Running for Congress is a learning experience for sure. I was defeated in a run-off for the nomination and that’s that — or is it? To state my key issue in the campaign succinctly, the interest payments on the national debt equal the entire defense budget. The US deficit is projected to exceed 120% of GDP in 2020 — or earlier. Deficit spending on an acceptable level is a reality in good times, but at this rate the “good faith and credit of the United State”, the perceived asset value that stands behind our debt, is in serious danger. Buyers of US Treasury Bills — the main instrument we use to finance government services — assume we have the resources, even in bad times, to make good on the money we borrow to cover the cost of government.
But what if that faith is shattered as borrowing increases exponentially and tax collections decline due to the increasingly shaky economy? To sell our debt in these conditions will require a large increase in the interest we must pay to attract buyers. That rate will translate into the amount Americans must pay to borrow for personal and business loans (if indeed banks will loan). The already sick economy will decline further, meaning tax collections will continue to decrease.
Then the other foot will fall: massive tax increases on top of the burden already suffocating the alleged “recovery”. High interest rates and excessive taxation will transform the vaunted American economy into Third World levels of inflation and debt. To put this in perspective, the former Comptroller of the Currency estimated it will require an 80% increase in the federal income tax to put our financial house in order.
Yet the United States possesses vast resources and, most importantly, gutty citizens who are willing to face the challenges. This quality resides largely in the small business sector that comprises nearly 90% of the economy, the keystone of economic structure ignored by the Obama recovery plan. Sadly, my campaign plank that “Obama bailed out Wall Street and left Main Street holding the bag” is becoming truer every day.
Obama and the majority in Congress are in the sway of theoretical economists who missed the point that the US economy is a small business construct. And start-ups create the only new jobs in the entire economy. But today the majority of the small business sector, from which tax collections and jobs depend, is moribund and teetering on collapse. And home values, the paramount asset of most Americans, remain 40% lower than in 2008. This extraordinary reality is indicative of how bad things really are, especially when you consider home values in Raleigh — until 2008 — had risen 10 to 20% every year since World War II.
The recovery has to start with small business vitalization and increased real estate values — and now. But banks are under orders by regulators to increase their assets on hand, restricting the percentage of capital they can lend. Home and second home prices continue to tank as foreclosed properties flood the market driving down values. High property tax valuations are an anchor retarding the sales of existing homes priced over $400,000. No wonder consumer confidence continues to fall.
What to do? The best hope is to change Congress in November and install representatives who understand the true nature of the economy. The first step is to reduce spending as much as feasible and cut taxes drastically, even if the deficit increases temporarily. This will simulate the consumer sector (80% of economic activity in the US), increase revenues and profits and create more taxable wealth that obviates the need for high tax rates. It’s called the Laffer Curve and it works. However, if conditions remain as they are, government will increase taxation on ailing businesses and households to finance ever increasing spending. Productivity and investment will decline, suffocating wealth creation. That in turn reduces significantly the amount of taxable income and wealth.
A new strategy by fresh faces in Washington could turn the economy around and offer hope for the future. But that hope is diminishing as Tea Party activists are more interested in nominating candidates who emphasize religion and abolishing abortion over high taxes and run-away spending — therefore ensuring the nomination of Congressional candidates who will probably lose in November. This new style of conservative politics is anarchic and self-destructive just at the point the Democrat left is vulnerable and primed for defeat.
The result of old-line far right activists high-jacking the authentic Tea Party Movement means the Obama administration will be able to rely on a continued Democrat majority to drive the economy and our well-being as a nation right over the cliff.
Notes From La-La Land
Bashing BP while they are the only ones who can cap the oil spill in the Gulf of Mexico is self-destructive and sadly typical of the vindictive political environment in the US. The time for recrimination and revenge is after the incident is over, not while the company could throw up its hands and walk of the job. The Obama strategy to bring criminal charges against BP personifies the irrational state of affairs in Washington.
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My first thought when the rig blew was the enormous bill to be paid out by BP’s insurance companies. Then it emerged that the company is self-insured. Talk about penny-wise and pound foolish. Some geeky financial whiz-kid ran the numbers and said why pay premiums since we are so big and rich we can do it ourselves. Now that decision is keeping BP executives up all night as the spill decimates the company. But the other angle the accounting geek missed is that all the malice heaped on the oil company about payouts to victims would be directed against insurance companies and not BP, thus salvaging a large portion of the company’s reputation and asset value.
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