Third Party & Independents Archives

2004 Election Issues (The Economy)

This article might be more aptly entitled ‘A Perfect Economic Storm in the making’. A quick look at the economy of the past and present paints a picture of the future for the economy in which 3 current dynamics shall converge sometime around 2015 to deal a devastating blow to the American economy. Nothing taking place at the levels of government today indicate that America is trying to alter the course of, or even prepare for, the storm ahead.

Past, present, and future.

PAST. President Reagan stimulated the economy in the 1980’s on the back of huge deficits and large national debt according to the Office of Management and Budget. (See Table 1 at end of article.) President G.H. Bush had to renege on his promise of “No New Taxes” in order to stem the mushrooming deficits and debt which portended stagflation if left unabated. During the Clinton years, the deficits were brought down to zero and even began producing a surplus, when global recessionary pressures such as high interest rates, speculative investments, massive accounting frauds, and the bust of the technology stock market bubble occurred near the end of President Clinton’s term.

President G.W. Bush entered office facing the exposure of the accounting frauds, a stock market already in decline, and a mild world wide recession nearing its end. He was later dealt a war on terrorism which he arguably could not avoid. President Bush however, unwisely expanded miltary activities into Iraq ballooning the defense budgets and creating a hugely expensive need for nation building at American expense that need not have been undertaken at all, or, at least could have been shared at some future time with the other nations of the world.

PRESENT. Today, the recession is well behind us. The Federal Reserve acted quickly enough and repeatedly enough in lowering interest rates to not only stall the recession, but, today its effects in conjunction with corporate downsizing and improved productivity gains have actually produced an economy which is growing at a modest rate of between 2.3 and 2.7 percent. Fourth quarter 2002 rate was 1.4%,first quarter 2003, was 2.4%, and third quarter results are expected to show even more improvement. The 2002 and 2003 growth rates were also modestly stimulated by the Republican tax cuts, though a measure of how much is yet to be determined. Economists generally agree that consumer demand and growth in exports are the key ingredients to any further growth in the economy from this point forward.

However, the end of the recession did not end the job losses. MoneyCNN.com reports:

Payrolls shrank by 93,000 jobs outside the farm sector, the Labor Department said, after falling a revised 49,000 jobs in July. Economists had expected payrolls to grow, according to a Reuters poll. The number of jobs lost was the biggest since 151,000 in March.

Without an end to payroll losses, the end of the recession is meaningless to the 8.79 Million unemployed workers in America, today. Note the following from the Center on Budget and Policy Priorities:

This kind of massive unemployment in America reflects missed opportunities by the Administration and Congress. Unless employment can be dramatically increased, the consumer's demand for goods and services will not be able to sustain the current economic growth rate, modest as it is.

Currently, the Homeland Defense agency and the first responders under its control are estimated to lack approximately 100 million dollars. There is debate over whether the budget already allocated the funds and the funds have not been received by the persons needing them, or the budget itself was under funded. It is clear however, that there are a myriad of needs for equipment and training that continue to go unfulfilled. Hiring by the Homeland Defense department is an opportunity to meet the needs of both the department and persons needing employment. An opportunity currently not availed.

America's infrastructure including roads, bridges, and drinking water systems are in desperate need of maintenance and upgrading, according to the American Society of Civil Engineers.The massive 220 billion dollar infusion to private industry for building up America's infrastructure in 1998 has not put a dent in the D+ rating of the nation's infrastructure as of 2001. America could certainly hire and train tens of thousands of workers to rebuild this infrastructure and get a valuable return on it's employment investment. Another opportunity for employment missed.

Qualified teachers and health care workers are in desperate demand all across the nation. Yet, as long as the bulk of health care worker wages are just above minimum wage and teachers make little more than that, it makes little sense for the unemployed to invest in college to retrain for these positions. The U.S. government could target and support private industry in hiring and training the newly unemployed for these positions. It also could provide tax incentives or tuition grants for the unemployed to retrain in these areas, making such a choice an economically viable one for the unemployed. However, this is yet another employment opportunity being ignored.

Manufacturing jobs lost in the last recession, by and large, will never return. The productivity gains enjoyed by American companies will insure this is so. American companies, while laying off workers have also been moving manufacturing overseas to lower wage markets, and investing in capital equipment and machinery to replace human workers.

Congress could increase the minimum wage to a living wage. This one act alone could result in placing hundreds of thousands of unemployed into needed teaching, medical, and homeland defense positions over the next few years. The time for such a move is when companies are profitable, the economy is growing, interest rates are low and inflation is very low as it is today. A phased in minimum wage increase of $2 per hour over 5 years could add the human capital resource to small business and large corporations without stifling growth and add the employment jolt the economy is going to need to maintain the rate of recovery experienced to date. But, this is another employment opportunity that will not even be debated, let alone passed by this Congress.

THE FUTURE   The movie, The Perfect Storm, was partly about an historical convergence of a hurricane, a cold front, and a low pressure center, if memory serves, which created a storm of such magnitude that it could not be entered and survived by normal vessels. Such a storm is growing on the economic front and the convergence of three main trends will occur in the next 8 to 12 years resulting in a wave of devastation across the American economy and possibly the world economy. The three trends are growing U.S. national debt, the retirement of the baby boom generation, and the incredible growth of foreign economies.

The United States National debt, now approaching 7 trillion dollars, will be in the 10 to 12 trillion dollar range in 10 to 12 years. Tax cuts in conjunction with deficit spending of nearly a half trillion dollars a year by the President and Congress are responsible for this debt. For a full discussion on this topic see another article posted here on Public Debt. It is enough to say for the moment that 10 to 12 trillion dollars in public debt places incredible pressure on interest rates. Lofty interest rates hurt citizens and American companies alike. Such interest rates raise the costs of production and the cost of living for all Americans and results in the most wasteful form of inflation. Inflated costs due to high interest rates are passed on to the consumer and lowers the buying power of the wage earner's dollar.

Already Americans are experiencing a lower quality of life than their parents enjoyed. A simple measure of this fact is based on 1 blue collar wage earner, 40 years ago, could make a sufficient income for a family of four and provide a middle class home, a car, home appliances, health insurance, and accrue a retirement package based on a pension plan and social security. To experience that same quality of life today requires 2 family wage earners to maintain the same standard at comparable wages.

The retirement of the baby boom generation is going to result in a demand upon the federal government for social security benefits that will be unprecedented. A smaller work force paying into the social security trust fund at the very time that a burgeoning retirement generation begins to draw benefits will inevitably cause the U.S. government to run deficits in order to meet the social security obligation. And it will need to run those deficits for approximately 18 to 24 years. If these social security deficits are added to an already established 10 to 12 trillion dollars of debt, interest rates will skyrocket. The effect may even cause concern over America's capacity to meet the debt obligation and cause foreign investors to discontinue investing in the American debt. This could result in a devastating blow to the American economy and its economic future.

Alternatively, the U.S. government may declare the social security system bankrupt and discontinue payments to retired citizens under social security. However, the result to the economy would not be lessened, since such a move would remove consumer income from millions of Americans and again deal a devastating blow to the economy by way of greatly reduced consumer demand and thus productivity of American business. This of course does not take into account the social cost of turning millions of retired citizens into paupers unable to afford health care, housing, or transportation.

The growth of foreign economies is the third condition for the perfect economic storm which appears at present to be inescapable. The Asian Pacific Rim countries including China, Japan, Taiwan, and Korea, is coming into economic growth that is unrivaled in these nations in the 20th century. While the United States economy is growing at less than 3 percent, the Chinese economy is growing at a year on year rate of 8.2%. An excellent source of current Chinese economic conditions can be found at the Embassy of Switzerland web site. Predictions in the past of China's economic growth have all been underestimated and China continues its growth through world wide recessions and internal social difficulties. In 1992 it was predicted China would become the world's leading economy by 2030.

This estimate too was underestimated. Previous analysis always included impediments to China's growth brought on by social upheaval. However, earlier this year, when protests broke out in Hong Kong regarding the installation of new security laws, analysts saw their predicted impediments coming to fruition. But, they were wrong. The Chinese government later this year announced they were rescinding all such new security laws in deference to the people of Hong Kong.

It is a mistake for analysts to assume the Chinese government is going to allow even its own political ideology to stand in the way of its economic growth and future status as economic super power in the world. There is a dream being transferred from generation to generation of politburo members. That dream is of supplanting the United States as the preeminent economic power in the world. China's fulfillment of that dream has continued to dash analyst's predictions of social tension blockading China's economic growth. Some analysts, learning from the mistakes of their predecessors, are now predicting China could rival the U.S. economically as soon as 2015 instead of 2030 or beyond. See table 2 at the end of this article for current statistics GDP and population for the U.S., Japan, and China.

However, China's dream only need be partially fulfilled in order to contribute to the economic perfect storm. With it's mobilization of rural citizens to urban environments and jobs, China is a powerhouse of relatively cheap labor. Its physical boundaries are home to vast natural resources. And China's manufacturing is already taking extremely large numbers of jobs from around the world for its own. While China is rapidly developing its industrial capacity, it is also investing in its technical development. This year China entered negotiations with Taiwan on trade agreements that will serve as a spring board for China's technological development. Far into the visible future, China will continue to grow as the United States struggles to keep its status quo.

The Perfect Economic Storm will be fully felt around 2015 in the United States. Global market share of industrial and technological output will have shifted from the U.S. to the Asian Pacific Rim. The government (i.e. the people) will be on the verge of bankruptcy with national debt equaling a full year of gross domestic product, or 10 to 12 trillion dollars. Taxes will have to skyrocket in order for the U.S. to maintain a valid investment rating for foreign investors. And Congress will have no choice but to drastically cut spending in areas previously never considered as discretionary, like Social Security, Medicare, and Medicaid, education and very possibly defense spending.

If the U.S. fails in either of these endeavors, its investment rating will plummet much as we have seen California's credit rating fall to levels requiring its promise to pay high interest rates on any future borrowing. A fall in America's investment rating will simply dig the economic hole deeper and make the financial and economic burden of today's school children an employee's nightmare as they have to shoulder high unemployment rates, steep payroll taxes, and lowered wages and purchasing power from their dollar. Crime will rise as it always does during hard economic times, and social services funded by federal, state, and local governments will be hard to find.

There are remedies to prevent this convergence. Taking back the tax cuts to the wealthiest Americans will help reduce the deficits over the next 10 years and thus lower the projected national debt. Regulating the pharmaceutical industries and gradually shifting medical research and development from the private sector to America's colleges and Universities will greatly reduce the costs of health care in years to come and generate royalty revenues that come back to fund the Universities and Colleges, thus lowering taxes on education costs on citizens.

Other options include: Creating a retirement incentive for retiring at age 70 will reduce the load on the Social Security system. Ceasing the development of star wars technology will save billions and halting any further research and development of advanced weapons of mass destruction will save even more. Backing off our preemptory strike policy will also save billions by making more conscionable for UN countries to share the cost of the war on terrorism, a war that will continue well past the economic perfect storm. Dropping all American trade barriers against other nations for one year and demanding that all other nations who wish to trade with the U.S. do the same within that one year period or lose trade with America for the following five years. This measure alone would stem the decades old trade deficits on America's accounting books and set an unprecedented level playing field for truly free trade in the world for decades to come.

None of this however, will take place unless the voters demand it at the polls in 2004. Since, that is unlikely, we should all begin to sock away now those resources we are going to need to weather the economic perfect storm that is looming on the horizon. And pray for those who have nothing to sock away, for they will be the first victims of the Perfect Economic Storm.

TABLE 1

Year        Deficit            Debt      Debt % of GDP

1979   -  $40,183   -     $828,923     34%

1980  -   $73,835   -     $908,503     34

1981  -   $78,976   -     $994,298     34

1982  - $127,989   -   $1,136,798     36

1983  - $207,818   -   $1,371,164     41

1984  - $185,388   -   $1,564,110     42

1985  - $212,334   -   $1,816,974     46

1986  - $221,245   -   $2,120,082     50

1987  - $149,769   -   $2,345,578     53

1988  - $155,187   -   $2,600,760     54

1989  - $152,481   -   $2,867,538     55

U.S. Office of Management and Budget, Historical Tables, annual.

Table 2

July 1 2002 GDP per capita est. and Population (source: CIA World Factbook)

U.S
GDP per capita $37,600
Pop. 290,342,554(July 2003 est.)
GDP 10,916,880,030,400

Japan
GDP per capita $30,000
Pop. 127,214,499 (July 2003 est.)
GDP 3,816,434,970,000

China
GDP per capita $4,400&
Pop. 1,286,975,468 (July 2003 est.)
GDP 5,662,692,059,200