October 2013 Economic News

Jobs created in September

On Tuesday, the Labor Department provided a disappointing report indicating 148,000 jobs were created in September; compared to the consensus estimate of 180,000. It was also reported that the unemployment rate was 7.2%.

The economy is still very anemic. Washington isn’t helping as they continue to erode confidence with small, medium, and large employers. Here is what Washington should do to help:

  • Announce a dramatic plan to balance the budget by 2018 by cutting unnecessary expenses, eliminating waste, and entitlement reform.
  • Announce a plan to greatly simplify the tax code, eliminating loop holes and making it fair for all. Eliminating taxes on repatriation of foreign earned profits, thus incenting corporations to return $1.7 trillion in foreign accounts back to the U.S. for investment and jobs growth.
  • Declare that the U.S. Government will be downsized, returning power to the 50 states where it always belonged. I.e. They will get out of the way and stop getting involved in every aspect of our lives.
  • Repeal Obamacare.

What progress did Washington achieve from the debt ceiling settlement?

Nothing more than a cease fire. No one won, especially the U.S. citizens. In fact, nothing was accomplished except for re-opening the Government doors and increasing its credit card limit. Huge spending continues, huge deficits (losses) continue, and the national debt continues to grow. Indeed, what we got was yet another maneuver that Washington has perfected — kicking the can down the road. We will see the next version of Washington’s soap opera in January 2014 when money runs out again. The debt limit will once again need to be raised by February 7th and the United States Government will continue its inevitable move toward bankruptcy.

Debt ceiling debates and their effect on the economy

Standard and Poor’s estimated this recent partial government shutdown took a $24 billion bite out of our anemic economy. The monthly Bloomberg Consumer Comfort Index plunged to the lowest level since November 2011, showing that people have turned more downbeat about the economy. Retailers are bracing for a possible drag on holiday sales. As the President and leader of the United States put it, the impasse caused “completely unnecessary damage on our economy”.

But this is not the first time Washington’s actions have helped to stall job creation. In April, 2010 President Obama created the Bowles-Simpson Commission to develop proposals for addressing the nation’s deficits and mounting debt. After nine months the Commission came up with a number of intelligent recommendations that would help reduce deficits and the national debt, while stimulating the economy. After most bipartisan commissions make recommendations on a pressing issue of the day, presidents and lawmakers have a tendency to ignore them, and that’s exactly what happened with the Bowles-Simpson Commission.

In August 2011, Washington reached its statutory limit as to how much money it could borrow. The limit was $14.3 trillion, and if not increased, it would mean the government would not be able to pay its bills. So congress debated the issue at length and finally agreed to increase the limit to $16.4 trillion. Congress also agreed it might be a good idea to make some changes in the government’s finances in order to avoid running out of money again. A “Super Committee” was created to find $1.2 trillion in cost cuts over ten years. If the committee couldn’t find a way to make the cuts, there would be a set of automatic spending cuts that would kick in January 1, 2013.

This was dubbed “The Sequester Cuts”. The Sequester Cuts were not well thought out and included across the board reductions, with many targeted at the Defense Department. Sure enough, the Super Committee failed, Standard and Poor’s downgraded the U.S. Government’s debt, and in January 2013, the Sequester Cuts kicked in. Because of the draconian nature of these cuts, Congress was outraged at the affect this would have on federal operations and thus the citizens of America. It’s ironic, even silly, that our elected representatives should be so furious with their own irresponsibility and ineptness.

What’s next? What can we expect out of Washington?

What’s next is another act from the Keystone Cops in January. While Washington antics are very entertaining, it creates FUD (Fear, Uncertainty and Doubt). As the FUD factor increases people are fearful of spending money. Businesses are uncertain about the future and reduce hiring plans. The Government’s creditors doubt it will be able to pay interest on its debt. All these things create a drag on the economy and the stock market.  Who would have thought Congress and the White House would be the biggest impediment to growing the economy and employment?

KeystoneCops

What should Washington do?

The U.S. Government needs to balance its budget. After that, it needs to start paying down the enormous $17 trillion debt. (By the way, it is almost certain the national debt will be over $20 trillion on the day Mr. Obama leaves office.) Will this effort be easy? No. It will be extremely difficult, given how deep Washington has dug the hole we are in.

Washington uses the term “budget” very loosely. The fact of the matter is that our Federal Government has not had a true budget since 2009. The Government’s bills get paid through a hodgepodge of “Continuing Resolutions” which approve spending as bills for certain items are approved.

As we all know, a true budget is a plan that is agreed upon well in advance of spending. Therefore, another way of putting it is that Washington has not had an approved financial plan for many years. As such, it is not surprising that the children running our nation have spent way more than they can afford. Indeed, you could make a strong argument that the United States of America is bankrupt — it just hasn’t been legally pronounced as such.

So what does it take to get a real budget so the Government can start to live within its means?

1. Congress and the White House must first acknowledge the depth and breadth of the financial problem.

2. Congress must craft a financial plan for the next ten years that shows the nation balancing its budget, then creating surpluses (profits) so that we can start paying down our gigantic debt. This budget will call for massive, structural changes in the way taxpayer money is spent. It will require bold moves such as reducing or eliminating department spending that does not contribute to the betterment of society and is a drag on the economy. A couple examples are as follows:

  • Elimination of the Energy Department
  • Significant cuts in the Department of Education (let the 50 states handle education)
  • Elimination of the Department of Housing and Urban Development (the Federal Government should not be backstopping mortgages for people who cannot afford a home)
  • Entitlement reform is way overdue. There are a number of proposals by smart people that will help preserve benefits while reducing the Government’s costs for entitlements.
  • Simplify the tax code, thus reducing costs and increasing revenue.
  • Obamacare needs to be repealed before it does more damage to the economy.

Can a balanced budget be obtained soon? No. The U.S. Government has grown so much that it now represents about 23% of total Gross Domestic Product. So cutting government spending has to be done over time, in a very artful way so that we don’t cause increased unemployment. However, the process of developing a financial plan and budget needs to start now.

The House of Representatives has proposed a budget that is balanced by 2023. The Senate has proposed a budget that shows continued deficits (losses) for eternity. Neither budget will ever see the light of day with the current dysfunctional Congress in charge.

3. The Government needs to adopt a budgeting process known as “Zero-based budgeting”.   With this process every line item of expenses must be justified without regard to prior year expenditures (i.e. starting from a zero-base). Government needs to scrap the old model of excesses and wasteful spending.

The new model needs to be one of thrift, and good stewardship of taxpayer money. It is outrageous for Nancy Pelosi to make comments like, “The cupboards are bare. There are no more spending cuts the Government can make”. Ms. Pelosi, and others in Congress with the “let them eat cake” oblivious attitude, please resign and give way to those who know the importance of balancing their check book.

What is required to balance the budget?

Balance the Budget

Balance the Budget

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