United States Current Economic Crisis: Solutions

| by Shehani A. Wimalawansa and Sunil J. Wimalawansa

(Continuation from the previous article, “Causes for the deepening United States economic crisis”)

The key to recovery is robust growth and reducing unemployment:

( June 22, 2013, New York City, Sri Lanka Guardian) Growth cures debt, as observed in the late 1990s. With robust economic growth, there is less unemployment, more collections from income taxes, and less money flow out from the government, leading to a rapid decrease of the debt ratio. It is necessary to reduce taxes in order to stimulate the economy, restore consumer and investor confidence, and encourage industries to generate more jobs.

Over the past few years, millions of US manufacturing and professional service industry jobs, such as software engineering have been outsourced to offshore locales. Corporate CEOs who sent American jobs offshore were rewarded with millions of dollars in bonuses. This was repeated when the failing banks and companies were rescued by government bailouts using taxpayers’ money. Sending jobs offshore led to further loss of tax revenues. In addition, the high unemployment rate, especially among recent graduates, despite potential economic recovery, further discourages the younger generation from entering and enhancing their higher education. Consequently, millions of jobs vanished, increasing poverty, widening the gap between the rich and the poor, and shrinking the vigorous American middle class who contribute much to the economy.

What needs to be done?
Stimulus packages assist only certain sectors of industries and groups of people, but payroll tax reductions benefits everyone across the country. Across the board, a 2% payroll tax reduction would stimulate spending and boost the economy―i.e., a $1,000 extra take-home pay for someone earning $50,000 a year. Instead of barren stimulus spending (including federal stimulus research grants), a payroll tax reduction that benefits everyone should be implemented. However, it is expected that 2014 will begin with several forms of tax increases. These include, the payroll tax increasing to 6.2% for those with income up to $113,700, a reversal of the Bush tax cuts for individuals making more than $400,000 and couples making over $450,000, (entailing increasing the top tax rate from 35% to 39.5%) and an increase in tax on investment incomes, from 15% to 23.8%. In addition, a 27% cut in Medicare payments to physicians that was postponed in Mach 2013 will resurface in 2014. This would decrease physician participation in Medicare programs nationwide and thus, further hinder access to healthcare for millions of vulnerable people. In an era just immerging out of a deep recession, tax hikes, flattening of the job market, and actions that lead to further decreases in access to healthcare, burdening the most vulnerable, are unwarranted. We need prompt and thoughtful actions to prevent these negative events.

Both presidential candidates, prior to the November 2012 election, were talking about creating millions of jobs each quarter for the next few years. However, after the election, hardly anyone is talking about the real issue of job creation. The Unites States needs approximately 200,000 new jobs each month just to employ new high school and college graduates. However, we have been behind this target, every month. The focus shifted from unemployment to the Fiscal Cliff (automatic spending cuts), debt ratio, and the budget deficit; we have clearly lost our focus. Furthermore, balancing a trillion dollar budget deficit by austerity measures—cutting expenses―and-printing money [quantitative easing; QE (for the nth time)] are not real solutions for the current US financial crisis. What is most important is to facilitate robust growth to prevent our nation from proceeding to yet another recession, possibly even dragging our friendly and indispensable trading partners down with us.

The proposed tax increases will not cure the debt:
The proposed tax increase in 2013/14 would hardly touch the 1.4 trillion dollar expected deficit this year. Moreover, increasing taxes for businesses would further decrease investor confidence, purchasing power, decisions to spend, tangible growth, and the hiring of new employees. This would only enhance more layoffs and fuel a negative growth cycle. While the government cannot generate adequate jobs, the private sector can. However, private hiring will not increase significantly until investor and corporate confidence is restored. With the rapid creation of wealth and consequently, generation of new jobs by the private sector, tax revenues would markedly increase and the budget deficit would decrease. Rather than increasing taxes, printing and/or borrowing money, the focus should be on creating jobs.

During the first quarter of 2013, there was a transient reduction of the budget deficit. This is in part due to the higher rate of selling and tax filling for 2012 in anticipation of the pending tax increases in 2013/14 and one-time Fannie-Mae adjustment. However, there are no signs to suggest that this is a continuous process that would decrease the budget deficit. The situation regarding the higher than acceptable unemployment rate, remains the same. The participation rate has fallen fractionally from 63.4% to 63.3% in May, but is still at the 1979 level. Baby-boomers are passing the retirement age and thus, falling off the unemployment radar, while more newcomers are joining. The biggest hiring continues to be in the lower-wage sectors such as leisure, hospitality, and retail. Moreover, most of these jobs are in fact temporary jobs created by firms to avoid potential penalties under the Obama-care “employee insurance” coverage costs.

Currently, the total U.S. non-farm payroll workforce is approximately 2.7 million―one of the highest temporary employments in history―amounting to 2.0% of the total. Yet, there is no significant opening of doors for the experience and qualification-appropriate white-collar sectors, and we are still 7.6 million jobs behind. While the construction sector is adding some jobs, manufacturing continues to shed jobs. The question is whether this trend is enough for the Federal Reserve to consider slowing down the QE and continuing purchasing of assets―monetization.

The U.S. employment-to-population ratio continues to be around 58.6%. The proposed increase in taxes would lead to further losses of industry and investor confidence—those who create jobs. This loss of confidence is confounded by the continuing severe weather-related issues experienced in 2013, including in the Northeast and elsewhere in the country, together with lower prices in the housing market and consumable sales caused by the large number of people affected by the massive storms and the nationwide high rate of unemployment.

Urgent actions are needed:
The U.S. Federal Reserve has resorted to a fundamental, uncharted spree of printing money (QE) that is not backed by gold (in fact, since 1977). Consequently, instead of spurring banks to lend, and corporations and consumers to spend, massive and continuing monetization has created a classic liquidity trap in the valley of Wall Street, where it is likely to inflate yet another unsustainable bubble in early 2014. To have a sustainable recovery, this has to be addressed and corrected.

In the absence of rapid growth or a miraculous new breakthrough in technological innovation in the near future, it is impossible to balance the United States budget without cutting expenditures. Before the elections, doing so would have been political suicide for the party in power; therefore, understandably, politicians were reluctant to tackle this issue.

Moreover, we are in the midst of the worst recession since the Great Depression (but, hopefully, emerging from it), and drastic cuts in spending would further decrease consumer confidence, increase unemployment, and hurt the majority of people, particularly the poor, elderly and the vulnerable. The real or perceived tax increases would further shatter consumer confidence, hinder investments and slow-down the market, and fuel the unemployment. Buying toxic debt during the subprime crisis, enhanced extraordinary monetization, the Federal Reserve’s bond-buy back and asset purchasing schemes, quantitative easing, duplicating governmental and departmental redundancies, raising the debt-ceiling, and spreading money into thin sectors in the name of stimuli, will not accelerate growth. These are not real solutions for the current economic crisis in the United States.

United States has an obligation to overcome the financial crisis:
Many countries in the world depend on the United States for their exports, whereas others are creditors. Their economies and livelihoods are dependent on the prosperity of the United States. Therefore, the US government has a moral obligation to get the economy back on track as quickly as possible; this would certainly help to ease the global economic crisis. 

The U.S. needs to protect the safe haven of the U.S.-dollar to prevent yet another global recession and to continue attracting global investments. In addition, we need to re-establish the broken “firewalls” between the Treasury and the Federal Reserve, as well as the executive/legislative and the judiciary branches of the government on Capitol Hill. Politicians should make the right decisions not for political reasons, but for the betterment of the country.

The United States needs new sound fiscal policies that guarantee its status as a financial safe haven, with forward-looking tax and immigration reforms, judicious spending policies, the eradication of injustice and inequalities, and the repeal of the Sustainable Growth Rate formula. It is time for the U.S. healthcare system, the states, and the federal government to cut the tremendous wastages and move towards lean operations.

The country is ensnared in a vicious cycle of debt and a liquidity-trap, and yet collectively politicians have not taken firm actions needed for the country to come out of this negative financial cycle. Currently, the most important issue is to focus on how to engender a stronger recovery, economic growth, and the creation of jobs. A stronger and more rapid recovery will automatically lead to improvements in the debt ratio and eliminate fiscal crisis. We need political wisdom, national political unity, and prompt, substantial, and definitive actions.

(An abstract of this article and the “Causes for the U.S. financial crisis” were published in the Guardian:

[Sunil J. Wimalawansa, MD, PhD, MBA; suniljw@hotmail.com;
Shehani A. Wimalawansa, Rutgers Business School (undergraduate), New Brunswick, NJ, U.S.A.]