Among the issues most commonly discussed are individuality, the rights of the individual, the limits of legitimate government, morality, history, economics, government policy, science, business, education, health care, energy, and man-made global warming evaluations. My posts are aimed at intelligent and rational individuals, whose comments are very welcome.

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"Observe that the 'haves' are those who have freedom, and that it is freedom that the 'have-nots' have not." Ayn Rand

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25 September 2010

Demorats Maximize Economic Uncertainty

By punting on passing legislation to extend the Bush tax cuts before the November election, the Democrats are once again proving themselves the masters of economic uncertainty.  As I have noted many times, economic uncertainty and the inability to calculate a probable return on investment due to hiring new employees or investing in plant and equipment, causes most businessmen to horde as much cash as possible.  According to Charles Krauthammer this now amounts to about $3 trillion.  The Federal Reserve says that non-financial corporations are reserving $1.845 trillion and financial institutions are clearly adding a lot to that.  It is also true that companies building their cash reserves has been a long on-going process since 1982, so it is not entirely due to the recession or the Obama administration. 

But, the reason for this has been an increasing sense of uncertainty throughout that period.  The socialist onslaught against businesses of the Obama administration did not come from nowhere, but has been building for a long time among the faculty of our colleges and universities and the college-educated elite of the Northeast, the Pacific Coast, and large parts of the Midwest.  Gore and Kerry came close to winning the presidency and in the 2006 elections, the control of Congress was passed to the socialist party.  Large companies with much to lose have become increasingly aware of their vulnerability to socialist redistributionist schemes, litigation, and extortion by Congress, Presidents, and state and local governments.  It is these large companies who are the ones most responsible for this increased cash hording.

Small business has long been the primary engine of growth and hiring.  The Bush tax cuts helped them, but the on-going growth of state and local governments, their regulations and taxes, and federal regulations and mandates substantially defeated the benefits of the Bush tax cuts for them.  The reduction of uncertainty due to the death tax, which wipes out many small businesses, was a Bush tax cut that was delayed in its start and had a brief duration of one year, 2010.  It expires at the end of this year and will return to a tax rate of 55% for any estate worth more than $1 million.  This is a huge business uncertainty for many small businesses.  In addition, these small businesses do not know what the tax rate on so-called profits will be in January, since those so-called profits are passed onto most small business owner's personal income taxes.  Those rates are going up, if the Bush tax cuts are not extended.  The Democrats are divided into those who want to extend the personal income tax part of the Bush tax cuts in total and the larger number who want the tax rates for the two highest tax brackets to go up.  Obama is a rather critical actor who wants those two tax bracket rate increases.  This will affect many small businesses.

Why did I say so-called business profits above?  Because the profit is often a fiction.  Suppose a company's income undergoes fluctuations through the year due to seasonal variations or due to more random fluctuations.  The end of the tax year comes along and a company has to pay taxes on that part of its income that exceeds its expenses to date.  Generally, it had better have some such income in excess of expenses, because it does not know whether income in the near future will be enough to cover expenses.  Nonetheless, it gets taxed on this essential reserve.  Suppose your company earns a lot of income in the Fall, but much less in the early part of the next year.  Every year you have to have some money to carry over to deal with the expenses of the early part of the next year.  This money is not really profit, since it may be barely adequate or inadequate to deal with the seasonal fall-off in income.  Nonetheless, the company is taxed on this. 

If the owner of the company makes enough to fall into one of the two higher tax brackets, his taxes may well be about to go up on this necessary reserve.  If he is in the highest tax bracket, the marginal tax rate will go up by 13.1%.  Because that may be the case, he may well decide to lay off some employees at the end of the year, since he probably has many fixed expenses such as rent and insurance he cannot do much to reduce.  He knows he will have less reserve money he can use to pay employee salaries early next year if Obama gets his way.  Of course, at this time, the small business owner in a lower tax bracket also cannot be sure the Bush tax cuts will be extended.  Uncertainty adds to firings and to less investment in equipment and plant to grow and to become more productive.  This uncertainty or an actual increase in taxes both have the effect of extending the pain of this recession.

It turns out that the Democrats have not even written a tax-cut extension bill yet.  If one is not passed, then the personal income tax marginal rates of 10%, 15%, 25%, 28%, 33% and 35% become 15%, 28%, 31%, 36%, and 39.6% brackets.  If Obama gets his way, the present 33% rate bracket is split, with the upper part of the bracket getting the higher tax rate of 36%.  The split would come at a married filing jointly income of $237,200, which is once again belies his pledge not to increase taxes on married people making less than $250,000 a year.  He would have the highest marginal rate tax increase from 35% to 39.6%.  This happens for married filers making more than $382,550.  The long term capital gains tax will also increase from 15% to 20% for upper income bracket filers and the present 0% rate for lower income brackets will increase to 10%.

In the second quarter of this year, net household wealth decreased by 2.7%, which hardly encourages the small businessman.  Net worth is down 19% since the second quarter of 2007.  The federal debt went up 24.4% in the second quarter this year, following a first quarter increase of 18%.  Apparently with the approach of the November elections, federal spending surged!  State and local government spending has long been going up, though it has slowed lately due to a loss of tax revenues caused by the recession.  The more governments spend, the more wealth is transferred from the private sector to the public sector.  More public sector spending creates more complex laws, regulations, subsidies, and mandates, which decrease American productivity and destroy jobs.  Overall, the spending of all U.S. governments (federal, state, and local)  is given in the chart below as a percentage of the GDP:

From a local maximum in 1991 of 37.22% of GDP, the spending burden slowly fell until it reached a local minimum in 2000 of 32.56%.  This had a lot to do with the relatively good employment numbers from 1998 to 2000.  Since 2000, total government spending has increased, though it was flat from 2002 to 2007, with spending in the range from 34.75% to 35.28% of GDP.  In 2008 it began surging upward to 36.94%, in 2009 it was 42.32%, and in 2010 it is expected to be 43.85% of GDP.  Noting the huge increase in total government spending since 1952 shown in this chart and understanding that the bureaucrats spending this money are creating new business regulations, mandates, and are picking winners and losers by industry, company, and location, this spending increase represents an ever greater burden on businesses.  The more governments spend, the greater the uncertainty for most businesses.

Now we should all be very reassured by the government's proclamation that the recession ended in June 2009.  Ha!!!  By the operational technical definition in use, it did end, because GDP has grown since then.  But, this really depends upon strict adherence to a definition that ties a recession only to GDP losses.  A recession would better be defined as any period of six months or more in which one or more of the following cases occurs:
  1. GDP has decreased.
  2. Personal net worth has decreased.
  3. Unemployment has exceeded 6%.
Real unemployment still exceeds 10% and net worth was down in the first two quarters of this year, so we are still deep in a recession.  It is true that GDP has increased of late, but the rate of increase in the last quarter was very low.  Overall, the suffering rate is very high.  The Democrat cure is to have the governments spend more money foolishly, to increase some taxes, to mandate increased energy costs, and to leave it unclear whether the largest tax increase in history will soon be knocking the legs out from under our staggering private sector.

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