Economic Growth

What kind of economic growth do we have? What kind do we want? Ask these two questions of economists and you will get very interesting answers. Ask this of senators and congressmen in DC and you will get a totally different viewpoint. Several of them in fact.

Here’s why. Economic growth, and the stimulation of growth in general, is done via tax policy and Federal Reserve interest rate manipulations. These are the two basic levers of the domestic economic growth machinery. They need to be manipulated if the economy isn't doing this for itself. However these actions must be made with care and serious calculations. 

Tax people more and you remove money from circulation. This moves stunts or dampens economic activity. This move generally is used to slow down a runaway economy and slow down or kill inflation. Cut taxes to do the opposite – that is, put more money in people’s pockets and they spend it thus increasing economic activity. Tax policy is complicated and affects many different consumer and investor behaviors. One size does not fit all circumstances.

Tax policy shifts are not the right lever to use if the economic circumstances don’t fit the need.

For example, current economic conditions do not show inflation. We have had an unusual period of stagnating prices, and lowering of prices in key markets. Thus, the issue of inflation was nearly considered a deflationary period. Thinking back on my 74-year life I don’t recall a general deflationary period in our economic history.

We have plenty of loose cash in our economy at this moment. Perhaps as much as 5 trillion dollars. This is cash corporations are sitting on wondering what to do with it. Lately, they have exercised stock buy backs and expensive mergers. The former forces current stock owners in a company to decide where they will next invest their new-found funds. They most likely will not spend it but plow it back into the investment market. No new jobs or corporate expansions will take place from their decisions.

If a merger is the result, the purchased company will likely be reorganized within 18 months and jobs will be trimmed. Negative investment will result and unemployment follows. The previous owners of the merged company will have a boat load of cash to disperse but most likely they will invest it in the market rather than starting a new company. Net result is no growth to the economy, and most likely some dampening of the economy.

Two or three trillion dollars belonging to American firms reside now in foreign lands. These funds remain in foreign territory because repatriating them to the US will cause large tax levies. Such funds remain overseas to be used in expansion of operations there owned by the US firms. Lowering the taxes on such funds might repatriate them to the US banking industry, but such funds will only add to the surplus of unused cash.

Surplus cash lying idle causes interest rates to decline or remain low. Such is the case currently and has been so for several years. Low demand for funds means low interest rates. Witness mortgage and auto loan rates. Also, witness low savings interest rates at banks (.2%) Not long ago saving accounts earned 3% to 6%. Certificates of Deposit often were 5% to 9%. Not so today.

Federal Reserve policies can be manipulated to affect higher or lower interest rates, but when they are currently so low, there is not much they can do to stimulate the economy.

The reality is no stimulation is needed at this time. Any stimulation will likely cause inflation, a condition where too many dollars are chasing too few goods; prices will rise. Period. That’s how it works.

Our economy is growing already. It does not need stimulation. The fact that various areas of economic activity are stagnating indicates something is wrong. Knowing what is wrong is of critical importance. Fixing the wrong thing will only make things worse.

Our economy has been wracked by heavy changes in technology, career shifts, and global competition. We need to digest the effects of technology and changing career patterns. Redirecting new vocations and absorbing these available workers into the economy will take a few years and a lot of training and education. That’s the investment we need to be making at this time. Not lowering taxes and making wealthy people wealthier.

Besides, lowering taxes is more likely to create inflation and debilitate both the wealthy and poor.

The American economy faces many opportunities and challenges. Responding to them with new investment is what’s needed to re-balance the economic engine.

Politicians do not understand this. They just want their constituents to see them as tax cutters. Little do they know how damaging such actions are at a time like the present.

December 4, 2017