December 24, 2010

Are We Pulling Out of The Recession?

"Jan Hatzius, the chief United States economist at Goldman Sachs, said the economy was likely to grow at an annualized rate of around 3 percent this quarter. Goldman projected last week that the growth rate would be 4 percent for most of 2011. Morgan Stanley, which raised its growth forecast for 2011 to 4 percent, is even more optimistic, forecasting a rate of 4.5 percent this quarter" New York Times 12/24/10
Is there really a Santa? Did he really deliver a sleigh full of merriment and optimism? Or were the reporters at the New York Times and several economists across the country taking part in too much spiked eggnog?
"An economist's guess is liable to be as good as anybody else's." Will Rogers
The tax cuts to the wealthy will not do anything to spur the economy, however it will exacerbate the huge federal deficit and reinforce the worlds perception that we do not have the fortitude to make the hard decisions necessary to get our fiscal house in order.

The tax cuts to the middle class will help; however not as much as is hoped. Millions of households are still upside down relative to the equity in their homes. This is not going to change overnight. We Americans in the past tended to think of the equity in our homes as a major part of our nest egg for the future to cover costs such as retirement and paying for the education of our children. This is going to take time to heal. As a result, much of the savings from the tax cuts will not be spent, but instead will be saved. This is the right thing to do.

Indeed the tax cuts to the working class will be mostly spent and this indeed will increase demand and that is what is needed to create jobs. The bad news is this will not happen as powerfully as it would in the past. Seventy percent of our economy is driven by the consumer. These days when the consumer spends, much of what is purchased is on goods manufactured oversees.

Thirty years ago when you went to the store you were buying something built in America. A major portion of the price you paid to purchase the product was used to pay the wages of not only the workers of the retailer, but also the wages of workers at the manufacturer and the manufacturer's suppliers. As a result, every dollar spent by the consumer was recycled within the domestic economy to other consumers working for the manufactures and suppliers working to produce the product you purchased.

In addition, the consumer is not going back to his borrowing and spending habits of yesteryear. He is going to be more frugal than he was in the past. He needs to rebuild his balance sheet, just as our government needs to do. We need to get our deficit in order.

By the way, rebuilding our infrastructure including roads, airports, rail, internet and schools does not damage the balance sheet of our governments. These are not expenses, but rather assets that will allow us to better compete in the future. If these projects were built for private companies, they would not be looked at as expenditures. The accounting rules for government are different for private companies. This is where money needs to be spent; on investment, not consumption.

The troubled economy still needs more time to heal. Don't get too hungover on the eggnog.

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