[FloareTraurne]

Obama's burning challenge

The latest US jobs data, showing 533,000 payroll jobs lost in November, after 320,000 jobs lost in October and 403,000 in September, illustrate a situation that is much worse than was expected and represents wholesale capitulation. The threat of a widespread depression is now real and present.

The full weight of the banking crisis, the trade deficit with China and burdens imposed by high-priced imported oil are now bearing down on manufacturing, construction and the broader economy with unrelenting pressure.

Unemployment increased to 6.7% in November; however, factoring in discouraged workers, unemployment is closer to 8.7%. Add workers in part-time positions that cannot find full-time employment and the hidden unemployment rate is nearly 13% .

The economy has been slowing since December 2007. The real question is whether the economy is in a recession or depression?
Recessions are like stock market corrections - after a time, equity prices rebound without government intervention. Federal Reserve interest rate cuts and stimulus tax rebates and spending have shortened the lives and eased the impact of post-World War II recessions, but those policies did not end them. The economy self-corrected.

A depression is not self-correcting. Franklin D Roosevelt administration stimulus packages in the early 1930s - huge deficit spending - eased the pain but failed to end the Great Depression. Roosevelt's policies did not put the US economy on a sustainable growth path, because New Deal policies worsened structural problems that pulled the economy down in the first place. For example, the New Deal proliferated monopoly pricing, extended the life of undersized farms, raised structural savings rates, and created a system of home lending too dependent on federally sponsored banks.

The challenges facing president-elect Barack Obama could not be clearer. The current economic slowdown has two structural causes - bad management practices at the large money center banks and the huge foreign trade deficit.

To accomplish lasting prosperity, Obama will have to fix the banks and the trade deficit. He must ensure that the banks use the trillions of dollars in federal bailout assistance to renegotiate mortgages and make new loans to worthy homebuyers and businesses.

Obama must make certain that banks do not continue to squander federal largesse by padding executive bonuses, acquiring other banks and pursuing new high-return, high-risk lines of businesses in merger activity, carbon trading and complex derivatives. Industry leaders like Citigroup have announced plans to move in those directions. Many of these bankers enjoyed influence in and contributed generously to the Obama campaign. Now it remains to be seen if he can stand up to these same bankers and persuade or compel them to act responsibly.

In addition, Obama must address the huge cost of imported oil and the trade deficit with China, or any effort to resurrect the economy is doomed to create massive foreign borrowing, another round of excessive consumer borrowing, and a second banking crisis that the Treasury and Federal Reserve will not be able to reverse.

Ultimately, reducing the oil import bill will require higher mileage standards for automobiles and assistance to automakers to accelerate the build-out of alternative, high-mileage vehicles. Fixing trade with China will require a tax on dollar-yuan transactions if China continues to refuse to stop subsidizing dollar purchases of yuan to prop up its exports and shift Chinese unemployment to the US manufacturing sector.

Near term, a stimulus package focused on infrastructure is critical for resuscitating growth. The recent round of tax rebate checks ended up in savings accounts or were spent at the Wal-Mart on Chinese goods and did little to create jobs or accelerate growth, whereas projects to repair roads, rehabilitate schools and refurbish public buildings would create high-paying jobs at home and provide a legacy in capital improvements that assist growth now and in the future.

However, stimulus spending alone won't fix what's broke. It didn't end the Great Depression. Japan has had a succession of stimulus spending plans over the past two decades and they have failed to restore its economic dynamism. Similarly, Obama's proposed massive stimulus package alone won't fix the US economy. He must also reach into the management of the banks, and dramatically reduce US dependence on imported oil and the trade deficit with China. The alternative is economic stagnation or worse, a depression.

Wages and unemployment
In November, wages rose 7 cents per hour, or 0.4%. With labor markets weakening, pay raises will be more modest in the months ahead.

The unemployment rate was 6.7% in November, up from 6.5% in October. However, these numbers belie more fundamental weakness in the job market. Discouraged by a sluggish job market, many more adults are sitting on the sidelines, neither working nor looking for work, than when George W Bush took the helm. Factoring in discouraged workers who have left the workforce and those forced into part-time employment owing to the lack of full-time work, the unemployment rate is about 12.8%.

During the presidential campaign, declining real wages and fewer adults working gave Obama's proposals to redistribute income through the tax system a lot of traction. However, those policies will do little to correct the fundamental systemic problems that are destroying good jobs and squeezing middle-class families, even if they would make them feel better for a little while.

Going forward, solutions that create better jobs will require cutting the trade deficit by at least half to substantially boost domestic manufacturing, solving the problems of the large money center banks to get mortgage money flowing and housing construction going again, and energy policies that more aggressively develop alternative fuel sources, conserve oil, and open up new domestic fields for conventional oil and gas production. Reducing dependence on foreign oil requires doing all things environmentalists want us to do and all things environmentalists don't want us to do.

Politically correct promises to create millions of new jobs producing alternative fuels make effective presidential campaign slogans, but realistic policies for governing require aggressive development of more conventional oil and gas, as well as non-conventional energy sources, and efforts to improve the energy efficiency of personal transportation.

If the Democrats are not willing to drill for more oil offshore and take on the automobile industry's resistance to significantly higher mileage vehicles, the US economy will be even more indentured to Persian Gulf oil exporters at the end of Obama's first term than it is today.

Finally, diplomacy has failed to redress the currency issue with China. If Obama is not willing to take tough steps to redress the trade imbalance with China and reduce oil imports, together the Persian Gulf oil exporters and China's sovereign wealth funds may be able to buy the New York stock exchange eight years from now. Americans, outside those working for the New York banks that facilitate this sellout, will find their best futures waiting on tables for Middle East and Chinese tourists.

[FloareTraurne]

Continue .....

Manufacturing, construction and job quality
Going forward, the economy will add some jobs for college graduates with technical specialties in finance, healthcare, education and engineering. However, for high school graduates without specialized technical skills or training and for college graduates with only liberal arts diplomas, jobs offering good pay and benefits remain tough to find. For those workers, who compose about half the working population, the quality of jobs continues to spiral downward.

Historically, manufacturing and construction offered workers with only a high school education the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags.

Construction employment fell by 82,000 in November. This is a terrible indicator for future gross domestic product growth. Retailing shed 91,000 thousand jobs, and financial services lost 20,000 jobs.

Manufacturing has lost 85,000 jobs, and over the past 104 months manufacturing has shed more than 4 million jobs. The trade deficit with China and other Asia exporters are the major culprits.

The dollar is too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government intervenes in foreign exchange markets to suppress the value of the yuan to gain competitive advantages for Chinese exports, and the yuan sets the pattern for other Asian currencies. Similarly, Beijing subsidizes fuel prices and increasingly requires US manufacturers to make products in China to sell there.

Ending Chinese currency-market manipulation and other mercantilist practices are critical to reducing the non-oil US trade deficit and instigating a recovery in US employment in manufacturing and technology-intensive services that compete in trade. Neither President George W Bush nor congressional leaders like Charles Rangel and Chuck Schumer have been willing to seriously challenge China on this issue, and Senators John McCain and Obama appeared comfortable with continuing their approaches during the campaign.

Now Obama must alter his position and get behind a policy to reverse the trade imbalance with China - or preside over the wholesale destruction of many more US manufacturing jobs. These losses have little to do with free trade based on comparative advantage. Instead, they deprive Americans of jobs in industries where they are truly internationally competitive.

In the end, without assertive steps to fix trade with China, as well as fix the banks and curtail oil imports, the Bush years will seem like a walk through the park compared to the real income losses Americans will suffer during the Obama years.

Instead, were the trade deficit cut in half and the banks fixed, manufacturing would recoup at least 2 million jobs, and US growth would exceed 3.5% a year. Real wages and domestic savings would climb, and the federal government would receive more revenues to balance its budget or address other pressing domestic needs.

The choices for the new president are simple. It's either renaissance or decline. Fix the banks, trade with China and adopt a realistic energy policy or become America's Nero.

[FloareTraurne]

The main problem with the US - Negative Savings
How is Obama going to fund any welfare programs without raising taxes?

Simple. Print money.

[FloareTraurne]

Anyone who read this essay in 2004 will not be surprise with the events happening today

Benson's Economic & Market Trends
Money Created "Out of Thin Air"
July 30, 2004

We hope this brief essay stimulates your thoughts with respect to how money is created - a secret all investors should know.

Money is created in two ways: First, money creation comes from borrowing it and spending it. (Money is literally borrowed and spent into existence.) Second, it can simply be printed up "out of thin air" by a central bank. The U.S. economy and other modern economies have central banks and fiat currencies. Central banks have two major powers. They can 1) "peg" the nominal level of short-term interest rates, and 2) purchase assets such as government debt, with newly printed money. When the central bank pegs short-term interest rates at a low level, it greatly encourages corporate and individual borrowing and spending.

For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sector's new borrowing will not create enough new money to keep servicing the already massive level of old debt. Central banks will need to step up their efforts to "print money out of thin air". Central bank printing of new money is accomplished by purchasing government debt or other assets.

Clearly, there has been substantial money growth since 2000. Moreover, neither the crash of the NASDAQ stock market, or the last recession, has slowed down money growth. The fact that the Fed cut interest rates 13 times since 2000 - reducing them to a 46 year low - has a lot to do with the massive amount of borrowing that has taken place in the United States.

The amount of net borrowing in the United States is quite impressive, particularly when you consider the old economic model when borrowing was limited to simply recycling savings. In 2003, the savings rate was 2 percent of GDP, while net credit market borrowing was well in excess of 20 percent of GDP. There has been a whole lot of borrowing and spending of new money going on!

Certain asset classes, such as financial assets and housing, have benefited the most by this credit and money creation. For instance, because the mortgage market has been willing to finance any and all mortgages, the credit creation process has allowed both new mortgage debt and the ability to pay for higher housing prices. These higher housing prices have, in turn, allowed for the funding of larger mortgages. Money creation in the private sector tends to concentrate in certain asset classes that facilitate the creation of new credit. This new credit lends itself to new spending, leaving behind new money as the residual, and a growing mountain of debt. To say that this process has been left to run wild is an understatement.

Indeed, it's time to think "Bubble" in stocks, bonds and housing. A rational investor understanding the credit creation process would have played the resulting upward momentum in asset prices for all they were worth!

However, the world is changing. The central banks are already printing vast quantities of new money, making 2004 a "watershed" year. In the general price level, due to the creation of new money borrowed into existence, inflation is starting to leak through.

If one examines individual incomes and corporate cash flows, you will realize the U.S. economic system can not service the mountain of private debt that has already been created at higher nominal interest rates. This watershed year could turn into a cliff side waterfall unless money growth keeps increasing to encourage the growth in personal and corporate incomes. Inflation is needed to push up cash flows to service old debt.

Without inflation, there remains a massive risk of deflation. If old debt is paid down, or forgiven in bankruptcy, money that has been previously created will vanish from whence it came. If the money and debt goes, asset prices will crumble. Many intellectual writers have logically concluded that rising interest rates will cause a "deflationary debt collapse" as interest rates rise. Certainly, a rise in interest rates to more normal levels will be painful and will cause some financial distress. Moreover, a rise in interest rates tends to slow the private money creation process. So, some questions remain unanswered. Where will enough money come from to keep the U.S. economy liquid and solvent? Where will the massive amounts of new money come from to service the debt mountain?

Let's not forget that central banks can create new money with a few strokes at a computer keyboard to purchase whatever assets they wish. The Federal Reserve can create any volume of money it needs to keep the economy servicing both old and new debts. It seems virtually certain that the Fed, and other friendly central banks, will print as much new money as they need to because "inflation tomorrow is better than a collapse of the financial system today".

Since the U.S. Treasury is running a $450 Billion deficit and a 5 percent trade deficit, central banks have actually begun the "Great Money Printing". In the past 12 months, global central banks have created about $800 Billion worth of new money (as measured by the increase in world central bank reserves). This is what the Federal Reserve Governor, Ben S. Bernanke, lovingly calls "Helicopter Money".

Foreigners already hold almost 40 percent of marketable U.S. Treasury debt. The Asian central banks have increased their holdings of U.S. assets to about $1 Trillion. In the relay race of money creation, 2004 is the year when the baton of money creation has already been handed from the private sector to the world's central banks!

Wide open money spigots in the private economy have a habit of financing "asset price bubbles". Since the prices of bubble assets (stocks, bonds and housing) are not included in the price indexes that measure inflation, the inflationary consequences of new money growth can be ignored. As central banks inject money growth directly into their respective economies by buying assets such as United States treasury bonds with Helicopter Money, it is impossible to totally conceal the fact that there is more money chasing the same number of goods. Inflation happens!

The massive trade and budget deficits in our country have acted as an "excuse" for friendly foreign central banks to do much of the needed money printing that would normally be done by the Federal Reserve. Our trade deficit gives companies in foreign countries dollars in exchange for their exports. Our treasury deficit gives foreigners the opportunity to buy our U.S. treasury debt with the dollars. Any foreign central bank can then swap their local currency with companies holding dollars and buy U.S. treasury debt! It's all so simple! New money has been created, just not in our country!

For instance, the Central Bank of China is creating new money by buying U.S. treasuries with our trade deficit. This has helped to drive up their domestic inflation rate to 5 percent a year!

Until just recently, even the Japanese have been suffering from mild deflation and may not have the economic capacity to buy unlimited quantities of our treasuries. Japan is already flooding their economy with fresh Yen out of thin air, as they finance their own government deficit. Japan is currently running a 7-8 percent fiscal deficit and their savings rate has been dropping. Japan's national debt is 140% of GDP and is rising rapidly. The Japanese bond market faces a serious risk of price collapse as their interest rates start to rise. Therefore, Japan can not be counted on to finance both their government deficit and our deficit for much longer.

Very soon it will be incumbent on our Federal Reserve to crank up the domestic U.S. printing press. It is one thing when your neighbor's central bank floods their country with newly printed money buying U.S. Treasury debt. It is quite another when the Federal Reserve flood's America with Helicopter Money by buying massive amounts of U.S. Treasuries.

As inflation comes, interest rates will be forced up. Rising interest rates certainly hurt the owners of old low-coupon bonds. Moreover, rising interest rates have never been the stock market's friend. Rising interest rates are the declared enemy of housing prices. Indeed, rising inflation in the general price level is the enemy of all those wonderful bubble markets. Rising inflation and falling asset prices will turn the world of investing upside down!


Richard Benson
President
Specialty Finance Group LLC
Member NASD/SIPC
800-860-2907

[dmitrynts]

The main problem with the US - Negative Savings
How is Obama going to fund any welfare programs without raising taxes?

Simple. Print money.

This is a littel dangerous. One one hand if he wishes to finance healthcare, he needs money and he would have to raise taxes. At a time like this, that is not going to be a desirable option. Another option is to print money. Printing money is only going to cause the US$ to fall and in the extreme case , make it worthless. Its like the choice between the devil and the deep blue sea.

[attackDoold]

This is a littel dangerous. One one hand if he wishes to finance healthcare, he needs money and he would have to raise taxes. At a time like this, that is not going to be a desirable option. Another option is to print money. Printing money is only going to cause the US$ to fall and in the extreme case , make it worthless. Its like the choice between the devil and the deep blue sea.

The US$ is already worthless or going to be.

[Uttephabeta]

The US$ is already worthless or going to be.

They have to borrow more from China and Japan. Hu Jintao maybe happy to loan Obama more dollars anyway, for many political reasons.

[Greactbet]

really? this is news to me. i wonder what the pound at 1.44 is, then? toilet paper? is the euro crash from 1.6 to 1.38 a disaster? perhaps the total collapse of the australian dollar from parity to 1.5 to the US dollar is truly the world's most worthless currency?

sorry if the truth hurts,

hee hee

On Bloomberg a special report last week said how the US is still the reserve currency of the world.

They mentioned Japan and China keep buying our treasuries, while Bernake prints money at 6% of GPD.

[FloareTraurne]

On Bloomberg a special report last week said how the US is still the reserve currency of the world.

They mentioned Japan and China keep buying our treasuries, while Bernake prints money at 6% of GPD.

Let's hope this continue forever, because the cracks of draconian labour practices in the USA are showing.

The pandora box is opened.

http://www.brillig.com/debt_clock/

The estimated population of the United States is 305,416,342
so each citizen's share of this debt is $34,840.74.

The National Debt has continued to increase an average of
$3.50 billion per day since September 28, 2007!

I am not jealous, perhaps Mr Mt Lawley is (frankly, he is at the wrong place at the wrong time) but are you still cocky over I.O.USA?

[Sarah Armstrong]

there is a reason why the top singaporeans will never choose australia for reason, you know, even if you lack the education to see the truth

FYI.. Me and my wife are also considered top Singaporeans leh.. We came here to set up chicken stall, outsource the entire chicken business.. and be a proud owner-cum-consultant

Soon you will hear the news of how the chicken suing process takes place - inefficiency of the local govt resulting in huge payout .. You never seen a small termite taking on a huge elephant eh ? It is rare in SG.. but not uncommon in Australia..

I always believe.. "if you wana dream, dream big.. (next) do big.. and achieve big".

[FloareTraurne]

Obama is talking about a spending stimulas to jumpstart the US economy. But if you think about it, haven't they spend enough. The US is the largest borrower in the world. They have been over-comsuming for the last 20+ years. They should be talking about saving, or at least, reducing debt.

Most of the US talkshows are talking about frugal living, reducing the credit cards' debts, discouraging Americans from taking loans from their 401K plans.

Redbull313: take heart! ...... why so quiet? Jealous?

[texprofi]

Redbull313: take heart! ...... why so quiet? Jealous?

Because the cockroach has gone blur and doesn't know what to say and has to consult his million $$ papaya masters about what carp he should post.

[FloareTraurne]

Because the cockroach has gone blur and doesn't know what to say and has to consult his million $$ papaya masters about what carp he should post.

That cockroach is copying my post and use "Aussie dollar falling" as diversion tactic.

Aussie dollar is a fully float currency, and Australia is rich in resources and commodities. I am not that worried over the currency. I am more worried that nobody is buying commodities because it means that no one is buying new cars, build buildings, etc

If half of Japan stop eating soba or udon and other asians don't eat noodle, WA wheat industry will be in trouble.
If a quarter of Japan stop eating pickled ginger with sushi, QLD Ginger industry is in trouble.

[FloareTraurne]

Can Redbull313 or Obama help find out what happen to American taxpayers money

Fed Refuses to Disclose Recipients of $2 Trillion (Update2)
By Mark Pittman

Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.

Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.

The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.

‘Been Bamboozled’

Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had “been bamboozled.”

Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.

On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It filed suit Nov. 7.

In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”

Data Provider

The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts.

While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as “IDC.” One of the e-mails’ subject lines refers to “Interactive Data -- Auction Rate Security Advisory May 1, 2008.”

Brian Willinsky, a spokesman for Bedford, Massachusetts- based Interactive Data Corp., a seller of fixed-income securities information, declined to comment.

“Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News.

‘Dangerous Step’

“In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information,” she wrote.

New York-based Citigroup Inc., which is shrinking its global workforce of 352,000 through asset sales and job cuts, is among the nine biggest banks receiving $125 billion in capital from the TARP since it was signed into law Oct. 3. More than 170 regional lenders are seeking an additional $74 billion.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.

The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.

‘Right to Know’

“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.

“It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she said.

The Fed’s five-page response to Bloomberg may be “unprecedented” because the board usually doesn’t go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington.

“This is uncharted territory,” said Levine during an interview from his New York office. “The Freedom of Information Act wasn’t built to anticipate this situation and that’s evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption.”

The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.

Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country’s biggest bank by assets.

Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month.

‘Complete Truth’

“Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”

The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said.

“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” Johnson said.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Mark Pittman in New York at mpittman@bloomberg.net;

[FloareTraurne]

Obama should reconsider bloated stimulus package
More targeted spending could benefit U.S. economy
By U.S. REP. KEVIN BRADY
Copyright 2009 Houston Chronicle

President Barack Obama met with House Republicans Tuesday. We urged him to seriously rethink the bloated $816 billion economic stimulus bill that is being rushed through the House this week as lobbyists swarm the Capitol to secure their piece of the ever-growing stimulus pie.

As much as we hope a stimulus bill will work, the economic reality is that they rarely do. Since World War II, Congress has enacted at least eight economic stimulus measures. The economic impact, what little could be directly attributed to them, typically came well after the recessions were effectively over. However well-intended the latest attempt is, economists are sounding the alarm it will miss the mark as well. In fact, it may do more harm than good as middle class families and small businesses ultimately shoulder the higher taxes needed to pay for this spending spree.

Not only does this bill fail to meet the president’s goal of “temporary, targeted and timely,” much of it sets permanently higher spending levels for federal and state governments. It gets worse. The bipartisan Congressional Budget Office estimates a mere one-fifth will be spent this year, when the economy needs it the most. How timely is that?

There is a lot of frivolous spending in this bill. I can’t find an economist anywhere who will admit that contraceptives, zoo exhibits and repairs to the Jefferson Memorial are serious economic boosts.

While stimulus measures tend to be more of a political than economic benefit, this one puts more money into buying new art than tax incentives to help small businesses invest in new computers, equipment and machines. Even the much touted investment in roads and highway infrastructure is a mere 3.5 percent of the total bill. School construction is also being touted as a major benefit, but only $14 billion of the $100 billion in education spending is for building new elementary and secondary schools —___ which is a state and local responsibility anyway.

Workers, meanwhile, get to keep on average a meager $1.35 more a day of their money, which won’t send families rushing to the mall. Yet their government spends in this bill, with interest, an amount almost equal to all the personal income taxes paid by Americans annually. In other words, paying for this stimulus would require nearly doubling all income taxes for one year — not just on “the wealthy,” but on all taxpayers.

Our country’s deficit this year will be the highest in peacetime since 1930. As horrible as we Republicans were about controlling spending, in just two years congressional Democrats will have generated deficits greater than the first six years of the Bush administration. When the stimulus is added in, America will be left to beg the rest of the world for nearly $3 trillion in Treasury notes over the next year just as finance experts are growing increasingly uncomfortable with the international view of the dollar.

If the political winds insist “we do something,” there is a better idea. A smaller, more targeted stimulus could replace the minuscule $1.35 a day work credit with a real reduction in the two lowest tax brackets. That way a two-earner working family could keep up to $3,200 a year of its hard-earned money. If we give small businesses with less than 500 workers a 20 percent income tax deduction, they can keep good employees on the payroll and make much needed investments in equipment. Without the pork and state bailouts, we can create a $7,500 housing tax credit for new and existing homes to help stabilize that critical market.

Since there is no such thing as free money, someone is eventually going to have to pay for all of this. I am urging the president to assure the American people that taxes will not have to be raised to pay for all this new spending. Instead, Congress should be directed to seek an end to wasteful spending in Washington, to sunset obsolete agencies, eliminate duplicate programs and stop abuses in contracts and earmarks. That’s a better way to achieve President Obama’s inauguration call for a new era of responsibility.

One way Congress can help restore confidence in Wall Street and in our financial institutions is by getting America’s own finances in order. The president is right to focus on the economy. Members of both parties should set aside partisanship and work toward the common goal of a stronger American economy.

Brady, a Republican, represents Texas’ 8th U.S. Congressional District.

[FloareTraurne]

http://www.washingtontimes.com/news/...cial-security/

Friday, January 9, 2009
Obama tax cut could hurt Social Security
Donald Lambro (Contact)

Cutting payroll taxes to quickly put money into the pockets of low- to middle-income workers -- an option being considered for Congress' economic recovery package -- could weaken the already-stressed Social Security safety net financed by the weekly taxes on salaries.

Social Security's defenders say a payroll tax cut would drain needed funds from the already weak retirement system -- a squeeze that is made worse by the economic recession and millions of baby boomers who will soon be retiring.

Details of the stimulus package are still being worked out between President-elect Barack Obama and congressional leaders, but Capitol Hill aides familiar with the negotiations say lawmakers from both parties have put a temporary reduction in the payroll tax on the table. Another method under discussion is to lower withholding levels for income taxes.

"The payroll tax is an easy method to distribute tax cuts and it's well targeted at low-income people," said Maya MacGuiness, president of the Committee for a Responsible Budget. "But on the other side, the payroll tax is a dedicated tax, with most of it going to Social Security, and any tax cut diminishes the money that goes into that system, leaving it weaker than it already is."

On Thursday, a day after Mr. Obama vowed to tackle the long-term viability of Social Security and Medicare, an Obama transition official shot down the idea that a payroll tax cut will be used to give about $500 to individuals and $1,000 to families with incomes of less than $200,000 a year.

"It is an income tax cut," the official said.

The transition, however, has said it wants the rebate on weekly paychecks and to include workers who do not make enough money to pay year-end federal income taxes, which would point to the payroll.

The president-elect wants to avoid handing out the tax cut in a lump-sum payment that people likely would save or use to pay down debt rather than pump into the economy. This happened to much of the $152 billion stimulus rebate paid out early last year, so Mr. Obama instead wants to distribute rebates in the form of reduced payroll taxes to make successive paychecks fatter.

At least 53 House Republicans already are calling for a two-month holiday from the personal income tax and FICA (Social Security) tax at an estimated cost of $350 billion, a concept supported by supply-side Republicans.

"Cutting the payroll tax is a great idea. It not only puts money back in people's pockets -- particularly for working- and middle-class Americans -- but it reduces labor costs for employers because they pay half of the tax," said economic strategist Cesar Conda, who was Vice President Dick Cheney's chief domestic policy adviser.

"I think most supply-siders would be supportive. It's clearly the best pro-growth tax cut that we could ever hope from an Obama administration," Mr. Conda said.

Several economic analysts with close ties to some of Mr. Obama's advisers and top officials at AARP said their understanding of the range of options being considered would not endanger Social Security's finances.

One AARP official said that a reduction in the amount withheld from worker paychecks could be designed as a credit that would not reduce the payroll taxes that are credited to the system's trust funds or the amount that would be credited to each worker's future retirement checks.

"Depending on where you are on the income scale, it may be the only tax you are paying if you are below the income tax threshhold," said David Certner, legislative policy director for the AARP.

"As a stimulus, those people on the lower end of the income scale tend to spend most or all of their income, so any additional money in their paychecks is much more likely to go into spending. So that makes more sense in terms of economic stimulus," Mr. Certner said. "We don't want to reduce revenue to the trust fund, but we want to see that people who are working get proper credit for their contributions to Social Security."

If Mr. Obama proposes cutting the payroll tax, some Democrats said, any drop in the system's income would be small compared with national economic troubles.

"It all concerns me, but we have a house on fire now. We have to put the fire out and deal with the water damages later. That's not a top concern right now," said William G. Gale, director of economic studies at the Brookings Institution.

"The money not going into the Social Security system would be relatively small potatoes ????? when compared to the situation we're facing right now. If the economy tanks, Social Security will be in much worse shape than if the economy is strong," he said.

Mr. Gale predicts that in the end the tax cuts "will be in the income tax. That's how I always understood it. I'd be surprised if it were different but I don't know for sure."