That would be the Fed. It looks
like another cut in interest rates when the Fed meets later
this month. The problem as we have stated in the past is not
interest rates. Interest rates are low by all historical standards.
Money is not the problem either. There is plenty of money
out there. The problem is confidence. Actually a lack of confidence.
Lenders are afraid to lend and borrowers are afraid to borrow.
Remember interest rates in Japan in the 1990s? They were practically
at zero yet the economy was stagnant because of a lack of
confidence in economic growth. So how do we get that confidence
back? Low interest rates will not do it. Investors need to
see that the housing slump and the credit crisis have hit
bottom. Investors are still waiting fearfully for the other
shoe to drop – either a bank failure or a major builder
going bust. We are seeing corporate America taking aggressive
steps to prevent that from occurring. Financial institutions
are writing off bad loans, cutting dividends and building
up their cash reserves. Companies are paring back staff –
the unemployment number jumped to 5% at last report. We are
encountering some short-term pain, but this will result in
long-term gains. Once investors feel confident that the worst
is over, the economy will resume its upward trend. Will we
encounter a recession before this happens? Not likely. A recession
is defined as two consecutive quarters of negative growth
in GDP.
Our economy is very diverse and there are some areas of
growth that will pick up the slack in housing, namely pharmaceuticals,
health care and defense spending, just to name a few. In addition,
some American and foreign companies are still building manufacturing
plants here to take advantage of our giant economy ($13 trillion).
Add to this an explosion of spending for the repair of roads
and bridges across the country. Also, with the increasing
number of inferior and dangerous products coming out of China,
we can expect consumers to turn more to American made products.
Now, we don’t profess to know when investors’
mood will turn, but it will be soon and it will be the start
of the next boom in the American economy.
What, if anything, could derail our rosy outlook? A repeal
of the Bush administration’s tax cuts. In fact, we could
use further tax cuts to reverse the current slowing of economic
growth, and we are talking about both corporate and personal
income taxes. The corporate income tax rate in the US is currently
35%. That is the second highest rate in the world after Japan.
The average corporate tax rate in the seventeen most developed
countries in the world was 31% in 2006, down from 38% in 1994
and 57% in 1982. This number is from the OECD (Organization
for Economic Cooperation and Development). Even Sweden, that
bastion of socialistic democracy, has lowered its corporate
tax rate from 61% in 1982 to a current rate of 28%. France
will soon lower their rate to 25% and Ireland has the lowest
rate of all OECD countries at 11%. Ireland of course has one
of the fastest growing economies in the world. The biggest
threat to the US economy is coming from tax competition. Kuwait
is reducing their tax on foreign corporations from 55% to
15% to attract more investment. The rest of the world is beating
us at our own game.
What about personal income taxes? They should also be cut
again to make us more competitive with the rest of the world.
Many like Russia are moving to a flat tax rate. Tax cuts benefit
everyone, not just the rich. In 1990, the richest 5% of Americans
earned 27% of all income but paid 44% of all taxes. Today,
the richest 5% earn 36% of all income and pay 60% of all income
taxes. The richest 10% of our population pay 70% of our income
taxes. This data come from the IRS. If the tax cuts are allowed
to expire in 2010, we will face the largest tax increase in
history (nearly $1.9 trillion over seven years), raising taxes
on 115 million taxpayers and returning to the tax rolls 7.8
million low- and middle-income families who now pay no federal
income tax (Wall Street Journal 1-8-08).
In sum, cutting taxes serves as a stimulus to work, to invest,
to create jobs and to save. That is the basic principle behind
a capitalistic democracy. The budget deficit vs. GDP has been
shrinking since the last tax cut and is now down to 1.2% of
GDP vs. 4% in 1982. This in the face of the war on terror,
Katrina and numerous other disasters.
As we head full steam into this election year, we will be
bombarded with negative outlooks on the economy (by both parties
actually), the war on terror, the oil crisis, the housing
bubble and anything else politicians can think of to get themselves
elected. We are an optimistic country and that “can
do” spirit is what keeps us moving forward. We have
overcome many obstacles in the past 230+ years and will no
doubt overcome many more. Politicians like to talk about change,
but it needs to be constructive change, and we should be looking
at economic changes that will maintain our competitive edge
in the world.
Random thought for January 2008:
“Success is the ability to go from one failure to
another with no loss of enthusiasm.”
- Winston Churchill
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