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Exploring Viable Policy Solutions to Fight Economic Headwinds


These actions could restore some business confidence, make a dent in unemployment, and garner a positive reaction from equity investors.


Editor's Note: This article was written by Robert Barone, head of Ancora West. Mr. Barone currently serves on AAA's Finance and Investment Committee which oversees $5 billion of investible assets.

I've written many blogs about the faltering US economy and the continuing headwinds that will prevail for the next few years. Those headwinds include:

  • A consumer balance sheet loaded with debt with flat to falling income;

  • The consumer's major asset, the home, continues to fall in value with approximately 25% of homeowners with mortgages now underwater;

  • A banking system whose lenders to small business, community banks, are constrained by lack of capital and which are under attack by their government regulators insuring a continuing small-business credit crunch;

  • The support of the "Too Big to Fail" with cheap capital injections, a bonanza in the arbitrage of borrowing at 0% and purchasing Treasury notes at a 3.00 percentage point profit margin, while shrinking their lending each and every month. Meanwhile, they've paid themselves outrageous bonuses while Main Street remains mired in depression;

  • Federal government economic policies which make the future so uncertain that businesses are reluctant to hire, including:

    • The adoption of health-care reform against the will of the vast majority of the population with the unintended consequence of a significant increase in the cost of health care and, perhaps, a much poorer delivery system;

    • Interference in and control of private-sector business including:

      • The government takeover of GM, forcing the firing of its CEO, and protecting 100% of Chrysler's union pensions at the expense of the bondholders;

      • The passing of a financial reform bill that completely ignored the institutions (Federal National Mortgage Association and Federal Home Loan Mortgage Corp) and Congressional policies responsible for the sub-prime housing bubble, and the establishment of a new government bureaucracy which will, no doubt, make it much more difficult and costly for consumers and businesses to access credit;

      • The use by President Obama of presidential fiat, against the advice of his own panel of experts, to stop all oil drilling in the Gulf of Mexico which, in my view, will have much more devastating and lasting economic impacts on the region than the oil spill itself;

    • The continuing threat to economic growth of cap-and-trade legislation which has the potential to significantly increase the price of energy.

Americans have now begun to realize that unemployment will be a significant issue for many years. At the same time, they see that the folks in Washington either won't or can't figure out how to really stimulate private-sector job growth. The US economy cannot expand, and jobs won't be created until investors feel it is safe to invest and businesses feel confident they know the rules of the game and that those rules won't soon change.

So let's look at what policy changes are possible to eliminate the uncertainties and bring confidence back. This will encourage business to take the risk of expansion and result in job creation. There are seven such policy changes listed below, three of which I'll comment on extensively. As each of these issues are addressed, if, indeed, there's the political will to do so, business confidence will improve and there will be a concomitant improvement in the equity markets:

1. The Bush Tax Cuts: It's not a well-publicized fact that the net effect of the Bush tax cuts was actually an increase in the marginal tax rates for the wealthy from what they'd paid previously. Yes, the marginal tax rates in the table were reduced, but incomes expanded such that the "rich" (the top 1% of taxpayers) moved up to higher table brackets and actually ended up paying a higher proportion of their income in taxes than they had during the Clinton years (38% versus 33%) (hat tip: Bill Frezza). The real issue -- which has always been obscured by the way the arguments are presented -- isn't that there isn't enough tax revenue; it's the explosion in government spending. Since 1950, federal tax revenues have fluctuated between 16% and 19% of GDP. And, during the Clinton years, we actually ran a substantial surplus. Balancing of the federal budget is more about spending control than about lack of revenue. It's just easier for the Congress and the politicians to pretend it's a revenue issue and to obscure the real issue by concentrating on the tax issue.

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