Many things are currently in place fundamentally to grow an economy, however there are two that are critically absent.
There is still too much leverage left from the last boom cycle that has not been eliminated and absorbed in both public and private sectors, and, there is still no path forward through the liabilities for either business or consumer confidence to support sustained growth.
The president’s American Jobs Bill can give the economy another boost, but until the drag of debt is reduced and business and consumers feel confident again, the U.S. economy will under-perform. Everybody including the President knows this, but his political opposition revels in it just a little too much for my tolerance.
By saying that many things are in place fundamentally for the economy to grow I’m referring to the abundance of liquidity. Business is awash in cash equity and consumers are working as quickly as they can to deleverage.
Interest rates are testing 1946 super-cycle lows. The tax and regulatory burden is more of a political than economic issue. Economic stimulus, pushing strings, has not proven very effective because of what is missing.
80 percent of Americans think the country is on the wrong track. They don’t see the path forward for sustainable growth and until the issues of deficits, entitlements, tax reform and health care system reform, to name a few, are effectively addressed I don’t think the economic confidence necessary to free up capital investment can offset gravity.
All the tax breaks are benefiting corporate profits, but that doesn’t mean that they will use those profits. Without confidence in the future they will sit on the cash and the economy will languish. Giving them still more cash will not necessarily change that.
What business and consumers are so disillusioned over that has contributed greatly to a crisis of confidence is the dysfunctional government. The debt ceiling debacle likely cost the economy .5 percent to 1 percent or more in economic growth that was not necessary.
Congress made the economy worse. The public understands that the toxic partisanship in Washington just poisons the well from which we need cooperation and resolute fiscal management to spring from. It was a shock to see political interests blatantly willing to take the country and economy over the edge and still would.
I tackle problems differently than what politicians do which would certainly make me a lousy politician. I focus intently on the problem, marshal all the resources and options, and then chose the most direct solution.
That is not even close to how the ideologues approach problems and is essentially why they are so pathetic at problem solving. That is why exercises such as debt ceiling increases become political and economic disasters and nothing is solved.
The country believes the problem is jobs so the President focused another economic stimulus on jobs. I am not convinced that pushing the string is going to be any more than a temporary benefit and unless the larger issues that have eroded business and consumer confidence are addressed will only have borrowed from future demand increasing the economic risk.
Here are my examples: Cash for clunkers sold a slew of cars and then auto sales plunked. They didn’t fix the auto industry until they restructured and recapitalized it, addressing the legacy costs akin to the U.S. entitlement crush coming.
The $8,000 first time new home buyer tax credit sold a lot of homes and then when it expired, new home sales tanked. The tax credit didn’t create demand, it just pulled demand forward.
Unless they get aggressive about modifying interest rates on home loans that can’t refinance, regardless of low rates go, and restructure Fannie and Freddie, they are not going to fix the housing market in a timeframe anyone desires.
It is a small thing, only $5 billion in the president’s jobs bill, but the 100 percent expensing of business costs is also producing a short term high in some industries that will be followed by a crash.
Section 179 – 100 percent expensing has created a building boom on farms as every farmer who ever wanted a new machine shed and sold some corn can afford one and then write if off. These buildings were supposed to be up and functioning by the end of the year to qualify and a local manufacturer, Morton Buildings, looks like a mad house of actively, their crews working all night under stadium lights to load trucks and deliver materials to sites to get the buildings up in time.
The president’s proposed jobs bill extends 100 percent expensing through 2012. My concern was that Morton sold the buildings that it was going to sell in 2012 and 2013 this year because of deductibility and would lay off half or more of its workforce next year when sales collapsed with the expiration of deductibility.
I don’t know how many buildings will now get pushed back into 2012 if Congress acts on the jobs bill, but I still think farm machine shed sales will be soft when the deductibility ends. I doubt that, in Morton Building’s case, that the deductibility extension will create new jobs, but it should sustain the old ones a little while longer.
It is pretty obvious though that these kinds of measures are not a real fix. They can get you by a while until you get to one, but that is about it. We have a long way to go to restore business and consumer confidence to a level where a majority would say the country is on the right track.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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