The Current Economic State: An Insider's View

by King & Spalding
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Few, if any, Economists would disagree that economic growth is the engine that drives the U.S. economy or, for that matter, the world economy. GDP growth in the second quarter of 2013 was 1.7% contrasted with 1.1% for the first quarter, well short of the approximately 3% GDP growth needed to absorb new entrants into the workforce, and woefully inadequate to reduce unemployment now hovering about 7.4%. Economic growth is essential to provide the resources needed for our Nation's social well-being, e.g., food, healthcare, housing, education, social security and other government services, and also our national security, e.g., military training, deployment, healthcare, housing, etc., and all other societal needs. It is becoming clearer each day that we cannot simply continue cutting expenditures to produce that economic growth. Two and a half trillion dollars of reductions in expenditures over the next 10 years are already in place. The deficit has been reduced by 60% over last five years. Our debt, however, continues to soar to $17 trillion. Most responsible Economists have indicated that it requires a combination of reduced expenditures and increased revenues to reduce the debt and deficit. As interest rates rise, the interest on that debt will grow crowding out the capital that is needed for economic growth and raising its cost. For economic growth you need capital, labor, and technology. The reason the United States is not seeing the level of investment that is essential for growth is because those that control the capital allocation in our business sector are reluctant to allocate their capital for investments without knowing the status of tax policy, spending policy nor regulatory policy. Why do we not have answers to those questions? It is because, in Washington, our Congress and the White House are mired in political dysfunction. They are in gridlock. It has been talked about, written about, and speculated about ad nauseum. But not the entire Congress. Those obstructing resolution to our Nation's challenges are a tyranny of the minority within the majority – mostly in the House.

The simple fact is that until and unless the President and the Congress strike a compromise that will provide the necessary level of expenditures and revenue, the U.S. economy will continue to experience lagging growth. Bond rating authorities have signaled that this will eventually result in another downgrading of the U.S. bond rating, increasing the cost of capital making it even further unlikely that capital investments will be made in a way that will ensure a reasonable return for those who invest. Clearly, we have labor in plentiful supply. U.S. technology is still a comparative advantage globally, but we face some critical policy proposals that could impair the incentive for U.S. innovation.

Can you imagine the response of the U.S. markets and the markets around the world if the President, the Speaker, the Majority Leader and the Minority Leader would all announce tomorrow that they have agreed on a "grand bargain" that will put our debt on a downward path reducing it by at least $5 trillion over the next 10 years? The pent up demand would explode. The markets would take off. The confidence of the American people – people around the world -- would soar. It would signal to the rest of the world that finally the United States has been able to manage its own fiscal and monetary affairs. Our economic growth would be inspiring not only to Americans, but to others throughout the globe. Just as a low tide lowers all boats, the rising tide would lift all boats. It would signal to millions of frustrated and discouraged Americans – young and old – that the American dream is alive and well again!

But how do we get there? We get there by changing the attitude or the composition of the current Congress. It is clearer each day that there are those representing various sections of our country who have come to Washington with the single purpose of significantly reducing or dismantling the function of government. A few – in both Houses of Congress – are advocating shutting down the government. Compromise is not even in their vocabulary. Their objective appears to be not to serve the Nation as their oath requires, but rather to serve their own narrow, selfish, parochial, and regional political views. Until those attitudes change and the House, the Senate and the thoughtful Members within both parties come together to put the well-being of the Nation at a higher priority than has been the case for the past eight or 10 years, we will continue to drift, suffer additional downgrades, reduce the value of our dollar by monetary policy of $85 billion bond purchases monthly. The answer is in the hands either of those within the House, the Senate and the White House willing to make the courageous decisions necessary; or in the hands of the public, who can change the composition of the Congress. Because restoration of robust economic growth is critical for our Nation's well-being – and for all Americans.

The views expressed here are those of the author, Lloyd N. Hand.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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