June 15th, 2011 – Debt problems
Market Updates
06/15/11The US should be looking at Greece as an example of how NOT to fix our budget crisis. You can not solve a debt problem if there is no growth in an economy. Last year, Greece tried to fix its debt problem by implementing spending cuts and tax increases – they increased their VAT tax by 20%. History has shown us that these types of measures slow down, rather than speed up, an economy. So what happened? The Greece economy shrank 4.5% in 2010 and is expected to contract by 3.5% this year. What did the austerity plan the International Monetary Fund (“IMF”) instituted for Greece last year do to its unemployment? It has shot up 40% over the last year to its current rate of 16.2%. This is why the streets of Athens are on fire with protestors.
How does Europe and the IMF measure the success of their policies? Is it a reduction of debt levels? Is it a growing economy? Is it a reduction of the unemployment rate? Using any of these measures, the Greece plan has failed as Greece now needs another bailout. You would think that after such a lesson in failure the Greek government (along with the IMF) would take a different approach. Unfortunately, that is not the case and the “new” plan calls for more austerity measures and tax increases.
What should the US do to fight our debt problems? Many say we should cut spending and increase taxes – mostly on the rich. That is the same plan the IMF created for Greece and it did not work. The same plan in the US would have similarly devastating consequences on our economy. In our opinion, here is what we should do:
- We should freeze spending or increase it at no more than the rate of inflation. We also should slowly raise the age when one is eligible for Social Security and Medicare.
- We should make structural changes on taxes that are permanent. We would suggest lowering the corporate income tax rate and capital gains tax rate. For some reason, Washington likes short-term stimulus – Bush $500 family tax credit, new home buying tax credit and payroll tax reduction for this year to name a few. These are nice in the short-term, but do very little for the long term viability of our economy. Corporations and individual investors are sitting on a lot of money that could otherwise be invested in our economy if there was some certainty regarding taxes. The most recent Bureau of Labor Statistics shows that new business start-ups are at their lowest level since they started tracking them in the early 1990’s. This is a clear sign of people not wanting to risk their capital. The economy roared ahead in the 80’s when the capital gains rate was reduced in 1981-1982 and again under Clinton in the 1990’s. We need to give companies and individuals a permanent incentive to put their money to work.
- We should freeze all new regulations and reduce current regulations – we will cover this topic in-depth in our quarterly newsletter. The uncertainty of regulation is causing companies to hold cash and defer investment.
There is an old adage that says “When one forgets history, you are bound to repeat it.” This is happening right now before our eyes in Greece. Hopefully, we will not repeat its mistakes when tackling our own financial problems.
Sincerely,
Your THOR Team