RUTHFULLY YOURS

PETER HUESSEY: AN INVESTMENT STRATEGY FOR THE FUTURE

Posted By Ruth King on October 3rd, 2012

http://www.familysecuritymatters.org/publications/detail/an-investment-strategy-for-the-future

In 2008, Senator Obama said the Bush administration cut household income by $2000 and increased the debt by $4 trillion in eight years. Understandably, he declared its time for a change.

What happened? In the past 4 years, household income dropped $4500 or 8%. The debt increased $6 trillion.

Over twice the income drop. Fifty percent more debt. In only half the time.

Where We Are

Yes the administration admits, things are bad. And yes the current recovery remains the worst since World War II. But they promise, things will get better. They repeat promises made four years ago, for example, that one million new manufacturing jobs will be created and oil imports will be reduced by half. They promise.

But if current policies are a failure, how will repeating them produce success?

Compared to January 2009, the number of people working in America almost four years later is up barely a few hundred thousand. If the number of people looking for work in January 2009 were still looking for work, the unemployment rate would exceed 12% not the official 8%.

Jobs are being created at less than 100,000 a month; economic growth has been revised down to 1.3% now compared to over 2% earlier this year. Even after three years of recovery, people added to the poverty rolls exceed those getting jobs. Poverty rates now are now over 15%, despite $16 trillion spent since 1965 when poverty rates were 16% and the war on poverty began.

Why such poor growth and job creation? Why after four years and $14 trillion in new government spending has the nation’s GDP remained at below the level four years ago and revenue to the government stagnant, with deficits still exceeding $1 trillion a year?

Three key reasons: private investment remains on recession levels; future debt estimates remain unsustainable, and costs of healthcare and energy remain at historically high levels.

These factors have led to anemic levels of private investment in job creation. On top of which the future business environment gets bleaker: taxes are scheduled to increase $500 billion a year, some 10 times the increase in any previous year in the past three decades. The debt says the Secretary of the Treasury is “beyond unsustainable”. But says the Treasury Secretary, the “President of the United States has no plan” to deal with it. After all who needs a plan if as the administration says “the private sector is doing fine”?

The administrations own numbers show future deficit spending going up “only” $6.7 trillion. But the “drop” is a mirage. For example, the spending cuts in the 2011 debt agreement are counted in deficit estimates, although the budget mysteriously adds back the spending.

Further, Medicare cuts of $400 are counted as reductions to the deficit but will actually be transferred to Obama Care. An additional $834 billion is counted as not being spent on overseas wars but which is not going to be spent anyway.

When all added up, annual real spending shoots up $1.5 trillion over the next ten years with the result that the future ten year debt climbs another $11 trillion.

The numbers could be even worse, as they rely on both fairy tale estimate that revenue in 2013 and 2014 will magically increase by $750 billion due in part to new economic growth, (compared to zero increase since 2007) and $1.8 trillion in new taxes, mostly on small business.

Despite these phantom spending and tax estimates, even while cooking the books, the estimated future 10 year deficits contained in the administration’s mid-year budget review will increase $10.6 trillion to over $26 trillion or by 72%.

In short, the administration proposes that we should all be happy because over the next ten years, the national deficit will increase more than it took America all of 232 years to accrue.

The Senate Budget Committee says the budget for the next 10 years is estimated to be $46.232 trillion if today’s spending simply continued with no changes. The administration’s mid-year review calls for $46.218 trillion in spending, a cut of $1.4 billion a year! As the Washington Post‘s Glenn Kessler points out, “the repeated claim that Obama’s budget reduces the deficit by $4 trillion is simply not accurate… virtually no serious budget analyst agreed with this accounting.”

There is a reason the administration attempts to hide with accounting gimmicks its stubborn insistence to tax, spend, and borrow. At the heart of our faltering economy is that we continue to pursue wrong-headed policies. The dominant economic thinking of this administration believes government spending can lead a sustained and robust economic recovery. And in order to justify further government spending, they have to look as if they are simultaneously cutting the deficit. This requires “revenue”, and how easy it is to simply “raise taxes on the rich”, make them “pay their fair share”, even as the economy slips back toward recessionary numbers. Thus the constant refrain we hear that “tax cuts for the rich” are the only problem we face. When you have no plan, you adopt slogans.

But let us face facts. The most successful economic recoveries of the past thirty years were investment led from the private sector while government spending was restrained by 1-3% of GDP. Added to this greater investment were tax cuts, regulatory and poverty program reform, cheap and plentiful energy, and free and fair trade. None of this is present today.

For example, in the recoveries started in 1983 and 2003, and accelerated in 1997, private investment increased $578 billion and 10 million jobs were created in those three years.

By comparison, in the three years of recovery since June, 2009, private investment has stayed on the sidelines and only one third the number of jobs has been created.

What then should the United States do? Should we pursue tax reform, including tax cuts, restrain spending or should we increase taxes and spend more government money?

The US economy created 54 million new jobs between 1983 and 2007. The initial recovery year was 1983; the 1997-2000 enhanced growth also started with tax reform, welfare reform and a balanced budget agreement; and 2004 was the recovery year after the recession of 2001-3, the collapse of the dot-com stock bubble (-45% loss) and the economic damage caused by the attacks of 9/11.

In 1983, 1997 and 2003 tax rates were cut. Energy prices were low or falling; and government spending as a percent of GDP was not only held in check but was being shaved by 1-3% in the first two recoveries, (less so after 2003).

In those same three years, 1983, 1997, 2003, private investment went up by $171 billion, $149 billion and $258 billion, respectively, or a cumulative $578 billion compared to the previous year, an annual increase as high as 33%* This “stimulus” package came solely from the private sector. And in the three years of economic expansion, (1983, 1997 and 2004) jobs increased by 10 million.

So the question comes down to: are jobs primarily created by “government spending” or as progressives like to call it “investment”, or by private investment creating jobs?

Since June 2009, the date chosen by the administration as the beginning of the recovery, the US government has spent in 3 years $11 trillion.

The economy has created 3.8 million jobs in 38 months or 100,000 a month, the worst recovery since World War II and the Great Depression. [The Labor Department says it has now discovered 400,000 new jobs created in the 12 months prior to March 2012 to boost job creation to a paltry few hundred thousand in the 44 months since the administration took office].

Now, let us compare the current weak recovery, with the recovery for the three years after each tax cut in the past, 1984-6, 1997-9 and 2004-6. The economy added 10.1 million, 9.9 million and 6.7 million jobs respectively, or an average of 8.9 million over the three years, which is 234% better than the current recovery.

Another way to look at the comparison is to take the 12 months from mid 1983-4, (4.3 million jobs), mid-1997-8 (3.1 million jobs) and 2004 (2.3 million jobs), and compare the total of 9.7 million jobs which is 260% better than the current recovery.

And these nearly 10 million jobs were created with new growth in private investment of $578 billion or overall total private investment of $4 trillion over three years. By comparison, government spending was $4.8 trillion. (1)

But the administration has spent $11 trillion over three years (Mid-2009-Mid-2012) and the economy creates a weak 100,000 jobs a month, while the debt increases $6.2 trillion.

On the other hand, the private sector invested $4 trillion over three years, (1983, 1997, and 2004) in three previous expansions, while the US government spent less than $5 trillion, and the US economy grew by 10 million jobs, or 278,000 jobs a month.

By comparison, in previous economic expansions, US debt was mild compared to today, as it increased for those three years a total of $530 billion, ($200 billion under Reagan, $69 billion surplus under Clinton and $400 billion under Bush 43).

The evidence is overwhelming that high levels of government spending is not the key to job creation. And it reveals that taxes cuts coupled with spending restraint can spur record economic growth and are also consistent with keeping debt under control.(2)

In summary, private investment spurred by a sound business environment and tax cuts, produces nearly 300% or triple the jobs supposedly created by government “stimulus spending”, while at the same time creating less government debt, and more private wealth.(3) Add to this domestic energy production, reform of health care, regulatory reform, and restraint in government spending and much can be done to restore the American dream.

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(1) By comparison, for all of 2009-10, private investment was a paltry $100 billion. Oil prices were also a significant factor, as oil was $32 in December 1982, in mid-1999, and the average for all of 2003. By 2005, oil began a steady climb to where it spiked in 2007-8 reaching $147 a barrel. By December 2008, coincidentally, oil again fell to $32 a barrel. But it has averaged close to $100 for all of 2012.

(2 )In the three recoveries there was also to varying degrees, low energy costs, regulatory reform, and government spending restraint, a strong dollar, and technological innovation. The relative weakness of the last recovery 2003-7 can be traced to soaring energy prices, (brought about in part by a weak dollar), the bubble in housing and subprime mortgage debacle, and the failure to restrain and reform health care spending.

(3) The marked difference between the impact of very large government spending compared to private investment should be obvious. Our most pressing objective should be how to put Americans to work and access the American dream, bring in the necessary revenue to pay our bills especially those required for our retired people, the poor and veterans, move millions of people from dependency to job independence, and balance our budget, increase peoples wages, strengthen the dollar and reduce the cost of energy.

The key link between tax rate cuts, tax reform and job creation is investment. And this can only come from the private sector. Those investment numbers dramatically increased in 1983, 1997 and 2003. A new study says for every 1000 Americans, new start-companies averaged 10-11 in these years, but now have fallen to 6.7, remaining at recessionary levels. These new companies created nearly all of the new jobs according to the study, and which exceeds by a factor of three the jobs created by a government centric spending strategy.

Read more: Family Security Matters http://www.familysecuritymatters.org/publications/detail/an-investment-strategy-for-the-future#ixzz28EESCsbl
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