Economy: The Fix is In

There's something intellectually dishonest and possibly cynical about Washington's fix for the economy. First, let me say I'm not an economist, but I understand macroeconomics and study the economy, world markets, and policy.

The tax rebate makes very little sense because the economic problems are not about consumer spending; consumer spending is merely a symptom of a strong or weak economy, it's not the cause of either. When the money is spent there's not another rebate to follow, and even if there is, the act of issuing the rebates devalue the dollar and the economy overall, contributing to the downward spiral, like struggling in quicksand.

The underlying weakness in the economy started sometime after the crashes of 2000 and 2001. Credit became easily available, and the IT boom was replaced by the housing boom. Housing prices were artificially inflated (Greenspan's "irrational exuberance" applied to housing), and people borrowed against the increased equity of their homes to finance lifestyles their income and savings could not possibly support. Credit card debt rose from an average of $2500 or so in 1998 to over $12,000. We became a debtor nation.

At the same time, energy prices tripled. So did many raw materials. And the Bush government spent like mad. To spend so much it raised the debt ceiling and borrowed huge sums of money from Japan, South Korea, China, and Saudi Arabia, among others, increasing the national debt from around $4.5 trillion to over $9 trillion in a mere 7 years. For perspective, consider that the national debt in 1980 was $180 billion after Carter, rose to over $3 trillion under Reagan and Bush, then tapered off under Clinton and the Republican Congress.

Federal debt as a percent of GDP has fluxuated dramatically over the past 60 years, since its recent low of 35% in 1980 (lowest since 1935), it has grown to 60%, an unhealthy level for any country. This does not take into account the federal pension obligations inherited from companies bumping their pension responsibilities (nice trick, that), social security, or other "off book" debt, nor does it take into account consumer debt, which is about $20 trillion.

Median household income dropped from a high of around $47,000 in 1998 by about 10% to $43,000 in 2007 (measured in 2004 dollars), while inflation has increased over 30% in the same period.

Some points:

• Inflation makes everything cost more
• People are earning less
• Personal debt is at an all-time high
• the housing bust has dropped home equity leverage...
• causing banks to freeze credit, equity, etc...
• causing foreclosures, tightening credit across the country, slowing debt-financed spending...
• leading to a drop in consumer spending, causing a slowdown in manufacturing, retail, service industries, etc...
• leading to the current recession.
• More people are out of work and the rate of full employment is decreasing at a good clip

So now the government has to borrow more to prop up the consumer spending aspect of it, but it's possible a good deal of people will instead save the money as a buffer given the real fear of job loss.

The problems in the economy are structural. Spending won't solve the structural issues, it will merely continue to mask them, and likely only for about 6 to 9 months, at which point Bush will hand over the hobbled, weak economy to a new president to deal with and make the hard choices.

To solve the problem for the long term, we need to do the following:

• balance the budget by increasing tax revenue through taxing those with over $160,000 combined income, decreasing spending, ending military action, etc.
• greatly reduce or eliminate the trade deficit, which represents economic activity happening elsewhere
• put tarriffs on goods from countries like China that subsidize their products
• eliminate the crazy farm subsidy program and create incentives for organic farming and strengthening local consumption of local produce
• move to a single-payer healthcare system, eliminating wasteful insurance marketing, HR costs, lost productivity, 50% of worker's compensation, Medicaid, Medicare, CHIPs, and every other patchwork social program and the costs that go with them
• create a living wage standard, thereby eliminating the need for food stamps,
• invest in something like the Apollo Energy Project to eliminate our dependency on fossil fuels
• eliminate taxes for first year startup companies and make startup investing 100% tax deductible
• reduce taxes on the middle class
• tighten regulation of banks and financial instutitions and redefine lending and credit rules in favor of responsible lending, including creating foreclosure safety nets for the poor and lower middle class.

Just a thought on a Saturday morning...