Monday, April 9, 2012

Economic Recovery, Tax Receipts, Retirement Funding and Stocks ... The Long Road Ahead

Government is getting bigger. Our nation's debt is, too. Meanwhile, annual operating deficits continue to exceed $1 trillion each year.

Additional tax receipts will be required to offset government expenditures, including escalating interest expense, over time.

As the economy recovers, government tax receipts will increase rapidly.

The trick and missing ingredient, therefore, is to achieve a solid and sustained economic recovery in the private sector.

But it's not happening that way--at least not yet.

In fact, today's U.S. economy is growing slowly and will likely remain subdued for several more years.

But why that's the case is the vital question that needs to be asked and answered.

That's because solid economic growth will result in an abundance of good things for all of us.

For example, jobs will grow and incomes will increase. As will consumer spending.

Almost as good, government transfer payments for unemployment compensation and such will then decrease.

Next let's consider stocks and retirement assets invested. As the private sector expands more quickly, individual companies will perform well, too. That means greater employment, higher profits and more tax receipts for government.

And as companies do well, the price of their shares will increase. That in turn translates into lower retirement funding obligations for companies and individuals.

When stock prices appreciate, retirement funding needs will lessen for companies and government sponsors as pensions and 401(k) plans will perform better, thus requiring fewer cash contributions for a given retirement income.

Yes, economic growth is the only real answer to the many financial problems that exist in America today.

The Worst Economic Recovery in History tells the all too often untold and neglected story of the current weak economic recovery. Here's what it says in part:

"How many times have we heard that this was the worst recession since the Great Depression? That may be true—although the double-dip recession of the early 1980s was about comparable. Less publicized is that our current recovery pales in comparison with most other recoveries, including the one following the Great Depression. . . .

The current recovery began in the second half of 2009, but economic growth has been weak. Growth in 2010 was 3% and in 2011 it was 1.7%. Who knows what 2012 will bring, but the current growth rate looks to be about 2% . . . . Sadly, we have never really recovered from the recession. The economy has not even returned to its long-term growth rate and is certainly not making up for lost ground. . . .

During the postwar period up to the current recession (1947-2007), the average annual growth rate for the U.S. was 3.4%. The last three decades have experienced somewhat slower growth than the earlier periods, but even in the period 1977-2007, the average growth rate was 3%. According to the National Bureau of Economic Research, the recovery began in the second half of 2009. Since that time, the economy has grown at 2.4%, below our long-term trend by either measure. . . .

Contrast this weak growth with the recovery that followed the other large recession of recent decades. In the early 1980s, the economy experienced a double-dip recession, with contractions in both 1980 and '82. But growth rates in the subsequent two years averaged almost 6%. The high growth that persisted throughout the 1980s brought the economy quickly back to the trend line. Unlike the current period, from 1983 on, the economy was in rapid catch-up mode and eventually regained all that had been lost during the early '80s.

Indeed, that was the expectation. As economist Victor Zarnowitz of the University of Chicago argued many years ago, the strength of the recovery is related to the depth of the recession. Big recessions are followed by robust recoveries, presumably because more idle resources are available to be tapped. Unfortunately, the current post-recession period has not followed the pattern.

The 2007-09 recession was induced by a financial crisis and some, most notably economists Carmen Reinhart and Kenneth Rogoff (authors of "This Time is Different: Eight Centuries of Financial Folly"), argue that financial crises pose more difficult recovery problems than do policy-induced recessions....

Are there other factors that may have contributed to the slow recovery that we are experiencing? It would be difficult to argue that government polices over the past three years have enhanced confidence in the U.S. business environment. Threats of higher taxes, the constantly increasing regulatory burden, the failure to pursue an aggressive trade policy that will open markets to U.S. exports, and the enormous increase in government spending all are growth impediments. Policies have focused on short-run changes and gimmicks—recall cash for clunkers and first-time home buyer credits—rather than on creating conditions that are favorable to investment that raise productivity and wages.

There are some positive developments. The labor market is improving, albeit slowly. Profits remain high and the stock market has enjoyed some recent success. We can hope that these indicate better times and higher growth ahead. But unless we move to a set of economic policies that are aimed at growing the economy rather than at promoting social agendas, this may be the first "recovery" in history that fails to see us return to long-term average growth."

Summing Up

We can't put our economic house in order without attaining a sustainable 3% real economic growth story over time. And we aren't likely to see 3% in 2012 while our deficits and national debt continue to spiral upward.

In fact, the lack of construction and manufacturing activity compared to recent decades will create further economic headwinds, as will strengthened global competition from developing countries.

When we combine the foregoing factors with an ever expanding government sector and a growing welfare society, warning signs are everywhere.

My strong view is that as a nation we'll need to encourage private sector expansion and competitiveness in every conceivable way.

We'll also need to aggressively pursue energy independence with a vengeance.

And we'll have to materially reduce the size of government as well.

All these things must happen if we hope to return to the historical pattern of average annual 3% real economic growth anytime soon.

Thanks. Bob.

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