SeriousBull

Anyone know a one-armed Economist?

Tags: Bush + Economy + Markets + Recession + Tax Reform

Remarkably, the consensus of US Economists still forecasts the likelihood for the 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 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 reoccurring revenues are insufficient to meet the liability. 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 SB sizes up the forces wearing on the economy as too debilitating to avoid Recession. Indeed SB predicts that the US could actually go into a Depression if the current policy of denial is continued. SB argues that 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 US must open it doors to unhampered foreign investment by those holding Petro dollars and US sovereign securities. This creates a way for the US to repatriate its devalued dollars while giving investors a means to diversify (own US business assets instead of Government securities and mortgages) and avoid currency loss. Thereafter, the US Government must quickly put together a temporary, fiscal stimulus package to reduce taxes of individuals and small businesses. Once this is done, they must follow through with 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 US 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.

Source: http://www.cbpp.org/12-18-07sfp.pdf

January 8, 2008 - Economy