"That's not class warfare; that's common sense."?

The phrase, “That’s not class warfare; that’s common sense,” has now become President Barack Obama’s signature catch phrase. From his State of the Union speech to his late release of the 2013 budget, President Obama uses this to invoke the support of the middle class and deflect the comments thrown at him from the Republican side. However, I can’t help but ask the question. Is it really common sense?

With the release of the 2013 fiscal year budget I, perhaps naively, was looking forward to spending cuts and programs that would grow the economy out of the recession. We had finally shown signs of life, albeit very dim signs, that we were creating jobs as we saw the unemployment rate slowly creep down to 8.3% last month. So what did we get in this new proposal? $137 billion in spending inside a $3.8 trillion budget while our hopes of reducing the deficit have been delayed from the original 2014 date to now 2018. Common sense you say Mr. President? I believe history wins that argument.

One of the main focuses for President Obama in the past months and will be at the forefront of the 2012 Presidential election campaign is the tax on what President Obama deems, “The wealthy.” This has been done before in American history and it did nothing but decrease cash flow in the economy. In 1930, President J. Edgar Hoover placed a major tax hike on the wealthy to balance the budget. The top marginal tax rate for incomes rose from 25 percent on incomes in excess of $100,000 to 63 percent on incomes in excess of $1 million. By doing so, President Hoover actually decreased household spending as their disposable income dropped significantly and it led to further contraction of the US economy.

In reference to this idea of spending to reduce the deficit, this has only worked as a major factor once in history: World War II. After the Great Depression of the 1930s a massive influx of military funding flooded the market. This worked because men left their jobs to fight in the war while women worked more in the factories. The number of unemployed workers declined by 7,050,000 between 1940 and 1943 as the number in military service rose by 8,590,000, according to the Library of Economics and Liberty. It’s apparent that it wasn’t so much the economic recovery as it was the draft that decreased unemployment, tightened budgets and rationed goods during war time. A recovery through spending is, thus, not the right solution.

It’s clear that America needs to be more focused on a supply-sided economy to see recovery. The current administration should be instilling consumer confidence back into the dollar. Economies grow when citizens have money, believe in it’s worth, and are given a low marginal tax rate so they can keep putting the money back into the market. If you tax someone with higher tax rates then they are less likely to invest that money back into the market. On the other hand, if you devalue the currency then the country will go back into a spending frenzy because they don’t believe the money will be worth anything as seen in drastic circumstances, such as the Great Depression of the 1930s. Value through steady cash flow of a strong currency and innovation will grow the economy, not taxing those who have already worked hard to be where they’re at.

It’s the American dream to work your way to the top and achieve your goals. What incentive is there to work your way to the top if getting to the top means you have to pay a substantial percentage more back to the government on issues that do not, and possibly will never, have an influence in your life? What are taxes but a number on a piece of paper that tells you how much you owe the government for something you may never use? We must all do our part to help the less fortunate, but at what cost to ourselves. When does it stop becoming affordable for us to help others? As they say in airline emergency guidelines, “Place your mask over your nose and mouth before assisting others.”

Spending Cuts or Higher Taxes: Is This Really A Question?

Did we learn nothing as children? When we wanted to go to the candy store to buy ourselves whatever $10 worth of candy could get us, we did. When our allowance dropped down to $5 and the jumbo candy bag was $7, we spent a little less that week and saved the rest for our next allowance.  This is called a spending cut because the need to pay for something else has caused us to decrease our current expenses. This makes sense right? So why are European countries favoring higher taxes rather than spending cuts to cover their budget deficits?

Europe will probably be facing another recession this year and their overall economy is expected to contract in 2013. Many countries are trying to avoid this by simply increasing taxes. The truth is this is not the recommended method and has actually proven to be ineffective in generating more revenue. Great Britain’s 50% top marginal income tax rate has actually reduced tax revue by as much as 5% this year, according the Wall Street Journal. Any idea why? Because those in the top marginal income tax rate did not get there by being careless about their money! When the taxes increase, citizens will simply shift their incomes and affairs into a more appropriate situation in a less tax burdensome country. So, the country either loses its population, and tax revenue, or they come up with a better way to handle the budget deficit.

As we know, higher taxes typically hurt new business and, at times, are a dangerous beginning to inflation; but they do offer a positive value that, I believe, most politicians enjoy: a short term fix. France and Greece are due to hold election this spring so both of them are looking for that sort of solution before dealing with the real problem at hand. Their plan is to increase taxes to start paying for the budget deficit, show positive signs of diminishing debt, and get reelected based on how “good” of a job they’re doing. These “excuses” are why Europe will face another recession this year and see their economy contract next year. They’re not fixing the problem; they’re delaying it with temporary ineffective solutions.

Positive signs of the right track are coming though. Portugal is looking to decrease their deficit by a plan of 70% spending cuts and 30% tax increases. Ireland, on the same token, looks to have two thirds of their deficit recovered by spending cuts and one third by higher taxes, which is the typical allocation. Unfortunately, as mentioned before, France, Greece, and Italy all look to balance their budget with tax revenue as the main contributor.

We’ll see what happens in the coming months as we watch the strategies of Portugal and Ireland as compared with France, Greece and Italy. Who will choose the best strategy? Who will save the most money? And who will eventually be able to afford their jumbo bag of candy the following week?

China's Glass Ceiling

 

                China has seen roughly 32 years of economic prosperity brought in by governmental reform under the leadership of Deng Xiaoping. Considered to be the architect of the Chinese economy after the death of General Mae Zedong, Xiaoping adopted a policy under the idea that, “Black cat, white cat, what does it matter what color the cat is as long as it catches mice?” With such a metaphor in mind he brought an average annual 10% growth in GDP from 1979-2010. Unfortunately, 32 years later from Xiaoping’s reforms, the cats have grown old and tired bearing the weight of old economic practices.

                In 1979, Xiaoping pushed through new economic policies that would initiate ownership incentives for farmers, establish economic zones to attract foreign investment, boost exports, import high technology products, encourage citizens to start their own business, and decentralize economic policy making. Prior to 1979, China’s real annual GDP growth was estimated at 5.6%. After these economic reforms were enacted China was able to double in real terms the size of its economy in real terms every eight years. The biggest factors in this were its large capital investment from foreign investment, savings percentage, and rapid productivity growth. Chinese foreign direct investment (FDI) grew from $2 billion in 1985 to $92 billion in 2008 while Chinese gross savings as a percentage of GDP rose to 53.9% in 2010. As a comparison, the United States gross savings as a percentage of GDP in 2010 was 9.3%. With the influx of foreign investment and the savings rate kept so high it’s not difficult to see how their economy grew so quickly. But what made it fall?

                Economic policy has changed in the 21^st century. Innovation and entrepreneurs are now at the forefront of economic sustainability and that’s unlikely to change anytime soon.  China’s major problem lies in their state owned enterprises (SOE). SOEs make up roughly 45% of the country’s economy; however, they act as a major barrier to innovation and entrepreneurs. With the state controlled system it increases the real estate values and deters foreign investment: two factors that can easily destroy a small business starting out. China was always known for importing parts and they’ll export the whole since labor was so cheap, but this is not how a small business works. China has recently made a push to encourage entrepreneurs by creating a $2.5 billion fund to lend to small and medium sized businesses along with relevant tax breaks. This is a great stride for small businesses but the struggle still comes with the looming real estate inflation bubble that could pop at any moment. 

                “China 2030,” an economic report produced by the Chinese bank and a government think tank, is due to be released on Monday, February, 27^th.  This report will hopefully contain guidance on economic sustainability for China.  This comes at a crucial time as their 2011 Q4 GDP was at its lowest in two and a half years at 8.9%. 32 years of strong economic growth have finally started to cool off. It’s time for the Chinese government to move in a different direction to get pass their current economic barrier.