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VIDEODeconstructing Deflation
Deflation from increased productivity is desirable, but deflation from a lack of pricing power and lower final demand is not.
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Even on the road (and maybe especially on the road, as I get more free time on airplanes) I keep up with my rather large reading habit. This week, the theme in various publications was the lack of available credit for small businesses, with plenty of anecdotal evidence. This goes along with the surveys by the National Federation of Independent Businesses, which continue to show a difficult credit market.
Businesses are being forced to scramble for needed investments, generally having to make do with cash flow and working out of profits. This is an interesting quandary for government policy makers, as 75% of the "rich" that will see the Bush tax cuts go away are small businesses.
There was a great graphic (that I now cannot find) showing that all net new jobs of the past two decades have come from small businesses and start-ups. And yet as of now, when structural employment is over 10% (if you count those who were considered to be in the work force just a few months ago), we want to reduce the availability of revenues to the very people we want to be hiring new workers, and who are cash-starved as it is.
It’s not just that taxes will go from 35% to just under 40%. It is the increase in Medicare taxes coming down the pike, too. We’re taking money from private hands, where it’s the potential to increase productivity, and putting it into government hands, where it will do nothing for growth of the economy. There’s no multiplier for government spending. And tax increases reduce potential GDP by a multiplier of at least one and maybe three, depending on which study you want to cite.
I understand that taxes have to go up. I get it. But we’d be better off having a discussion of where we want tax dollars to come from before we risk hurting an economy that will barely be growing at 2% in the fourth quarter, and maybe well below that. It’s the increase in taxes that has me concerned about a double-dip recession.
That being said, the announcement by several prominent Democratic senators that they think we should extend the Bush tax cuts is significant. As I said a few weeks ago, we shouldn’t experience a double-dip recession absent policy mistakes. A slow-growth world, yes. But an actual double dip is rare.
If Congress were to extend the Bush tax cuts for at least a year, until the presidential commission on taxes is done with its work and then have the debate, it would make me far more optimistic. And it would be quite bullish for stocks, I think. Businesses would know how to plan, at least, for a year, and the economy would be given more time to actually recover. I’m not ready to channel my inner Larry Kudlow, but from what we see this summer it would make me more optimistic and reduce the chances of a double-dip recession significantly.
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