Sunday, September 9, 2012

Why We're In an Economic Slump

Debunking Fallacious Talking Points
One of the 'talking points' used by the Democrats in this election cycle blames Bush's "economic policies" and tax cuts for our current situation.  This is politically effective but basically incorrect.

We had a financial crisis that quickly morphed into an economic slump.   It's misleading and dishonest to blame only the "economic" policies of G.W. Bush.  The factors and root causes that led to the financial crunch extend back decades and through many administrations.

The Real Causes of Our Current Slump
Let's be perfectly clear, our current problems are basically three issues:  1) we had a housing and personal debt bubble, which was created by Government and (Federal Reserve) monetary policies over three decades (or more).  Those bubbles burst and left millions of people with declining asset values (house prices fell) and a poor employment situation.  The debt burden remains--constraining personal consumption and keeping the economy weak,  2) The inappropriately de-regulated money center banks and Wall Street Casinos Investment Banks had far too much leverage of their balance sheets and quickly got into trouble,  3) the US has hemorrhaged manufacturing jobs to China and the rest of Asia for decades.

So, let's be clear, we had a financial crisis building over the years, through many administrations, that finally burst leaving the US and Europe in a "balance sheet" recession.

The US Government Is Largely At Fault
A crisis this big can only be created by Big Government.  Government policies that created the bubbles and the lack of proper regulation of markets and banks are as follows:
  • Mortgage interest tax deductibility skewed the housing market as people sought tax relief
  • Fannie Mae and Freddie Mac reduced lending standards all the way back to the Clinton administration
  • Excessive government and personal debt creation over 4 or 5 decades necessarily stole growth from future.  Unfortunately the "future" is now!
  • Federal Reserve interest rates were unusually low in the early 2000s which stimulated a housing price bubble.
  • Government agencies (Congress, Fed Reserve, SEC, Treasury Dept) were completely and utterly ineffective at their job of regulating markets and banking before, during and after the "big crunch."  So, why would today's solution (Dodd-Frank) call for enlarging these same entities?   For example, the Glass Steagall act, in place since the 1930s, was overturned during the Clinton administration and opened the door for banks to over-leverage themselves with risky bets in mortage securities and newly created financial derivatives.    
  • Bankers estimated, quite correctly, that the government would bail them out if there was a financial bust!
Job Repatriation May Be The Best Idea
G.W. Bush inherited Clinton's "dotcom" recession and he reduced taxes to fight that recession.  It worked.  Other tax cuts such as capital gains tax reduction came in the wake of post-9/11 recession.  It worked.  Don't be fooled, tax cuts are always pro-growth and have worked well since Warren Harding, Calvin Coolidge in the 1920s (yes, I notice that this preceded the Great Depression--refer to this link for more discussion from The Cato Institute),  the huge tax cuts after World War II, John F. Kennedy in 60s, Ronald Reagan in the 80s and finally under G.W. Bush.  The efficacy of the G.W. Bush tax cuts were much less robust due to the hemorrhaging of jobs and entire industries abroad.  They may not work as well this time either--but they will help.

But income tax collections in the US are quite low as tax collection has shrunk markedly from a usual post-War 14% of GDP level to about 11% of GDP.  Because taxes are already low, an effort to repatriate industries and jobs back to the US from Asia is the single most important idea to pursue.  To do that, we'll have to create incentives for companies to relocate back home which means that we need tax cuts for businesses---not threats and insults from the current administration.  Expanding US energy production is another winner, again despite bad-mouthing and name-calling of energy companies.

Conclusion
Since Government created the bust that we're living through, why would the answer be more government as proposed by the current administration?  Yes, appropriate re-regulation of banking is required but Dodd-Frank is the wrong approach  (See the Banking and Financial reform section of my Blog entry for Solving America's Big Problems).   Lastly, if the economy is not doing well, tax cuts may still be the right answer but may not be as effective as  in the past.  Bringing back lost jobs is probably key.  For that we need real national leadership at the top. 

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