Economic Salvation Prescriptions du jour -- The Frustration of Thrashing About

Here we are, almost at the end of the month of August, and it seems like this country and its economy are pretty much right where they were at the end of last year.  During these eight months we--that is, you and I, the "typical" or "average" or "middle class" or "non-politician" or "not-an-elected-official" or "not-a-captain-of-industry" type of person who comprises about 98% of the population of this country--have been suffused on a daily basis with competing ideas on how to best improve the American economy.  These "prescriptions du jour" for our economic salvation have apparently produced little in the way of tangible gain, as evidenced by the U.S. Commerce Department's report this morning which reported that real GDP growth for the second quarter of the year was 1% over the first quarter.

So many ideas, so much debate, so much noise, so much chatter, and yet so little to show for it.  That's a lot of thrashing about, and it is very frustrating.

In reflecting on this, it seemed to me that Mark Twain might have said or written something that could be an appropriate comment, and maybe even provide a hint of guidance.  Sure enough, after a little searching this dandy passage turned up:  "Soap and education are not as sudden as a massacre, but they are more deadly in the long run."  (From The Facts concerning the Recent Resignation Sketches New & Old (1900), p. 350.)

These "prescriptions du jour" are like the massacre.  They are described with embellishments of urgency, finality and calamity.  Soap and education is what you are getting if you have read this far, and especially if you continue reading:  it is analysis.  It is the process of cutting through the puerile posturing of the petty, pugnacious and pusillanimous from among those of our pundits, politicians and prophetic prognosticators of labor and industry who consume the nation's oxygen in order to out-speak the others; it is a process conducted with informed, thoughtful and critical analysis.



Now begins abundant applications of soap and water.  A funny-odd thing has occurred to me:  for all of the time and words spent on describing how we go about gaining economic salvation, the number of such prescriptions is actually rather small, or perhaps it is simply that there are only a few general categories that provide themes for all of these different solutions.  Here is an overview:

1. Taxes should be lowered.
2. Taxes should be raised.
3. The Federal government's debt is too high and must be lowered.
4. The Federal government's debt ceiling should not be increased.
5. Many government regulations on business are burdensome and should be removed.
6. More government regulations on certain businesses are needed to correct the problems of the past and ensure that they do not happen again.
7. Additional Federal government stimulus to the economy is needed.

This is not to say that there might be other types of solutions that should be considered, but these are the only ones that are being considered.  Everything that has been a part of the public discourse seems to be either a variation on one of these themes, or is a logical economic consequence of the current environment.  For example, a variation on the theme of tax reduction--item #1 above--is the concept that a special reduction in corporate tax rates for the repatriation of a company's cash that is now held outside of the United States would lead to significant American job creation.  For an example of a prescription that is mostly a logical consequence of the current economic environment, consider the legislative actions against union representation in Wisconsin and elsewhere:  this has been made possible because high unemployment and resulting voter discontent has simply weakened the power of unions.

Of the seven items listed above, the notion of using the Federal debt ceiling as a bludgeon for achieving goals in the formation of governmental policy--#4 in that list--is essentially either a fait accompli or has been postponed for further consideration until probably the height of the 2010 political campaign season, depending on your perspective.  And the last one--use of additional Federal stimulus spending--is something that people will speak of only in hushed whispers, at least until after President Obama's upcoming post-Labor Day address to the nation.

Of the remaining five categories or themes, today's choice for some soap and water is items 1 and 3--reducing taxes, and the national sovereign debt load.

Bloomberg Businessweek has today published an article titled "Senate Panel to Study Corporations' Offshore Cash Holdings."  Behind this story is a concept that has been talked about with a growing intensity on the part of the large business lobby over the past few weeks, and my guess is that the intensity will compound to a crescendo over the next few weeks.  The concept is this:  many, maybe even most, of the largest American corporations are keeping much of their cash outside of the United States so as to avoid having to pay high US corporate income taxes if they were to "repatriate" that cash back into the US; if the tax were to be significantly reduced then those companies could be induced to bring that money back into the country and use it for job creation.  Without passing judgment on this idea, here is a punch list of related issues and questions; working on them should help Congress and the Administration come to a well-considered and helpful policy decision:

• Whatever is the amount of cash that could be subject to such an action, it is probably enormous; estimates that are bandied-about run up to about $1.4 trillion; however, some large companies apparently do not disclose this sort of information, so some type of rigorous forensic accounting should be done as a part of the governmental decision-making process.
• If it is true that a special-purpose and lower tax rate for this "repatriated" cash would produce additional revenue that the government could put to good and productive use, then it is worth considering that some amount of such revenue that is realized through a lower tax rate is preferable to a higher tax rate that produces no such revenue.
• What would be the best options for governmental use of this "windfall" tax revenue?
• What could be done to ensure that the companies involved in this program would use the repatriated cash to create additional jobs beyond what they might have created in any case?
• What, if any, requirements should be placed on the jobs to be created?  (For example, should they be part-time or full-time, or some combination of both?  For how long should they be maintained?)
• Should there be any strings attached to how the money is used, or none at all?
• Considering that so much of the political discussion about job creation has focused on the need for it to come from the nation's smaller businesses, why is it valid to now expect that the biggest businesses will become veritable foundries of job creation?
• Can some help be directed to smaller businesses as a result of any policy motivation offered to large corporations that would cause them to bring their mountains of cash back into the country?

There should be more on this topic in the future.

Regarding the U.S. sovereign debt load:  probably most people are at the point of believing that the nation's Federal debt is currently at a record level.  If so, that is an incorrect belief in a very important way.

The most meaningful way to judge the amount of a nation's sovereign debt is as a percentage of that nation's Gross Domestic Product (GDP).  In the case of the United States, the high level of Federal debt load occurred after the conclusion of World War II when it reached an amount that was about, or slightly above, 125% of GDP.  This level of debt came as the result of the nation coping with several years' worth of severe economic shrinkage--the Great Depression--and prolonged armed conflict.

The national scenario that took us to the record debt level of the mid-1940s is one which has now been repeated.  Current calculations by a variety of sources put the Federal debt in the range of 85% to 90% of GDP.  The only way in which the nation can pay down that debt is to use the monies from Federal tax revenues.  The best way to do that is to have a growing economy that can generate additional revenues for the government even while decreasing the individual burden by decreasing tax rates.

In the aftermath of World War II, the Federal government acted to rapidly pay down the debt level through a program of fiscal austerity.  The nation entered a significant recession in 1948.  Recreating that pattern now would be a great mistake for the country.  We should learn from our own not-too-distant history.

Finally, something in the Commerce Department's report from this morning that can be counted as good news is this:  meager though the 2nd quarter's GDP increase might have been, it was greater than what happened in the first quarter (a 1% increase vs. a 0.4% increase).  We all hope that the trend continues.