I have been thinking of a good analysis for our economy. Imagine if you were told 2 years ago that you had cancer and needed emergency surgery to live. After the surgery the doctors told you they successfully removed the cancer, but there were several infections that will remain and you need to prepare for a long, slow recovery. I feel the same about the US economy. We are past the bad stuff, but recovery will take time.
One of the “band aids” that was put on the economic “wound” initially was the Obama Stimulus Program. The program was designed to help the economy by creating jobs, prolonging benefits to the unemployed and elderly, provide tax cuts and other stimulus thus kick-starting the economy into growth. But, like drinking a caffeine soda, once the buzz is over you feel drained. The plan had good short-term intentions, but no long-term infrastructure was created by the plan to sustain economic recovery. The plan was intended to maintain household cash flow in a dropping economy, allow consumers debt relief via loan modifications thus increasing savings rates. Now a year later most of the jobs created by the stimulus have been completed, benefits are near end, tax cuts have helped somewhat, but with less income being earned tax cuts will only survive the economy not revive the economy.
The main infection we are facing is the depleting revenue needed to fund the infrastructure of government. Municipalities, being one of the largest employers in the US, are reliant on taxpayer revenue. Property tax, sales tax, payroll tax, personal income tax, retirement tax are all in decline and infrastructure costs (roads, bridges, health care, wages) are on the rise . We have reached a tipping point where alarming cut backs in schools budgets, police force, fire departments, water districts, department of transportation are deteriorating the fabric that holds everything together. Municipalities are searching for alternative revenue sources and will begin to include emergency sales tax increases on November ballots across the country. This move by municipalities will drive the economy into further decline by taxing the heart of the economy, the consumer. What else can government do? Without much needed revenue cities budget deficits face the same bitter economic reality as businesses and individuals. Just such an event is happening with the city of Half Moon Bay, Ca. The city is “strongly recommending” that residents vote to approve a sales tax increase or the city will consider un-incorporating and handing the city of Half Moon Bay back to San Mateo County because they are insolvent. Events like this show the depth of the problem we all face.
What we have a year later is an abundance of pessimism. Yes we are saving more money per household, but spending less as well. Consumer confidence, though currently on the rise, is the life blood of the economic revival. With interest rates low and budget deficits high the government is running out of tools to fix the problem. Small business are the back bone of this great nation. Governments can stimulate small business growth through hiring incentives, revenue tax cuts, payroll tax cuts, temporarily lowering the minimum wage and creating easy qualifier business loan programs. These measures will increase hiring and begin to turn the wheel of economic recovery. With these measures in place our patient will then get of bed and regain the health and strength it once had.