Private Sector Economy Health Check-up

The jobs report from Thursday June 7, 2012 showed a 12,000-claim drop in initial claims for state unemployment.  This was good news in light of the fact that there had been increases in initial claims the previous 4 weeks (1).  However, is this a sign of a robust recovery?  In an economic speech given on Friday 06/08/2012, President Obama stated, “The private sector is doing fine.”  House Speaker Boehner responded by saying, “The private sector is not doing fine” and Mitt Romney said that Obama’s remarks show that Obama is out of touch (2).  So which side is correct?

In support of the President’s position, he cites the creation of 82,000 jobs in May and the fact that wealth in corporate America is at an all-time high in relation to GDP (2).  However, 82,000 jobs is not an impressive number when compared to the fact that there are almost 2 million fewer people working today than when Obama took office.  In addition, 82,000 jobs are only 1640 jobs per state. 

While corporate wealth may be at an all-time high, small business, the engine of job creation for the economy, net worth is declining.  Profit growth is also slowing and slowed to 6.5% in the first quarter of 2012.  Plus corporate cash flow growth  is also slowing, which is expected coming out of a recession, but at only 4% the showing for the first quarter of 2012 remains weak (2). 

In Obama’s favor, corporate balance sheets are awash in cash, though the Federal Reserve revised lower previous estimates (2).  It is good news that corporations have sufficient liquid assets to remain solvent but it also shows corporations reluctance to invest these liquid assets due to economic uncertainty.  So what may be causing this uncertainty?

1.       Taxmageddon (3) – The tax cuts of 2001 and 2003 are slated to expire on January 1, 2013.  This will result in a greater tax burden for corporations so we would expect them to be setting aside additional cash resources to meet this potential additional burden.  

2.       Obamacare (4) – Many of the regulatory requirements of Obamacare will begin kicking in on January 1, 2013 so corporations are also setting aside cash to meet these requirements.

If these corporations were able to invest their cash reserves in business expansion rather than paying additional taxes and compliance costs brought on by additional regulatory requirements, we would begin seeing some real job growth.  Obama, to his credit, did back off on his remark and now needs to follow through by making permanent the tax cuts and repealing Obamacare so companies are free to begin investing their excess cash reserves.  If President Obama, the Congress, and the Senate were to do this, we would begin to experience a real recovery as we experienced during the 1980’s.

In 1980, our nation faced another serious economic downturn.  We had the triple double (double digit inflation, double digit unemployment, and double digit interest rates).  A tired electorate seeking change ousted the incumbent president and voted in Ronald Reagan who promised a new direction for the nation.  His policies were the opposite of the Keynesian theories of the previous administration (5) in that they proposed decreasing taxes, government spending, and government regulations.  These supply side policies resulted in a robust recovery which compared to the current recovery, shows the current so-called recovery to be anemic (6).

President Obama needs to abandon his Keynesian policies, establish permanent tax policies, and begin curtailing the onerous regulatory requirements of Obamacare for real recovery to occur.  Then corporations can begin investing their excess cash reserves and real economic and job growth will occur. 

That is my opinion, now I am interested in yours.

1. Reuters. Weekly jobless claims fall for first time since April. Fox Business. [Online] Fox News, June 7, 2012. [Cited: June 7, 2012.] http://www.foxbusiness.com/economy/2012/06/07/weekly-jobless-claims-fall-for-first-time-since-april/?test=latestnews.

2.  Market Watch. Obama says private sector is fine -- see the charts. marketwatch.com. [Online] June 8, 2012. [Cited: June 9, 2012.] http://www.marketwatch.com/story/obama-says-private-sector-is-fine-see-the-charts-2012-06-08?link=MW_home_latest_news.

3. Dubay, Curtis. Taxmageddon: Masssive tax increase coming in 2013. www.heritage.org. [Online] The Heritage Foundation, April 4, 2012. [Cited: June 9, 2012.] http://www.heritage.org/research/reports/2012/04/taxmageddon-massive-tax-increase-coming-in-2013.

4.  Bedard, Paul. 6 pages of Obamacare equals 429 pages of regulations. www.usnews.com. [Online] US News and World Report, April 7, 2011. [Cited: June 9, 2012.] http://www.usnews.com/news/washington-whispers/articles/2011/04/07/6-pages-of-obamacare-equals-429-pages-of-regulations.

5. Wisegeek. What is Keynesian Economics. wisegeek.com. [Online] [Cited: June 7, 2012.] http://www.wisegeek.com/what-is-keynesian-economics.htm.

6. Pethokoukis, James. Why the Reagan recovery was much more impressive then Obama's. Businessinsider.com. [Online] Business Insider, January 29, 2012. [Cited: June 7, 2012.] http://articles.businessinsider.com/2012-01-29/news/30675210_1_quarters-economy-real-disposable-personal-income.