No Confidence = No Growth

We are now nearly 2 years into the current economic recession and most economic indicators do not signal a near term recovery. Conservatives blame Obama, Obama blames Bush.  But why after all the stimulus dollars have been allocated, and over half spent, have we not seen much improvement?  I believe it is because of how those federal dollars have been spent. 

Most of the stimulus has been spent balancing state budgets to continue inflight projects and extend employment of state workers that would have been cut without the assistance.  This is very short term thinking by the administration.  Saving a job until next year when it again is at risk is not wise spending that instills confidence in workers, state governments or businesses.  Without this confidence, real recovery will be extremely slow or impossible.

Business leaders around the nation know that federal deficit spending cannot continue forever.  This along with talk of increased taxes gives them little confidence that any apparent improvement is real or sustainable.  Until the business community believes the economy is improving and will continue, there will be no improvement in unemployment or the capital investment that drive our economy.  Businesses will remain in a wait and see mode, watching for clear signals of a better economic environment.  They will not hire people if there is significant risk of future downsizing.  They will not spend to expand if long term economic improvement is not on the horizon.

Looking for lessons in the past uncovers the only strategy that has ever worked effectively.  While counter intuitive, cutting taxes is the only proven method to climb out of a recession.  When President Reagan inherited a recession comparable to this one, he did not blame President Carter.  Instead, he cut income and capital gains tax rates across the board.  Hiring, investment, and the economy began to improve in just a few short months, and within 3 years federal tax revenue increased by 50%.  This act led to the longest period of economic growth the country has ever experienced.  The lesson unlearned is that if Obama would have cut taxes by $750 billion stimulus dollars, we would now be witnessing an improving economy.

The Obama administration believes that government spending leads to economic growth.  So in order to fund his vision for the country, he cannot continue to borrow and spend money.  Multiple taxes and fees are in the future, the most ominous one being Cap and Trade.  This one tax will hit every American hard by increasing the cost of most goods and services.  Increased taxes make businesses less profitable unless they pass the cost on to the consumer.  Regardless of whether they pass on the cost or absorb it, new taxes decrease certainty and lower confidence.  Businesses will not hire or invest.  Recovery will be stymied.

While it appears that government spending has avoided the second Great Depression, it also appears that we are now in Obama's Great Recession.