I am not an economist. I would like to state that first and foremost. I’m more of a pragmatist.
There is certainly no doubt, despite public statements to the contrary, that the US economy is not doing well. Some will tell you we are at risk of recession, while others will tell you that it’s a certainty, and rate cuts are merely delaying the inevitable.
The stock market has been on a rollercoaster course since before the end of last year. Just last week, markets around the world were resting on the verge of collapse. In celebration of Martin Luther King Jr. Day, US markets were closed on Monday. That evening, while having dinner, I overheard a day trader at the bar quip, "If the markets were open today, it probably would have been an all new Black Monday." And he was right.
Early Tuesday morning, the Fed announced significant rate cuts (three-quarters of a percent on two major lending rates) in an effort to prevent the wholesale collapse of the NYSE. There is currently talk going on both in the Administration and in the House and Senate of an Economic Stimulus Package, hoping to be rolled out in the very near future. People on all sides are debating how to restore faith in the economy and increase consumer confidence. But will any idea currently being proposed really work?
The short answer is no.
Depending on which idea you embrace, the preferred solution is either a tax refund check, a deeper rate cut, or tax cuts for businesses. Sadly, all three of these supposed "solutions" would only lead to more economic disparity and hardship for the average individual.
President Bush has recommended a tax refund to be handed out widespread across the population, averaging $800 per individual or $1600 for a couple. This will not work for exactly the same misguided reason that people think it would work. A check in the mail for $800 will allow an individual to pay down some debt, and in rare cases, increase their personal savings. Taking into consideration the considerable credit card debt of the average American, $800 will not erase even the balance on a single card of many. Considering the housing crisis, the chance of $800 saving anyone’s mortgage is a joke. If that amount is even enough to cover one single payment, it will do nothing to help the individual whose mortgage is already in default due to an Adjustable Rate Mortgage, or the individual whose mortgage has already exceeded a reasonable amount of their monthly income. To the housing market, $800 is a band-aid on a sucking chest wound.
If we assume that a tax refund check would result in consumer spending, and ignore the issue of existing debt entirely, the situation becomes even less ideal. If everyone took their $800 check and went on a spending spree, business profits would rise briefly. That is the only positive result. As businesses move merchandise, they must also replace their inventory. Once those $800 checks have vanished, though, the business is in the same position as before, with inventory sitting on shelves, and no idea when the next spending spree will come.
Deeper cuts to lending rates, while they may stimulate markets, will do nothing to revive the economy for the individual. The folly of rate cuts is the idea that they will benefit the consumer, when in reality they benefit primarily the banks and junk-bond traders. Lowering lending rates does not equal a lower percentage rate that you or I would pay for credit cards, or mortgages, or car loans. Even if the associated lending rate was lowered for every possible lending option, existing loans would have to be refinanced, at additional cost to the individual. If you have been late on a single payment for your loan or mortgage, your credit rating has already declined, and the chances of you getting those "historically-low" rates are next to nothing.
Mark Travis, CEO of Intrepid Capital Funds, told CNNMoney today that tax cuts for businesses would help. "Travis said that when the government lowered the capital gains and dividends taxes in 2003 it sparked a nice run in stocks. ‘If they made those cuts permanent or lowered them even more, the market would take off like a house on fire.’"
A realistic look at the option of tax cuts for businesses only helps to show the difficulty our economy is facing, and also the disparity between the "Stock Market Economy" and the Individual Consumer Economy.
Businesses today are struggling because of a lack of consumer confidence. Fewer individuals are financially secure, resulting in a drastic decrease in purchasing power. Individuals are losing their jobs and being laid off not because of taxes that businesses pay, but because fewer goods and services are being purchased. Fewer houses are being built, leaving construction companies with less work, reducing the amount of lumber that is purchased, and decreasing the furnishings that would go into a new home. Cutting the taxes that the builders pay does not result in fewer people losing their jobs, just as cutting the taxes that Home Depot pays does not result in more houses being built. Business tax cuts will instead result in increased profits for these companies (though not an increase in jobs or employee compensation) and an increase in the stock market, which coincidentally also leads to increased profits for companies, with the windfall going to traders and fund managers.
Oil companies have been getting tax breaks for decades, yet individuals have seen a steady rise in gas and heating oil prices, while Exxon has seen record-breaking quarterly profits in the billions. A safe assumption would be that this is the norm among corporate leaders.
Cutting taxes for businesses will not result in a decrease in the price of their goods and services. Your cup of coffee will still cost five dollars, even if Starbucks pays less corporate taxes. The cost of gas will not decrease because the oil companies pay less taxes, and as long as gas prices are high, the trickle-down effect causes the trucking company to pay more to deliver items, or synthetics companies to pay more for raw materials. Cutting taxes for businesses does not mean you can get to work cheaper.
So then what is the solution? What would help the economy rebound from its current decline, restore consumer confidence, and steady the stock market? Well, sadly, nothing. There is no cure-all solution that will help to recover from years of complacence and financial blunders by individuals, businesses, and the government alike.
But we can start somewhere.
We can start by immediately repealing tax breaks for big oil companies. Tax breaks have traditionally been used to help an industry maintain viable in a changing market, to prevent companies from entering bankruptcy when their industry is threatened, or to compensate a company or industry for doing something that is beneficial to the overall local or national economy. If a large corporation has ever opened an office or manufacturing facility in your area, they have likely been given tax breaks by the local government, in exchange for the benefit to the local tax base in jobs or income. Tax breaks have been given to industries that have run into financial troubles, such as tax breaks and subsidies for airlines facing bankruptcy. A simple look at the public balance sheets of large oil companies clearly shows that these tax breaks are not necessary. Amid ballooning profits, oil companies are still getting tax breaks, despite increased overall fuel costs for the consumer.
Enact or adhere to laws and constraints governing corporate profits to prevent detriment to the economy. Price fixing and gouging laws already exist on the books, but the conditions to which penalties can be levied are so incredibly complicated and convoluted that they become essentially null and void. In many states, price gouging can only be prosecuted when there is a declared State of Emergency. Again I will use oil companies as an example, because they have continually adhered to a publicly-damaging corporate policy. Gas prices change daily, and have increased considerably over the past few years, actually outpacing the standard rate of inflation. It is often blamed on OPEC, but this is a false enemy. In nearly every industry, the cost of raw materials has increased. Synthetics companies pay more for petroleum, just as oil companies do, but rather than increasing prices at the drop of a hat, they are forced to absorb the difference. The bottle of soda that cost $1.49 last year still costs $1.49 this year, despite the cost of making the bottle itself rising with petroleum costs. The McDonald’s dollar menu still has items that cost a dollar, despite the rising cost of transporting that food to the individual restaurants. PepsiCo and McDonald’s have not been posting record profits, because they have been forced to absorb rising costs. Because soda and burgers are not a necessity themselves (I know many people who are vegetarians, or that don’t drink soda), consumers can go elsewhere. Despite there being options for purchasing fuel, there is no incentive for oil companies to reduce profits in order to provide a more affordable product.
Require corporations to adhere to some manner of corporate responsibility. There is absolutely no justification in a CEO receiving a $112M "Golden Parachute" for driving a corporation into failure, as is about to occur with the outgoing CEO of Countrywide Mortgage. We sit back and complain when a CEO gets a massive outgoing compensation package, while the corporation itself goes through widespread layoffs. While employees lose their jobs and corporate executives reap massive windfalls, we watch patiently as Congress investigates the use of steroids and human growth hormone in Major League Baseball.
And lastly, raise taxes. There is a large disparity between tax brackets, and the result is a continued increase in both the wealth and poverty of individuals. There have been suggestions to get rid of income tax, and instead increase taxes on goods and services, but that will do little to change the overwhelming gap between rich and poor (in reality, it would likely impact lower income individuals significantly). If a consumption-based tax were enacted, an individual looking to buy a million-dollar boat would have to pay a large tax, and this is the example that supporters would like you to focus on. However, they would pay the same amount for basic goods and services, from power bills to toilet paper. Few people will ever buy more than one million-dollar boat in a three year span of time, but everyone will pay their power bill and (hopefully) buy toilet paper in those same three years. This tax idea only shows a benefit on big-ticket "luxury" items, but negatively impacts basic consumer purchases. And because I think it bears mentioning, celebrities are always seen with new cellular phones, or new designer clothes, but they are given to them. Star athletes or musicians do not always pay for that new Bentley they are seen driving.
Raise taxes on the people who can afford it the most. There is absolutely no reason an individual making more than a million dollars a year should pay a lower tax percentage than the individual making $20,000. There is certainly no reason that an investment funds manager making nearly a billion dollars should pay a lower percentage than the school teacher making one forty-thousandth of that amount. Is market speculation more beneficial to humankind than teaching basic skills to future investment funds managers?
Only one of my ideas will result in an increase in consumer confidence immediately, and that will also come with a reduction in the cost of fuel for individuals and companies alike. When an individual can drive away from a gas station with more money in their pocket, that is money that can be spent on other goods and services. But the other ideas will result in a sustainable economy for years to come. I would welcome any dispute on these theories, as I know that none of them are likely to be proven ineffective. While the economy does need a rapid solution, the only way to maintain future economic stability is to enact real, effective solutions that are more than just a band-aid to get us through the current quarter.
(this is my first DKos diary, so if I have done anything in error, please let me know)