The Economy: What will fix it?

There are certain moments in life when a person realizes that their ideas remain solely in their thoughts; within their own mind; there is no record. I, like many others, often listen to the news and have some expectation that 'expert opinion' or competent views are the ideas expressed widely by news organizations. This blog is an effort to cement a moment in time with my own personal opinion. It is an effort to forecast the U.S. economy based on personal opinion and simultaneously create a record to validate or invalidate my opinions.

This moment is an end of an era: the George W. Bush era. I meet few people that are happy with George W. Bush - overall. This blog focuses on one aspect of his Presidency: the economy! First, there is no question that the economy at the end of George Bush's Presidency is not good. However, there are important questions: What happened? What went wrong? What will fix the economy?

 

Perhaps you are one of those who heard, "George Bush was President the last eight years. The economy is bad under George Bush. George Bush supported "trickle-down" economics. George Bush supported reductions in capital gains taxes; therefore, reductions in capital gains taxes are bad for the economy!"

Is this true? Shouldn't we ban any reduction in capital gains taxes? After all, these tax reductions must have benefited the rich and made the poor more poor, correct? Before answering these questions, let's consider some basic concepts in any beginning-level philosophy class. Let's consider some fallacies of reason. Let's assume that "All ducks are white." The point is not whether all ducks really are white, the point is to understand logic and reasoning. So, if I say, "All ducks are white. Harold is a duck; therefore, Harold is white." Is the the logic sound? I submit that the logic is sound. If, in fact, all ducks are white and Harold is a duck, it must be true that Harold is white. Now, if I change the statement to: "All ducks are white. Harold is white; therefore, Harold is a duck." Is that logic sound? I submit that it is not. While all ducks are white, it is not true that all things white are ducks. It is important to note that sound reasoning must be understood and employed or there is no point in analysis. The point is to identify fallacies of reason, to look for truth not rhetoric.

So, George W. Bush supported reductions in capital gains taxes and while he was President the economy went south: the economy has entered into a severe recession. I ask this, "How does reducing taxes, in any form, cause an economy to decline?" There is only one major argument to support such a statement. The argument must be that government failed to collect taxes AND that those taxes would have been spent in support of the private sector for necessary fundamental government functions such as roads, highways, or, importantly, an overall oversight of the market such that the market is allowed to function freely. Is that what happened? The U.S.  had insufficient infrastructure? There were too few resources for police, law enforcement, and those that are part of the legal system? I submit that the U.S. had ample resources and ample infrastructure. While there are substantial arguments for improvement, I don't believe there was such a massive reduction in government resources that the economy had to to decline into a recession.

Now I have to ask, "Does every reader even understand what is a capital gain?" It is a simple concept but many simply do not know. A capital gain is the result of a purchase and sale. If some property is purchased (whether it be stocks, a building, or whatever) there must be a resulting sale where the sale price is greater than the purchase price. If this happens, there is a capital gain. For example, if a building is purchased for $100,000 dollars and it is later sold for $120,000 dollars, there is a capital gain of $20,000 dollars. The U.S., generally, requires citizens to report these gains and pay taxes on these gains. I ask, "How is it possible that reducing taxes will cause the economy to decline?" Other than the government reason supplied above, it is NEVER possible!

So, what really happened during the last eight years? This is the "meat" of what I want to have on record. Further, I want to have on record my predictions for the current proposals by the incoming administration, the Barack Obama Administration.

 

 

 

My view of what happened:

1. Both state and federal governments have substantially increased deficit spending: they spend more than they collect. When governments spend more than they collect, they essentially issue credit cards against those who pay taxes. Currently, there is about 303 million citizens in the United States. The recent "bailout bill" cost $700 billion dollars. If we divide $700 billion by 300 million citizens we get approximately $2,310 per citizen. However, 40% of American citizens do not pay tax. They do not contribute their income to address such deficits. In my opinion, it is incorrect to include those who are not liable for the debt; therefore, we need to divide by approximately 182 million people who are liable. The result is $3,850 per tax-paying citizen. The current total deficit (before the bailout) is about $10 trillion dollars! Each tax paying citizen (before bailout) is liable for ~$55,005 dollars in debt. This burden is dominating the private sector (business) and driving the economy down - period.
2. Federal and state laws have increased the cost of business by continually adding the burden of increased laws and regulations. For example, building construction requires permits and inspections. Right here in the state of Oregon, we have inspectors to verify the proper installation of various structural components. Businesses must submit proposals, pay fees, and wait for inspections. Isn't it interesting that the building inspectors failed to catch severe flaws in their own building? Water pipes burst and flooded the building - after their inspection. What is important is that, for all the costs and delays, statistically, there are the same number of flaws in construction as there are without inspections. What are these inspections for? It might be understandable, or acceptable, if these added costs resulted in structures with substantially reduced failures and increased safety. That is not the case; we just pay more and wait longer for the same result.
3. The Abandonment of Usury laws. If you look at the one possible reason that reducing taxes could possibly cause the economy to fail. Usury laws would be part of that reason. Isn't it interesting that there has been a trend for citizens to pay increasingly higher interest rates and penalties to maintain their debt? Increased taxes did not result in better oversight, it resulted in the opposite: worse oversight. Credit cards now have interest rates as high as 39%, so do credit lines and many other forms of debt. Our government has taken increased tax revenue but have failed to protect citizens. It is my submittion that failure for proper oversight is the underlying reason why homeowners are defaulting in higher percentages than ever before. Government is not short money, they are large in corruption.
4. Failure to stomp out corruption - Yes, this is a broad topic, but it is simply too true. AOL had millions of customers requesting to end their payments; to stop their service and AOL simply kept billing them and refused to acknowledge customer requests to end service. AOL's actions were criminal and massively costly. Did the government react? Did they help? No! They allowed AOL to collect cash they did not earn. Further, this was one more stone cast on the average citizen that resulted in one more step closer to bankruptcy. AOL should have been forced to compensate every last customer who requested their service to end and instead had their bills extended. There is only one reason why AOL and other organizations get away with such scandalous behavior, they lobby politicians and buy their protection. The scandals in Chicago and California and New York and Connecticut, etc never cease. I live in Oregon. We need a new bridge. We have paid millions to "study" the "right" new bridge. The bridge that collapsed in Minnesota was replaced for approximately $280 million. The bridge we need is smaller. The current proposal: in excess of $4 billion dollars! Corruption is rampant in Oregon too.
5. Credit Reporting Bureaus - as noted with AOL, many businesses simply lie; they report debt that they are not entitled to collect. I personally was billed by Direct TV after I canceled my service. I paid after I canceled by phone and could not prove that I canceled. However, after that experience, I wrote on my check, "Last payment, by accepting this check the bill is paid in full". Direct TV canceled me and mysteriously reactivated me retroactively. I referred to my check, and they removed their claim... until they SOLD that claim to third-party collectors. To this day: I prove I canceled and paid and the phony debt resurfaces and ends up with a new collector (it has been removed and reactivated more than ten times for more than ten years). The process of removing bogus debt is atrocious. I worked as a loan officer for a brief time and read thousands of credit reports and worked with many people with similar issues. There is simply a hugely weighted scale in favor of anyone claiming a debt and almost nothing in place that actually works long-term to remove false claims. My opinion why? It is simple, bad credit reports allow every lender to charge higher rates. These lenders lobby politicians and get what they want. The result is a debt-laden society on the verge of a depression.
6. Gambling - this is a no-brainier. Anyone who travels anywhere that gambling is legalized knows that the majority of those "playing" are those who don't make a lot of money and are those who can afford such habits least. It is simply predictable that a percentage of the population WILL gamble more than they can afford. Even those who gamble and still manage to still pay their bills. Of these, there is a percentage who have essentially kept themselves from growing their wealth. It was one thing to support casinos on reservations, in limited fashion, in order to provide a means for native Americans to add value to their land. That concept was destroyed when tribes were allowed to lease land and call it "reservation" land. Simply put: gambling destroys a significantly predictable percentage of the population.
7. Okay - there are many more reasons, but you get the point. These type of problems MUST be corrected: the actual reasons that the economy has scaled back and began to decline. We don't need rhetoric and we should be scared of what could actually make things worse.

My forecast:

Barack Obama has suggested that massively increased government spending will solve the economic problems. He supports over a trillion dollars in increased deficit spending and simultaneously supports increased taxes. This is a recipe for disaster. The government cannot even account for the $350 billion dollars they recently spent in the bailout bill. I don't care if a person refers to a business or government. It is not likely that any major problem will be solved by simply writing checks and throwing money at the problem. Problems are solved by actually applying sound reasoning and judgment, by understanding fallacies of reason.

Can anyone name what Barack Obama identified as the cause the economic problems during the Bush Administration?  I am positive that no person can because he never did. He always stuck to generalizations. He played a 'guilt-by-association' game of Bush was there, bad things happened, they are bad, I am good. We are for change. Change with me will be good.

Hmmm? What did he say? How will things improve? Is he really 'good' (for the economy)?I am not saying he isn't, but I am saying that what little he has proposed seems to be a recipe for economic disaster. Increasing government spending, raising taxes, and finding more ways for government to be a burden via laws and regulations will never steer any economy into growth.

I needed to have this on-the-record. I needed to be able to look back after Barack has been in office and compare my forecast from today with the actual results of tomorrow.

It is my prediction that the economy will continue to decline until actual problems (like those I identified) are corrected. We need the government to cut-back, not expand. We need corporate tax cuts (different than capital gains cuts which don't provide significant incentives in declining economies; only in flat or growing). We need those who fail in business to be relieved of their jobs, not given bailout money.

What would have happened if we gave over a trillion dollars to those businesses that succeeded rather than hand-out money to those who failed... to the sinking ships?

The future (as proposed) does not seem hard to predict. I actually hope I am wrong, but I cannot map-out any logical scenario that leads to an improving economy when corruption continues to be brushed aside (in fact seems to be expanding), government is expanding, debt is increased, taxes are raised, and laws are increasingly more costly and burdensome. Help me understand, please, how can so many news organizations find so-called "experts" that actually believe the current proposals have any chance of success? We don't seem to have experts anymore. We have someone's pal, friend, or a supporter of some preconceived idea packaged as an expert. So, I am now on-the-record. Only the future will validate or invalidate the statements made.