Part I
[Printed in April 2009 issue, In Business magazine]
The Dow closing in on 6500, unemployment headed toward 10% to 12%, and a decline in the GDP that’s headed towards 15% by year end. Who would have predicted it? I did; late last year (before I briefly let myself get caught in the hoopla of Obama-mania). What politicians of all stripes don’t understand is that economics is less about science and more about human behavior. I had hoped that the euphoria over Obama taking office would change the psychology of consumers and business managers and lead to a recovery starting in 2010. However, recent events now suggest otherwise.
I can’t stand by and not say something — either out of arrogance or incompetence Obama is headed in the wrong direction. He can claim that he “inherited” this economy, but the truth is that he turned the recession into a depression. He owns this problem now. What’s become apparent to me is that Obama (and Pelosi and Reid) and the old-line media are not interested in a recovery; they have recently demonstrated that their true interests lie in installing European style Socialism before the American people wake up and catch onto their act, as demonstrated by his rush to push through tax increases, heavy new regulation, and as much government spending as they can get away with.
So here’s the low down on the slow down and what we can do about it…
Being a student of history, having an economics degree and having read numerous books on the dozens of economic calamities this great nation of ours has endured over two centuries, I am fearful of where we are currently headed.
Instead of Obama’s promised “change,” he’s returning the U.S. to the failed policies of 1930’s depression economics.
What is a depression? While the American Heritage Dictionary defines “depression” as “A period of drastic decline in a national economy, characterized by decreasing business activity, falling prices, and unemployment,” (certainly the current situation falls under that definition), my own definition is when asset values fall. The U.S. economy is most certainly in a depression; asset values are in a free fall. Yes, counteracting a depression requires drastic action, but not the kind of action Obama, Pelosi, and Reid are providing.
First, during most depressions in U.S. history the government over reacted, deepening and prolonging the down turns. Certain actions can improve a depression while other actions can easily make the matters worse. Many people have commented to me, “we should do something, anything,” but that is not a recipe for ending a depression. Expanding the money supply is key, which the Fed has been doing; but while the right hand of government provides a hand, the left hand of government (the FDIC in this case) takes it away by substantially increasing depository insurance premiums banks must pay and telling banks to curtail lending thereby lessening the supply of credit in the marketplace. Likewise, Obama et al. are contracting the overall supply of capital — by scaring away private investment and by withdrawing income from the private sector in order to feed the government beast. A massive federal government gorging itself and preying on the jobs-creating “class” will not end this crisis.
In the last 60 days, the Obama administration has authorized more spending than Bush did during all eight years combined; close to $4 trillion in new spending, with the national debt is approaching $11 trillion! (And Obama has the unmitigated nerve to say that he is going to cut the federal deficit in half during his first term! Ha!) As I told my shareholders last fall, a government cannot spend and tax its way out of a downturn.
A little bit more history: In the 1930s FDR imposed massive tax increases, with income tax rates up to 90% causing businesses to collapse and stop creating new jobs. Likewise, Obama and Doyle are now imposing tax increases of all kinds — higher income taxes are coming, higher capital gains tax, more social security tax, etc. These taxes will handicap the economy for the next few years. But don’t be surprised when the estimated tax revenue doesn’t materialize as businesses first will suffer losses during the depression and secondly, will curtail risk taking and profit making thereby reducing taxable income. (Of course, they’ll then propose even higher taxes to “solve” the problem.) The result will be massive federal deficits unprecedented except in war time. (Doyle’s campaign literature still blames the Republicans for Wisconsin’s $5 billion deficit even though Doyle has been in charge for over six years!)
Obama’s tax increases on incomes over $250,000 really hit private business owners, because they own pass-through entities and declare their business income as personal income, even though the overwhelming majority of them plow all or most of their profits back into their businesses, creating more jobs. With this tax Obama will cripple small businesses, and with that, cripple capital investments by small businesses, worsening the depression.
Then there are the structural changes that will also handicap the economy that will take years to reverse. The new banking regulations will inhibit lending for years and “cap and trade” will inflate the cost of energy likewise for years. Obama also wants to separately tax the “carried interest” of investment funds, which would be double taxation. As individuals, fund managers already pay tax on any income, so a carried interest tax would be a second tax. My company already pays $5.7 million annually in property tax, plus more in sales tax, income tax, social security tax, all kinds of fees, and much more, but according to Obama business owners don’t pay enough!
Part II
[Online Exclusive]
Welcome back. In the April “Up Against the Wall” In Business column we started talking about the problems with the current Obama “plan” (if you can call it that), and now after wrapping up a few more comments, we’re going to talk about how to get this great country of ours out of this mess.
Obama’s legislation and spending bliss have been received negatively by Wall Street as well as Main Street. GDP dropped a record 6.2% last quarter and will decline a similar amount this quarter as evidenced by record layoffs and lack of consumer spending and business investment. If Obama has taken a different approach, business and consumer confidence would have increased, but instead, Obama has scared away private investment capital and scared consumers into holding onto their cash.
Not wanting to miss out on the fun, Doyle too proposes his own similar tax increase and worse, a capital gains tax increase (by halving the exemption). Doyle is also including an inter-state branch tax again, trying to tax the profits of out of state branches of businesses headquartered in Wisconsin. (Truly unbelievable; the guy is attacking those businesses that are most loyal to Wisconsin.) Doyle is willing to jeopardize tens of thousands of headquarter jobs for a few million in new taxes, except that those taxes will never materialize; instead, businesses will move their headquarters out of state to avoid the tax and take their jobs and other taxes with them. Attention Doyle: Business leaders are not idiots, and you can’t force them to keep their headquarters in this state. Unemployment will increase as a result.
Between Obama and Doyle’s tax increases, businesses are going to take a one-two punch. Either these two guys didn’t read their history books and are bound to repeat it or they know history and are deliberately following FDR’s New Deal program, which in 1932 sank this nation into an additional eight years of depression until the war boosted employment and kick-started a recovery.
A little more history: FDR continued Hoover’s Smoot-Hawley tariffs that started the downturn in 1930, and when other nations retaliated, international trade shut down, eventually leading to World War II. Ditto: similar protectionist mentalities prevail in Washington and Europe today.
FDR also passed significant new regulations on the private sector, took over the banking system, and scaring away private capital from investing, with the result being that private capital sat on the sidelines for over a decade before finally reinvesting. Sound familiar? Obama is executing the same plan. Obama and Doyle are likewise increasing regulations (the wrong ones by the way — we need regulation of the hedge fund and derivative markets, not on regular businesses.)
Hmm, does anyone see a pattern here? I realize Bush blundered, but unlike Bush, Obama has the hindsight of seeing what didn’t work under Bush. Yet, he and his team are deliberately executing a wholesale takeover of various private sectors for the benefit of the public sector. Not convinced? The government has now effectively nationalized the banks, the auto manufacturers, the world’s largest insurer, and is looking to do more. In the last two months, the Obama administration and Democrats in Congress have deliberated targeted and vilified industry after industry. First they attacked the banking sector, then the private jet industry, then the hospitality and convention industries. Of course, now that hotels and resorts are hurting, they’ll default on their loans and their banks will have even more bad debt! Even Newsweek admitted this is Socialism; they’re not even trying to hide it anymore.
Fortunately, older generations have been down this path before, and I don’t think they bought into Obama’s Raw Deal. Unfortunately, those who put Obama in office, the younger generation, don’t yet know better, because they haven’t lived through a down turn. Maybe a good stiff bout of unemployment will wake them up and change their minds.
A Plan for Recovery
In fact, the upside of this downturn is that the U.S. was headed toward the classic fourth stage in the lifecycle of a nation that becomes wealthy; the latest generation having grown up being given everything and not having to work as hard as prior generations. This downturn will teach us all valuable lessons and act as a reminder of the value of lower leverage, hard work, and individual responsibility.
So, what can we do at this point? First we need to ask, “What brought private capital back following the Great Depression?” Much of the New Deal being dismantled and struck down by the Supreme Court following World War II, that’s what. Why did the economy take off in the 1960s and again in the 1980s? The Kennedy and Reagan tax cuts, decreased regulation, more freedom and liberty; property rights being restored, free trade, etc.
To jump start a recovery, we need to restore confidence in private sector investing. Let’s start with getting the government out of the private sector and also immediately address a few housekeeping items: Eliminate the mark-to-market rule so that the banks aren’t forced to mark down their assets during a downturn (or mark them up when bubbles occur). Likewise, ban naked short-selling and re-install the uptick rule. These changes will help restore confidence in investing in banks and other companies. There’s no reason why hedge funds and other speculators should be allowed to trash perfectly good companies to satisfy their own greed. Company managers are busy running a business and looking out for the shareholders, employees, and the community and don’t have time to be looking over their shoulder every day for hedge funds that might be sneaking up on them.
Second, since our Treasury Secretary can’t seem to figure out his own tax returns, why should the rest of us be required to? At a time when even IRS representatives answer the vast majority of taxpayer inquiries wrong, how can the tax code have any integrity? It’s time to simplify the tax code.
Third, get Obama and Congress to issue a real stimulus package, not that welfare and transfer payment plan they are trying to pawn off as a stimulus package. Real stimulus would include a significant reduction in the capital gains tax, which would spur all kinds of transactional activity that would in turn spur the economy, as well as spur new capital investment in public infrastructure. (Cut the red tape and let’s make it happen this year, because the current alleged stimulus package really only has about 15% of it that is actually stimulus.)
Likewise, reduce income taxes, and then combine that with specific tax credits for businesses that invest in new technologies, new equipment, etc. Restore the higher tax credits for buying a new hybrid car; those credits were phased out last year and replaced with lower credits. (Obama — Are you serious about helping the auto industry or not?) More tax credits for alternative energy and green innovation would be helpful too, along with reduction in regulations for small businesses.
Now, if you really want to get creative in order to attract private capital back into support the banks, provide a 25% tax credit for investing in a bank. Talk about focusing capital where it’s needed! Unfortunately, right now Washington has scared away investors from banks and other stocks, because we’re all terrified of the government coming in and wiping out our investment, not to mention putting banks and businesses under the government’s thumb. (The hundreds of banks that have told the Treasury that they intend to repay TARP funds demonstrate the object failure of the TARP program.)
Now let’s talk also about the government spending side. The present Obama plan to stimulate the economy with massive government spending will not work. As I told my own shareholders last year, every dollar of government spending must come from one of three sources; printing, borrowing, or taxing. Printing will eventually lead to out of control inflation a few years from now. Borrowing only works if foreigners, like China, continue to have confidence in our nation’s ability to repay and the confidence that the U.S. dollar will strengthen. If China cuts off their credit to us, we’re finished. (Nations can go broke; just look at Iceland and also Spain following the New World gold rush. — And I wrote this before China stated its doubts about its investment in U.S. bonds.)
Lastly, let’s face it, the American people have lost a lot of money in the stock market as well as jobs and they just don’t have the ability to pay higher taxes, so tax cuts are critical to recovery, because the cuts put more money into the people’s hands.
We need to focus on reducing government spending; before Congress and the new Administration bankrupt this country with their spending spree (admittedly Bush and a number of Republicans contributed to the problem), let’s stop spending like drunken sailors. As California has proven, endless deficit spending eventually comes back to haunt you. There is a limit to how much a nation can spend; at some point the rating agencies will downgrade the credit rating of the U.S. (just like they have recently with other countries), and then it’s all over. It’s time to cut waste and terminate out of date programs. With spending cuts and increased tax revenue resulting from increased economic activity, the deficits could be paid down substantially.
We also need to reverse the Bush Administration’s weak dollar policy. The evidence is clear; a weak dollar contributed to this mess, which means the only other alternative is to return to a strong dollar policy. Continuing to try to berate China into strengthening their Yuan against the dollar will only lead to more inflation, because a strong Yuan means a weak dollar, and a weak dollar means paying more for foreign goods, i.e. inflation. Besides, what country wants to invest in U.S. Treasury bonds if they are going to receive repayment in less valuable dollars? If the U.S. dollar declines more in value, China will consider alternative investments to U.S. Treasuries. Foreign investors are not idiots; they invest smartly just like us.
Lastly, get the government out of the business of buying private assets, private companies and banks. When the government competes with private sector investors, the government scares off private investment capital. Trillions of dollars of private capital are sitting on the sidelines just waiting for the government to get out of the way and stop competing with them before they invest.
So, that’s it. Simple! Actually, all joking aside, these ideas are actually easier to implement than the messy approach presently being taken, and many of these ideas have been articulated by others since last fall when I first stated them. The point is to re-articulate them so the discussion starts to change in the right direction. Too many of us complain, but sit on the sidelines. I suggest you write your Congressional representatives and let them know where you stand, because so long as the present administration and Congress believe that they have the support of the American people to pass their agenda, they’ll continue to push forward.
Unfortunately, by the time we can implement regime change in the next election, we could all be operating under a whole new set of rules that will make it structural difficult for us to get this nation out of the downturn in the next two to three years. We must act now to prevent the same unintended consequences that created and prolonged the Great Depression if we want to avoid a four or five year depression. Act now.
