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Richmans' Trade and Taxes Blog
What are the prospects of the US economy short-term and long-term?
According to the Council of Economic Advisors, the US economy is growing steadily. It recently reported that "we have now seen twelve straight months of private-sector job gains above 200,000 -- the first time that has happened since 1977” and that the “GDP report for the fourth quarter of 2014 is consistent with a wide range of indicators showing further labor market strengthening.” 252,000 jobs were added in December, 2014, 257,000 in January, 2015, and 295.000 in February, 2015. The unemployment rate fell to 5.5% in February, 2015. The stock markets have risen to new highs although they are highly volatile. Real estate values have been rising. So how good is the good news? Not so good, really.
The recovery as the ordinary man in the street knows has been sluggish and the data corroborates that. AS I pointed out in a recent posting to this blog, the measures taken by the Treasury and the Federal Reserve Board have made the rich richer and poor poorer. Consider the following table which shows the changes in employment and unemployment between 2008 and 2015:
As the table shows, the number employed has grown by less than one percent in the seven years of recession and recovery. The number unemployed increased 23 percent, millions are employed part-time for economic reasons beyond their control and millions more have stopped looking for jobs and are not counted in the labor force.
Why such a lackadaisical performance in spite of huge government deficits, now over $18 trillion for the federal government alone, and huge quantitative easing by the Federal Reserve Board?
First, we continue to export jobs. The trade deficit of the US in spite of the reduction in oil imports has been above $40 billion per month and is a drag on the GDP. Gross Domestic Product, the output of all new goods and services was $17.4 trillion in 2014 and the trade deficit was $539.8 billion. GDP and employment would have been three percent higher had trade been balanced.
Second, negative government policies including excessive regulation has slowed business investment in the US. Whatever the cause of the inadequate level of investment, economic growth and employment depends greatly on growth in the manufacturing sector and the government has done nothing to keep the US attractive to business investment. Indeed, the out-sourcing of production overseas has dramatically slowed economic growth at home. Fortunately, in spite of government opposition to the use and production of fossil fuels, there has been a spectacular increase in oil and gas production in the US which has reduced demand for foreign oil and reduced imports, keeping the trade deficit from expanding.
Third, the federal and state minimum wage laws keeps millions of unskilled workers from finding jobs.
Fourth, the corporate income tax, as we have argued on this site, has negative economic consequences and discriminates against lower middle and working class taxpayers. It has reduced their income and the growth of their retirement accounts. It contributes to the growing inequality in the distribution of wealth.
Fifth, the growth of government receipts and expenditures as a percentage of GDP has been at the expense of private sector growth in expenditures. A very large proportion of federal government expenditures is unproductive and consists of transfer expenditures which are sometimes counter-productive, for example, those that create a disincentive to seek employment.
What then is the prospect for the economy in the short-run? The answer, it would appear, is continued slow growth, with few benefits to the lower middle class and working class.
And what is the prospect for the economy in the long-run? Without a reversal of government anti-growth policies, the economy is likely to undergo a severe economic crisis. An end to quantitative easing is likely to produce a collapse of asset prices including securities and real estate. The value of an asset is determined by capitalizing its prospective yield, the periodic income expected from its ownership. The annual yield divided by an appropriate interest rate, which takes into account risk and other factors, determines its market value. At the low interest rates currently determined by federal reserve policy, the stocks on the principal exchanges are selling on the average at over fifteen times expected annual earnings. Suppose the average rate used in determining asset values is currently 5%. A rise in the rate after abandoning quantitative easing to 10% would reduce asset values by one-half. Taking into account the adverse expectations this fall in asset prices is likely to cause, the fall in asset prices could be much more. So the possibility, in this bad scenario is a deep recession or depression.
To avoid or even ameliorate this result, we would have to take such action as the variable single country tariff we advocate in our recent book, Balanced Trade, to balance our foreign trade, abolish the corporate income tax and tax corporate earnings as personal income as we do with partnership earnings, eliminate some departments of government and reduce government expenditures and taxes, abolish the minimum wage, and change the nature of transfer payments to eliminate the disincentives to work, and hope for the best, that the policies work. What is the likelihood of Congress and the President of adopting these policies? Well, miracles do happen. Another possibility is that the Fed will ease even more to prevent such an economic collapse eventually bringing about a hyper-inflation German-style. The most likely government response under the Obama administration is an attempt to impose a controlled economy, national socialist style. That would require support of the armed forces which is extremely unlikely.
Comment by Ron, 3/24/2015:
I like your professional opinions and you guys are spot on.. It is very comforting to read your articles and to know that there really are some sane people in our country..
Comment by John R, 3/27/2015:
It is also important for everybody to understand that investment startup capital for small business is almost non-existant. When all the company's manufacturing costs are financed, the generated receivable are 100% financed, a $6,000,000 monthly backlog for orders can be proven, the compant can't even raise $300K in additional capital in any form to finish our project. The market that the company is positioned to penetrate is $53 Billion. We have a premium product (where none exists) that will penetrate this market and add 4% - 6% to that segment. Thank you Mr Government...
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