Staunch Government Intervention Needed to Avoid Full-Blown Depression

Remarkably, the bulk of U.S. Economists still forecast the likelihood for Kudlow’s “Goldilocks” economy to continue through 2008. Indeed it’s hard to find an Economist willing to project greater than a 50/50 chance of recession. Yet the Center on Budget and Policy Priorities recently released its report (pdf file) of how states see the economy. According to their budget survey asked of states, almost half of the states (24 states) already are experiencing, have projected, or expect revenue shortfalls over the next few years out to 2010. Those states cite a decline in Sales Tax revenues and falling property values as uncontrollable factors impacting revenues and are bracing for Federal cutbacks particularly in Transportation and Medicare spending. Many states, according the Center, additionally have revenue imbalances derived from costs of providing services rising more rapidly than the revenues collected. The report concludes that many states will require above average revenue growth to restore their budgets.

Prior to the economic slowdown brought on by the Housing debacle, states largely ignored other budgetary imbalances. For example, most states have huge, unfunded pension liabilities that have been undisclosed to the public until last year and now require dramatic spending and service cuts as recurring revenues are insufficient to meet growing liabilities. This fait accompli is further exacerbated by the widespread competition of states to offer incentive programs for jobs while major corporation’s have started PIC programs to avoid paying state taxes–a corporate income tax avoidance strategy that is based on transferring ownership of the corporation’s trademarks and patents to a subsidiary corporation located in a state that does not tax royalties, interest, or similar types of “intangible income." States have been reluctant to close this corporate loophole, desiring to be perceived as a “business friendly” place to locate.

So the elephant is no longer tap dancing in America and this author sizes up the forces pressuring the economy as too debilitating to avoid recession.

Indeed this author predicts that the U.S. could actually go into a depression if the current policy of denial is continued. I believe America must address the seriousness of its lack of savings and anemic growth by taking corrective action to stimulate consumer spending, cut regulation, and curtail litigation.

The very first step must be to maintain consumer spending to perpetuate trade with Asia. That’s because the ramifications of curtailing exports from China will be price hikes on exported goods leading to inflationary pressures which could spiral out of control.

Next, the U.S. must open it doors to unhampered foreign investment by those holding Petro dollars and U.S. sovereign securities. This creates a way for the U.S. to repatriate its devalued dollar while giving investors a means to diversify (own U.S. business assets instead of Government securities and mortgages) and avoid currency loss.

Thereafter, the government must quickly put together a temporary, fiscal stimulus package to reduce taxes on individuals and small businesses. Once this is done, the government must follow through with a permanent tax reform package to more fairly redistribute income favoring the middle class and close tax loopholes used by corporations to avoid paying taxes altogether.

Finally, the government must lessen its stifling regulation of business as well as initiate Tort reform to remove the incentive for businesses to domicile elsewhere where conditions for starting a business are less hostile.

Comments

[richjoy:]

This guy is a nutjob...the field is crowded with those predicting a recession; so he thinks if he predicts a depression, we will read his remedies.

2008 Jan 08 10:49 AM

[eponymousLTC:]

Government revenue shortfalls do not mean a depression is coming, or even a recession, for that matter. It may mean paring down expenditures, but that's a normal part of any business cycle and should be considered healthy.

2008 Jan 08 10:58 AM

[BxCap:]

State budgets are balanced annually. No money. No programs. I think you took a simple reality and went a bit too far with it. The Fed cares about the State budgets because they often have to make up the difference in a State program with a similar Fed program. Or they don't. I liked the Z1 numbers linked by a commenter yesterday, on the Barry Rhitholtz posting, better.At least he could undersell the illusion to the panic of all.

2008 Jan 08 11:21 AM

[Dean M:]

"The very first step must be to maintain consumer spending to perpetuate trade with Asia. " - Bad idea to encourage the broke, debt laden middle class to run up the plastic even more. "That’s because the ramifications of curtailing exports from China will be price hikes on exported goods leading to inflationary pressures which could spiral out of control." -doesn't curtailed demand cause prices to drop?

2008 Jan 09 02:06 AM

[Sr. Pessimist:]

I never wanted to start a business in the US. I was intent on receiving my lawsuit on time, pressing charges on a vile health system worker, and leaving this country to monetize in a superior system. The US Government would rather me not. Desperate scums. Take care of your own children, you upper class losers.

2008 Jan 10 12:59 AM

[JohnIsOld:]

Some decent points, but this is wacky: "The very first step must be to maintain consumer spending to perpetuate trade with Asia."

Today AMEX took a charge for their credit card delinquencies. Other cards are also hurting. Christmas spending was less than forecast. The average consumer should not be told to continue to spend.

2008 Jan 10 11:22 PM

[Lawrence York:]

Hey don't shoot the messenger. Fed Chairman Bernanke just chronicalled how the credit crisis has unfolded disclosing exotica lending practices and how securitization of inflated mortgages into derivative security packages guaranteed by banks and sold around the world has made the US financial system and economy "fragile." What teh Fed has not yet tallied is the total risk exposure to the financial system largely because it is probablly unknowable. We do know that typical loan to value ratios are 20:1 and we know that bets were made on both sides of various economic events (somebody loses). Therefore we know that "Events" will trigger (or not) guarantees over time and losses will be realized (or not). Banks will certainly have to continue to inventory homes that have considerably less value than the loans made against them and therefore have write-offs, many of them. It is the uncertainty and consequential loss of faith in the financial system as disclosure is gradually made (as triggers occur) that feeds on itself and exacerbates financial problems. There is an estimated 10-20 percent further decline in home values likely to yet be realized. The negative multiplier effect impacting capital reserves at financial institutions combined with the added requirement to set aside loan loss reserves for coming legal liabilites are likely to push a US recession into a US depression if mishandled as it seems to be. Since consumer spending accounts for some two-thirds of US GDP, I believe it would be more preferable to once again stimulate consumer spending by capping credit card interest rates to accomplish this. It would come at a cost to Credit Card issuers (banks, AMEX & MC) but would great a positive, offsetting multiplier effect stimulating our economy. It might also preclude some foreclosures by providing more discretionary income to pay a mortgage rather than default on a home. Moreover, the US is attractive to Asia because of our consumer spending and sharply curtailing that factor might trigger any number of additional adverse consequences. Seems to me extending consumer spending and opening up our markets to let them buy our troubled banks and inflated real esate is a good solution. What's really 'nutso' is thinking nothings really all that serious and cutting interest rates will solve this problem.

2008 Jan 11 12:04 PM