You broke it ... now fixit ...the economy stupid

I listened with only mild interest as the announcers on MSNBC proclaimed it a "perfect storm". The culmination of the bursting housing bubble, panic in the financial markets, layoffs, unemployment….All propelling Barack Obama’s poll numbers to higher levels. It is sad that we have come to the point of manipulating our economy for political gain, but it is a repeatable and durable pattern.

Bill Clinton rode to victory on “it’s the economy stupid”; just after defense contracts were canceled in every major state, driving up unemployment (the so called peace dividend).

Turn about is fair play; so George Bush brought Dick Cheney and big oil into the fray to eek out a victory over Al Gore amid fears of economic collapse due to sky rocketing oil and gasoline prices.

2008 and the perfect storm is caused by changing the asset ratios for the primary and secondary mortgage markets, and an FHA incentive program that created 2.3 million untenable mortgages.

An entirely new class of home buyer is born. In San Diego, they call them leavers. They moved up, saving hundreds of thousands of dollars on their dream house. They will get a ding on their credit when their old property (now hopelessly under water) is foreclosed on. Whatever…

Now we have total economic collapse. We have “leavers” in the housing industry and we have “leavers” in the financial markets. The new administration is running some really left wing policies up the flag poll. The investment community is voting with its feet. They too are “leavers”. Leaving before the promised increase in taxes takes effect. Leaving before 401K nationalization…Leaving before spreading the wealth…

Many will say that this has been in the works for decades. That is true. We have been limping along for almost 5 decades. This all started with the Great Society programs of Lyndon Johnson. As first sold to the American people, the welfare state and all of its programs were never going to exceed 3% of worker’s income. No problem, just throw the taxes on the worker. For expedience, congress modeled the new taxes after social security. Three percent was insignificant. No big deal.

Then time starts to roll forward and we are creating a huge job pump. All of our manufacturing and related blue and white collar jobs are being pumped off shore. Payroll and corporate matching taxes are as high as 50-60% of every labor dollar in some states. Even worse than the direct job loss is the recurring loss of retained earnings and capital formation which accompanies the manufacturing process.

Roll the clock forward, each and every year raises the pay roll tax rates or the taxation limits, exports more jobs and accentuates the difference between affluence and poverty. The manufacturing jobs which were the stepping stones from lower to middle class are gone.

Let me try a congressional sales pitch….
Americans we propose to you an economic model wherein we will ship our raw materials, intellectual property, design innovation and manufacturing facilities over seas. We will then buy back the consumer goods produced, relinquish all associated taxes/financial assets and will use credit cards to purchase the items via our markets. We will then float additional federal debt instruments to adjust for the balance of payments. This will cost us about 2 trillion dollars (give or take a trillion). Sign here…

Nuts?

We now find our selves at the intersection of a perfect storm and opportunity. When your barn finally burns down you have two choices: 1) rebuild it, 2) build a better barn.

Our objective must be to restore America as the preeminent industrial and financial super power.

Let’s establish our key metrics for success up front. By the year 2015, we will have generated 20,000,000 new manufacturing jobs; we will have a positive balance of trade; 80 percent of Americans will own their own homes; 80 percent of all goods purchased in our markets will be stamped “Made in USA”; 60 percent of all new manufacturing plants will be “green” and will run on electricity generated with clean energy sources. An additional 20,000,000 new jobs will be generated which are not manufacturing based.

(Although not covered as part of this solution, my other posts describe providing universal health care, etc after the first order problem of economic/tax reform is addressed. )

We have three significant problems to confront:
1) We must restore confidence in the housing market and home owner ship as the key ingredient to personal investment wealth.
2) We must remove government from the cost of goods sold equation for goods made in America
3) We most start the process for mass production of clean energy.

Problem 1 Solution:
Create a resolution trust corporation to manage (not own) foreclosed properties. Provide incentives to investors/home buyers to purchase these homes for the price of the mortgage. This will require buying the interest rate (discount points) down. This may require 3 or 4 percent mortgages to be offered as an incentive. This will preserve the current mortgage and allow the equity basis of the property to rise rapidly as the housing markets recover. This should be done immediately. This approach conserves investment and leverages the built in price (in)elasticity of capital assets.


Problem 2 Solution:
All government taxes(Fica, Suta, Futa, Medicare, Medicaid)/fees which impact the cost of goods sold shall be eliminated and replaced with a federal sales tax. Food/school supplies, etc will be exempted. This process is covered in detail in my blog on tax reform. The new sales tax will be phased in after the economic recovery is well underway. If we can rebuild Japan, Europe, Asia, Iraq… then we can damn straight rebuild Ohio, Michigan, Pennsylvania….Sales tax will only be phased in after the economic recovery is well underway.

Problem 3 Solution:
Start with emphasis on electricity as the standard power required for all mechanical devices. Auxiliary power can be supplied to such devices, with preference given to solar, natural gas, and then carbon fuels.

Start immediate transition to nuclear and clean coal electrical power generation.

GPC Passing Through