Strong presidential leadership needed to halt growing economic drift

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

The most curious aspect of President Obama’s announced Jobs Creation Plan was its delay and the dramatic buildup one month before its issuance. His showcase before a joint evening session of Congress heightened the anticipation even more. But what resulted was a mixture of unemployment compensation extension, continuation of temporary payroll tax cuts and infrastructural construction projects requiring additional fiscal stimulus. With current deficits still out of control, the “make work” aspects of his proposals have no chance of passage.

According to a vast majority of Americans polled, the current unemployment crisis is undermining any chance for economic improvement or even for maintaining its current fragile status quo.

Although this economically corrosive malady may not exude the passionate public reaction of 9/11/01 or the Pearl Harbor sneak attack of December 7, 1941, it is a critical exemplar of economic mismanagement, waiting to be resolved.

Just as the legendary president Franklin D. Roosevelt rallied a previously isolationist nation to a unified war-effort, and even as the less inspiring President Bush unified a national response against radical Islam, it is incumbent on President Obama to evoke a sense of urgency regarding the jobs crisis and the broader economic consequences that threaten America’s future growth as well as national security.
With more than 14 months remaining in the president’s elected term, the American nation is desperate to embrace an unprecedented leadership message that includes tough, courageous remedial action that will resonate with the majority of the American people.

It must rise above the partisan decision-making that brought us the highly controversial universal healthcare, the overbearing, small business-hostile financial regulations, and the obviously union-biased National Labor Relation Board’s recent decisions. Calling off the Environmental Protection Agency’s indiscriminate enforcers would be a good start. At this writing, the latter seems to actually be happening.
Popular presidents Kennedy, Reagan and Clinton were successful in pushing through legislation supported by a wide margin of the U.S. voting public. This became their key to success. Nothing gets Congress behind legislation as quickly and forcefully as when they know that American citizens support it overwhelmingly.

Capital goods spending holds key to manufacturing comeback

Within a dismal economic performance, manufacturing had shown surprising strength earlier this year.
Despite a lull in May and June, the backbone of that sector’s capital goods arena came roaring back with an unexpected surge, indicating a 2.5% jump over the previous level. The new order total of $72.7 billion was joined by solid expansion in shipments, unfilled orders and even a slight inventory increase.

Prior to this latest turnaround, negative signals emanating from a 3% deterioration in exports in the past two months, as well as a sharp downturn in the recent Empire State, Philly Fed and Richmond Federal Reserve regionals had indicated the weakening of the one pillar of manufacturing strength in a flagging economic recovery.

Although capital goods spending has historically provided insight into the rapidity of business and industrial expansion, the current uptick in this arena is primarily a factor of modernization, upgrading and technological improvement of existing facilities. The unusual emphasis in this direction, in light of weak consumer demand and limited growth opportunities, is overwhelmingly driven by the desire of independent businesses especially, to cut back their workforces, both on the shop floor and in back offices.

Ironically, this represents an outgrowth during the past two years of universal healthcare, the Dodd-Frank financial regulations and the Sarbanes-Oxley accounting burden imposed by the government on thousands of small businesses.

It’s becoming increasingly obvious that the bulk of independent private businesses, which constitute two-thirds of all full time employees in the U.S., are strengthening their productivity capabilities by capitalizing on the most efficient technologies available.

It’s unfortunate that the stimulus behind these decisions has to be the negative costs of additional insurance and the ancillary costs imposed by government fiat on these businesses’ personnel complement. It is a major factor for the absence of supplemental employment, which was a major plus in previous post-recession recoveries.

Congressional budget office’s long-term outlook based on rosy assumptions

The ostensibly politically neutral Congressional Budget Office calls for a 2011 fiscal year (ending September 30) deficit of $1.3 trillion, substantially lower than the $1.8 trillion anticipated early in the year.
This is pretty much in line with last fiscal year’s results and attributes its improvement to better than expected tax collections and enforcement of government spending cutbacks agreed to in the 2010 year-end lame duck Congress. This was most recently supplemented in the $2.7 trillion debt ceiling pact of early August.

The CBO’s longer term assumption holds little hope for unemployment improvement in the foreseeable future. In the critical period leading up to the November 6, 2012, presidential election, the CBO sees the official percentage of joblessness at 8.5—8.7%. This would be the highest percentage of registered unemployed since the Great Depression and President Roosevelt’s landslide reelection in 1936. It would also reflect those not fully employed in the 15% range of the nation’s 153 million employables.
The CBO predicts that this indigestible lump weighing on America’s shaky economic recovery is not expected to get to an acceptable five percent unemployment level until 2017.

Other assumptions project an improvement back to the 2007 level of a 2% deficit of gross domestic product by 2018. However, this depends on the restoration of taxes to before the 2003 Bush tax cuts, which not only increase revenues on the highest bracket but also on all the other levels, making up the Clinton-era tax code.

The CBO also presupposes that the November “trigger mechanism,” if Congressional agreement can’t be reached, will become national policy. This would then automatically cut back entitlements and the Defense establishment by a large percentage. This conclusion is dubious at best, as far as actually becoming operational.

A dramatic change in budget deficit reduction would entail a massive overhaul encompassing a total review of over-extended government spending, especially the redevelopment of the out-dated tax code.
Relevant tax structure must become central to America’s economic revision

As the U.S. settles into a long, low-growth economic malaise, the need to evolve a meaningful, long-term tax policy moves to the forefront of governmental decision-making sooner rather than later.

As the tides of partisan politics are making such a monumental change impossible prior to a potential “game-changing” 2012 general election, it should at least focus discussion on a 21st century universal tax approach. This, in effect, should become the centerpiece of the nation’s long-term economic debate.
As the situation now stands, the current U.S. tax policy has never been more convoluted and unfair. President Obama’s dwelling on taxing the highest bracket at the pre-Bush tax-cut level, while keeping all other brackets intact, does nothing more than exacerbate the antagonism of independent businesses in the name of “wealth redistribution.”

The large majority of such enterprises file Sub-chapter S income statements, which integrate their taxable business income with their personal IRS forms. This would impinge on those companies generating $250,000 or more in revenues, a demarcation that the current administration has chosen as the dividing line between the wealthy and those needing greater government protection. It has also created a higher percentage of those paying no federal income taxes and a growing number of those receiving unearned income rebates.

What should start to enter into the national dialogue is an overall tax structure that encompasses the huge amount of sub-rosa income that has continually gone untaxed. This oversight has existed ever since the current federal tax system first saw the light of day in 1913. It also inevitably calls for the closing of loopholes that manipulate government fiscal policy. It should also be supplemented by a consumer-based federal sales tax that would catch those affluent elements forming the underground tax avoiders.

A necessity for a fair tax, be it a flat tax or one continuing to be bracket-based, is being demanded by the productive sector of the American economy. They are now more convinced than ever that the government’s current fiscal approach is a rank failure and needs revision, if not replacement, to get the once globally predominant U.S. economic structure to again become viable.

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