Fixing the Economy

By On September 30, 2011 · 2 Comments

Over the past few years, the US econ­omy has taken a severe beat­ing leav­ing mil­lions of Amer­i­cans strug­gling to find employ­ment and forc­ing oth­ers to be cau­tious in their spend­ing habits. As a result of this cli­mate of eco­nomic uncer­tainty, peo­ple have been quick to point their fin­gers at what they per­ceive as the source of their prob­lems but very few are offer­ing up effec­tive and valid solu­tions to help solve this prob­lem. In order to wrap our arms around this major issue, we need to first diag­nose the issues that cre­ated this prob­lem in the first place in order for it to not hap­pen again.

Cat­a­lysts and Causes

  1. Oil price spikes in 2008. With prices surg­ing over $100 US/barrel, this sent US con­sumers and busi­nesses into a state of shock. Peo­ple almost dou­bled their expenses at the pump — fill­ing up a SUV that would have nor­mally cost around $40, sud­denly pushed $80. While $40 may not seem like much to some peo­ple, for oth­ers that added up to an extra $160/month which would cut into their gro­ceries, mort­gages, sav­ings, and other expen­di­tures. To add to this, the price of trans­port­ing goods and resources increased which fur­ther impacted con­sumers. Many politi­cians argue that the wars in the Mid­dle East as well as some of their gov­ern­ments were to blame for the sharp rise in oil prices, how­ever I firmly believe that the issue had mostly to do with the com­modi­ties mar­ket spin­ning out of con­trol and unreg­u­lated. At the time, I was actively involved in day-trading ETF com­modi­ties and wit­nessed the effects first-hand dur­ing my trad­ing ses­sions. In my opin­ion, this is the cat­a­lyst which started the cur­rent down­ward spiral.
  2. Inten­tional loop-hole in mid­size vehi­cle pur­chases (tax write-offs) under the Bush admin­is­tra­tion which caused a rush of busi­ness own­ers to pur­chase large vehi­cles, which they in turn ended up pay­ing at the pump dur­ing the oil price spikes of 2008. “Iron­i­cally”, both Pres­i­dent Bush and Vice Pres­i­dent Cheney (CEO & Chair­man of Hal­libur­ton) both had sig­nif­i­cant ties to the oil industry.
  3. Faulty under­writ­ing/preda­tory lend­ing of major mort­gage lenders. Sim­ply explained, the large lenders and banks in the United States let smaller lenders par­tially take over mort­gages on home­own­ers that were not credit wor­thy. When the home­own­ers couldn’t make pay­ments, smaller lenders got into finan­cial trou­ble. Some of the major lenders weath­ered the storm, but a lot of the smaller com­pa­nies went under.
  4. Faulty credit lead­ing to a wors­en­ing sit­u­a­tion. Part of the above issue, home­own­ers that did not have a solid track-record of credit were sold homes, then quite often found them­selves unable to pay their mortgages.
  5. Home value depre­ci­a­tion. People’s homes are worth less now as a result of the above. Peo­ple can’t refi­nance as a result, and hence they are spend­ing less money in the market.
  6. Bank lend­ing prac­tices. I work with a lot of major real estate devel­op­ers in my main line of busi­ness. One of the most com­mon com­plaints is that the banks will not lend out money unless a sig­nif­i­cant amount of cash is put down. They sim­ply don’t want to take risks in this econ­omy. As a result, these devel­op­ers are not devel­op­ing new prop­er­ties which in turn affects peo­ple in the con­struc­tion indus­try, retail­ers, etc.
  7. The cost of two sep­a­rate wars. I’m not here to argue the rea­sons for going to war or to debate their neces­sity, but I’m sim­ply point­ing out the tril­lions of dol­lars spent which have affected tax­pay­ers and other avenues of gov­ern­ment spending.
  8. The cost of Home­land Secu­rity, some­thing which even Con­gress is still debat­ing (somehow.)
  9. Large cor­po­rate tax breaks. The the­ory behind this is that if busi­ness own­ers are given sig­nif­i­cant tax breaks, that this would lead to employ­ment gains. Employ­ment sim­ply didn’t gain dur­ing the Bush admin­is­tra­tion, and a lot of major com­pa­nies con­tin­ued to off-shore their work and man­u­fac­tur­ing processes where labor is cheaper.
  10. Wealth­i­est Amer­i­can tax breaks. Some peo­ple argue that the wealth­i­est per­cent­age of Amer­i­cans pay pro­por­tion­ately smaller amounts of income towards taxes and that it’s unfair.
  11. Out­sourc­ing work and account­abil­ity. It’s very sim­ple math — it’s cheaper for com­pa­nies to send their work over­seas. Com­pared to 10 years ago, the Inter­net has now enabled us to do so more read­ily and eas­ily. A lot of the money that is being sent over­seas feeds other coun­tries economies, but does lit­tle to help our own. The money that is sent over­seas is spent over­seas and doesn’t return. We may in-turn receive cheaper goods, but since there’s less peo­ple employed in our own coun­try, very few peo­ple are left here that are capa­ble to buy the goods that are imported. Out­sourc­ing has affected numer­ous areas of cus­tomer ser­vice and man­u­fac­tur­ing and has lead to sig­nif­i­cant job losses in high-tech fields. The flow of work and money over­seas is largely unac­counted for.
In order to stop fur­ther ero­sion, we need to act imme­di­ately in tack­ling the issues listed above.

Solu­tions

  1. Com­modi­ties should be made unavail­able in ETFs (Exchange-Traded Funds.) Trad­ing com­modi­ties at one point required spe­cial licens­ing and fees to get into this area of trad­ing. ETFs allowed ordi­nary peo­ple to sud­denly enter the once priv­i­leged field of com­modi­ties, and basi­cally gam­ble with that por­tion of the mar­ket which has lead to instabilities.
  2. It’s just a bad idea all-around to give breaks to peo­ple and cor­po­ra­tions on vehi­cles which are largely inef­fi­cient finan­cially and envi­ron­men­tally unfriendly. It only ben­e­fits the peo­ple con­trol­ling the pumps and does more dam­age to the soci­ety as a whole. It was only a tem­po­rary solu­tion to a much larger prob­lem that ended up com­ing back for us. On the other hand, breaks should be given to those who pur­chase fuel-efficient vehi­cles. This actu­ally helps stim­u­late advance­ment in tech­nolo­gies as well as putting money back into people’s pocket-books (ver­sus just a few.)
  3. Credit-worthiness has to be highly reg­u­lated. You can’t expect large cor­po­ra­tions to reg­u­late them­selves, but legal­ized loan-sharking has to be mod­er­at­ing by an inde­pen­dent orga­ni­za­tion such as the government.
  4. Faulty credit is part of the above issue.
  5. Home val­ues will only increase if these other issues are addressed.
  6. Banks need to start assum­ing risks again. While no agency can enforce them to, they can be pro­vided with incen­tives to do so. I don’t like the idea of pro­vid­ing incen­tives, but rather address­ing the other solu­tions listed here first and this will even­tu­ally follow.
  7. One war in Iraq has largely ended dur­ing the Obama admin­is­tra­tion. This is a huge reduc­tion in gov­ern­ment expen­di­tures. If we could some­how reduce troops in Afghanistan, this would fur­ther stim­u­late our econ­omy. At the same time, we still need to be cau­tious and weigh that our home­land is secure.
  8. The costs of Home­land Secu­rity might be one area that we have to live with mov­ing for­ward. I think there’s valid issues con­cern­ing effi­ciency in Home­land Secu­rity which can and should be addressed. Being able to pull resources out of Afghanistan and Iraq should more than sup­port this agency.
  9. To be com­pletely hon­est, I think large cor­po­rate tax breaks is one of the smaller por­tions of the prob­lems at-hand. I think even if the rates were raised, that would help but it wouldn’t solve all of our cur­rent issues.
  10. While I think peo­ple can always con­tribute a larger share to soci­ety, I dis­agree with War­ren Buf­fett in that I think by rais­ing taxes across the wealth­i­est Amer­i­cans, it might help a lit­tle but it’s still not going to solve our cur­rent eco­nomic issues. Even among the wealth­i­est Amer­i­cans, I think an increase in taxes might only make a small dent. It’s more impor­tant to address some of these other issues first and foremost.
  11. I believe that the major­ity of our cur­rent issues stems from unreg­u­lated work, tech­nol­ogy, and money flow­ing over­seas. Unless a politi­cian or an indi­vid­ual has been directly involved in the process of out­sourc­ing, I think it’s hard to imag­ine the astro­nom­i­cal amount of money and work that is going towards other coun­tries cur­rently. Part of the issue is reg­u­la­tion and mon­i­tor­ing — there’s sim­ply lit­tle in place to see how finances are being trans­ferred. It’s not just large cor­po­ra­tions that are doing this, but rather mil­lions of indi­vid­u­als and small busi­nesses which are par­tic­i­pat­ing. I have spo­ken with fel­low artists, archi­tects, devel­op­ers, real estate agents, small game com­pa­nies, shoe man­u­fac­tur­ers, pro­gram­mers, print­ers, and pub­lish­ers — all of whom have sent work to other coun­tries recently in order to stay com­pet­i­tive here in the United States. It’s a really big prob­lem where the focus is less on qual­ity, and more on medi­oc­rity if it means sig­nif­i­cant sav­ings. For every $20,000 I send to another coun­try (which can be eas­ily done), that’s one per­son that could have been employed here within our own coun­try. Now mul­ti­ply my amount to mil­lions of small busi­ness own­ers and ever larger cor­po­ra­tions, and that is a big source of our finan­cial drain. I’ve even suf­fered job loss due to this. If the US gov­ern­ment can work out a sys­tem which pro­vides bet­ter account­abil­ity and out­sourc­ing mod­er­a­tion, I firmly believe that this would help solve a lot of our own cur­rent issues.
As some of you are aware, I’m not an econ­o­mist. I’m just a small busi­ness owner on the front lines of the hous­ing and con­struc­tion indus­try who hap­pens to know tech­nol­ogy fairly well. I have spo­ken with some of the wealth­i­est and most influ­en­tial peo­ple in this this coun­try on a fre­quent basis, and have come to my opin­ions in hav­ing many of these first-hand dis­cus­sions with other busi­ness owners. I don’t claim to know it all and per­haps I’m mis­in­formed on some of my views — I would like to be cor­rected when I’m wrong. An argu­ment in my favor is that even the econ­o­mists and politi­cians can’t even agree on how to solve these issues, oth­er­wise we would have already been see­ing a marked improve­ment in employ­ment. The only thing I can try to do is to pro­vide some con­struc­tive crit­i­cism by point­ing peo­ple in the right direc­tion and hope that this arti­cle sparks fur­ther dis­cus­sion. The issue at-hand is mul­ti­fac­eted — there’s no “one but­ton fix” or solu­tion to these eco­nomic issues. At the same time, we can’t always real­is­ti­cally expect some­thing to get bet­ter overnight — it gen­er­ally takes time. How­ever, these issues need to be addressed at some point or another oth­er­wise we risk a wors­en­ing or a repeat of this down the road.
 
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2 Responses to Fixing the Economy

  1. Jonathan Horvath says:
    October 2, 2011 at 10:38 pm

    I would dis­agree increas­ing taxes on the rich would not have much of an affect on the econ­omy. I believe the rich has lit­tle incen­tive to take risks under the cur­rent tax rates. Low risk invest­ment have very low tax rates. At a 15% tax rate for div­i­dends, the wealth live very well with their exist­ing cap­i­tal. Start increas­ing the taxes on div­i­dends and long term cap­i­tal gains, and peo­ple will need to find ways to make more money.

  2. cleo says:
    October 4, 2011 at 7:26 am

    First, let me start off by say­ing that I’m tak­ing a neu­tral polit­i­cal posi­tion — that is that I’m not lis­ten­ing to the polit­i­cal right or left, but rather com­ing to my own conclusions.

    So let’s say taxes are increased (via div­i­dends) on the small por­tion of the wealth­i­est Amer­i­cans — less than 1% of the pop­u­la­tion by some esti­mates and those are peo­ple that hold the major­ity of the wealth in this country.

    That’s not so much increas­ing “taxes on the rich”, but rather mak­ing changes to the way the IRS han­dles invest­ments. It ends up affect­ing every­one (not just the rich), and mostly those that can afford to invest. Per­haps I’m just play­ing with seman­tics at this point but it sounds a lot less like it’s tar­get­ing a spe­cific demo­graphic and that it’s more to do with the way the gov­ern­ment revises its tax code.

    But even if investors have to pay more in taxes, who does it really ben­e­fit? It puts more money into the gov­ern­ment which may in turn fund pub­lic works for all of us — roads, teach­ers, mil­i­tary spend­ing, etc. Chances are that the major­ity of the increase in tax rev­enue ends up going to pay down our debt with other coun­tries even­tu­ally (China in par­tic­u­lar — why is that in the first place?) The mid­dle class still won’t see a drop in their taxes.

    So even if taxes do increase for div­i­dends, I don’t see how that trans­lates into tak­ing more risks — I see it as peo­ple becom­ing even more cau­tious as to how they spend their money.

    My whole point of the arti­cle is that fix­ing our econ­omy has less to do with increas­ing taxes on a cer­tain seg­ment of soci­ety, but rather to address the under­ly­ing issues that caused this large dis­crep­ancy in the first place. Even if we do increase taxes on that seg­ment of the pop­u­la­tion, the under­ly­ing prob­lems that lead us into these con­di­tions will still exist unless we address that first and foremost.

    I’m not deny­ing that taxes are part of the prob­lem, but it’s not so sim­plis­tic as to plac­ing the blame on the wealth­i­est Amer­i­cans for tak­ing advan­tage of a sys­tem that’s bro­ken. It’s the sys­tem itself that is bro­ken and has gone largely ignored.

    I wouldn’t blame our eco­nomic con­di­tions solely on the wealth­i­est and gov­ern­ment cor­rup­tion which I think a lot of peo­ple tend to do. I’m sure it has some part to do with our prob­lems, but I think the source of the prob­lem lies in how the work in this coun­try is flow­ing over­seas to cheaper man­u­fac­tur­ing and pro­duc­tion. It will con­tinue until our gov­ern­ment puts some bet­ter con­trols into place.

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