporate income taxes for the next 5 years. The idea is that if corporations don’t have to pay taxes, they will have more money available to spend on expansion and investment – hiring new workers, opening new plants and factories, etc. Hopefully, that would accelerate economic growth across the board.
A complete reform of the Tax Code would involve setting lower rates for individuals and corporations, and the elimination of most – if not all – tax deductions and credits. Essentially, whatever percentage bracket you land in is what you pay – period. Most plans for this include the elimination of the Estate Tax (the so-called “Death Tax”) and the Capital Gains Tax. With the latter, it has been suggested that any capital gains should be counted as regular income, and taxed accordingly with your income taxes. The idea behind this is that a simplified tax code can more adequately predict revenue levels for the Government, and make budgeting easier. That in turn could help reduce and ultimately eliminate deficit spending.
All of these plans have some merit, but I don’t believe any one of these things is the “silver bullet.” I don’t believe economics can be fixed with simple solutions – our economy is WAY TOO complex for ‘simple.’ However, a balanced, non-partisan, combination of aspects of all of these things may be helpful. Investing in infrastructure is always simulative – especially since the construction industry has been hit particularly hard the past few years. The Federal Reserve and the International Monetary Fund have hard evidence that Tax Holidays can provide short term economic acceleration – sort of like a jump-start for the economy. And, reforming the Tax Code – well – it would be nice not to need a Doctorate in Mathematics and a Masters Degree in Law just to file personal income tax these days!
I believe our political leaders need to pause and look at where we are now, versus where we were when this mess started. Republicans need to stop perpetuating the myth that the economy is still in recessions – by any definition, it’s not. Democrats need to stop touting the “success” of their economic policies as heavily as they have. Yes, the bleeding has stopped – but this is not a success by any real measure.
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