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Posts Tagged ‘economic growth’

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Just like former President Jimmy Carter, President Obama is doing his best to gift the White House to the Republicans through misguided economic and foreign policies. Nothing from his State of the Union speech signals substantive change for the country.

An economy can grow through either increased productivity or increased government spending fueled by borrowed money. Since 2007, productivity in the U.S. has been growing at half of its historical rate. That means the modest economic gains we’ve experienced were fueled largely by an unprecedented increase in Federal government borrowing and by the printing of money by the Federal Reserve. And the piper will have to be paid in 2016.

Since 2007, the Federal government debt has increased 110% to almost $19 trillion. The debt outstanding has soared from 63% of GDP to 105%. Annually, the Federal government is currently spending around $1 trillion more than it takes in. The U.S. now ranks 11th highest in government debt to output among all the nations in the world.

The fiscal gap, the difference between the present value of all the Federal government’s projected financial obligations and its future tax receipts, now totals $230 trillion…or $721,000 per citizen. The fiscal gap includes such unfunded future obligations as Social Security, Medicare, and the food stamp program (now the Supplementary Nutrition Assistance Program). The fiscal gap is twelve times the national debt and to close the gap we would have to have either a 60% increase in Federal taxes or a permanent 40% cut in transfer payments.
Major nations are now dis-investing in U.S. government debt. So how has the debt spending been sustained? The U.S. treasury securities held by the Federal Reserve have gone from $800 billion in 2007 to $2.5 trillion today. The Federal Reserve has been printing money faster than a third-world dictator.

Where is the economy today?

Inflation adjusted median household and family income is down at least 8% from 2007, and more for blacks and Latinos. The individual poverty rate has climbed by 20% and household income inequality is growing nearly 40% faster since 2007 then in the preceding 7 years.

Transfer payments such as Social Security, Medicaid, food stamps and other welfare benefits are the fastest growing component of personal income. Half of the gain in personal consumption expenditures since 2007 has been funded by deficit-financed transfer payments.
The growth rates in both real per capita personal income and real GDP have fallen more than one-third since 2007.

The stock market has peaked and cracks are appearing. The margin debt is at an all-time high despite a rock-bottom volume of trading. The Schilling PE ratio is nearly 70% above normal and rising interest rates will stop companies from buying back their stock to inflate its value.
Labor force participation is falling and the number of discouraged workers rising. Real hourly wages have been flat since 2007. Home ownership has dropped to its lowest rate since 1965 and rising mortgage rates will do little to change this.

Rising interest rates, falling exports due to a strong dollar, weakening markets for Federal debt, deflating of commodity markets, and a stock market decline add up to a shaky U.S. economy going into the November elections.

The President offers no substantive answers to these challenges.
Dr. John E. Stapleford
Director,   CEPA

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This guest post is provided by Jack Massih, CRI’s summer intern. This is his debut post.

Connecticut recently decided to walk off of a cliff with its tax hike on businesses, and unsurprisingly the affected companies are looking to move to friendlier climates. Governors from Florida, Texas, Georgia and even New York quickly jumped at the opportunity, calling CEO Jeffery Immelt to explain why their state is the best place for GE’s new home. Delaware, with its business friendly reputation, ostensibly seems a natural place for GE to plant its new headquarters, but Delaware has fallen behind other states in offering a pro-business atmosphere, and if GE does decide to move, it is a near certainty they will not relocate to Delaware. For a State that has historically acted to accommodate businesses, this is a troubling development, indicative of the disastrous path state leaders have charted for Delaware.

As the current General Assembly looks to raise the personal income tax on the state’s wealthier families and raise the gross receipts tax on businesses, it is easy to forget there was a time when Delaware actually cut taxes and streamlined regulations to attract businesses and their employees to the first state. Lawmakers and Governors worked hard to woo the banking industry into Wilmington, and they adroitly maneuvered to land AstraZenica’s corporate office. Such policies paid off massively for Delaware, and even though tax rates were decreased, revenues grew as people and businesses flocked to the first state. In recent years many other states have prospered thanks to this pro-growth model, and Delaware was the pioneer of such policy, but state lawmakers have forgone this proven path to success in favor of increased taxes and ever expanding regulations.

One merely needs to examine the wealth migration into and out of Delaware to understand that families and companies vote with their feet. Money is still coming into the state from surrounding states in the mid-Atlantic and northeast, but much of it is offset by wealth leaving the state for even sunnier financial climates in the south. Delaware seems to be nothing more than a layover on the flight of money out of the region, rather than a permanent destination. Smart decisions to cut taxes sensibly will entice that money to stay within the state, boosting revenues and infusing communities with cash, while reckless tax hikes and wanton government spending will permanently scare it away. Delaware is straddling the line between being a winning state or a losing state, and current decisions by the General Assembly threaten to push it into the losing camp.

The risks of Delaware’s loss in competitiveness go beyond families and businesses leaving the state, there is also the loss in growth due to companies choosing not to relocate or expand into Delaware. Not only does the state run the risk of turning away established businesses and residence, it stands to lose out on the next generation of AstraZenica’s and banking firms. As firms like General Electric looking to relocate pass over Delaware, the state will lose out on the important revenue growth these income-earners and employers will bring, and its options to meet its ever growing spending commitments will invariably shrink to increasing taxes and/or making drastic discretionary cuts to state services. Both unsavory options inevitably push people out of the state and leading to an increasingly vicious cycle of austerity as people abandon the state and the tax base decreases further.

In order to avert such a scenario state officials need to drop their current tax and spend predilections and carefully examine their options to make Delaware more competitive. The bad news is that in many respects Delaware is lagging behind many other states; its tax burden is one of the highest in the country, and it is one of the few states that levy both a corporate income tax and a gross receipts tax. However this also means Delaware’s lawmakers have many routes to take in order to make Delaware more attractive to businesses. What Delaware should do is examine the states that have lined up to court General Electric and attempt to recreate their environments. In many cases these states have no personal income tax or no corporate income tax, a lower overall tax burden, and sensible regulations that make it easier to conduct business.

Delaware was once an expert at making itself hospitable for businesses and workers and it must rediscover that talent or it will lose out to states that recognize the need for sensible regulations and tax policy. The beauty of the federal system is the competition it engenders between the many states, encouraging creativity and common sense while punishing irresponsibility and complacency. If Delaware wants to keep its reputation as the first state for business, it must abandon its current self-defeating policy of constantly raising taxes to meet swollen budgets, and it must instead make itself attractive to business through the pursuit of pro-growth policies that will allow the state to reap the advantages of a healthy economy. The sooner citizens come to this realization the sooner Delaware can work to restore its waning competitiveness.

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