AN OVERVIEW OF AMERICA'S ECONOMY

The most urgent and important issue of the 2008  election is the economy, and yet none of the  remaining Presidential candidates understands the basics of economics or offers serious solutions that would spur economic growth.  This analysis is intended to:

• Summarize the root causes of  our current economic slowdown.
  
• Expose the counterproductive proposals of our politicians.
  
• Offer serious ideas to spur economic growth.
  

Why is the American economy nearing recession after years of strong economic growth?

The reasons are countless, but please consider the following key causes of our current economic difficulties:

• Americans are over taxed
  

Consumer spending and capital investment are the primary drivers of economic growth. Every dollar paid in taxes to Federal and state governments reduce the dollars available for consuming and investing.  The current huge tax burden on the most productive workers in the economy is retarding economic growth.

• The Federal government has no spending discipline
  

The responsibility of government is to minimize taxation, to spend tax dollars wisely, and to minimize its expenditures to levels that can meet its necessary obligations without retarding economic growth. Federal spending is completely out of control, and it is producing deficit spending to an extent that our huge amounts of public debt have become a drag on the economy.

The Federal government has grown into a hugely inefficient wealth consuming, income redistribution system that incents low economic productivity and slow economic growth. Federal entitlements are growing rapidly beyond the economy's ability to support them. However, no one is doing anything to fix the problem because accumulation of political power has become more important to our politicians than their responsibility as public servants.

• Oil prices rose 60% last year & 327% in 5 years  

As previously discussed, oil permeates the cost of almost everything in the economy, and the USA is paying at least $250 billion more for oil per year than it was on election day 2006.  This radical rise has had a very negative effect on economic growth because every additional dollar spent on oil, is a dollar not available to use on consumer spending and capital investments that drive economic growth. Inflation related to higher oil prices has limited the Federal Reserve's ability to reduce interest rates to stimulate economic growth.

• The USA credit markets are a disaster
  

Big banks have lost billions of dollars on investments in sub-prime mortgages.  This problem is the result of poor credit underwriting that relied not enough on borrower credit evaluation and too much on the valuation of real estate assets that had dramatically risen in price for years. 

Once the property values receded, and the floating interest rates rose, many home owners walked away from their houses and left the banks holding the loss.  Those same borrowers will find it difficult to borrow money on credit cards and that reduces their ability to consume.

The magnitude of the losses has been so large, that it has severely impaired the capital  base of many large banks.  Bank lending limits are set based on their capital levels so less capital means banks must reduce their lending activities.  Less lending retards economic growth. Some banks have secured new capital from foreign funds, but new conservative lending guidelines will be a limitation on borrowing and economic growth.

What can be done to improve the economy?

There are many things that can be done, but here are a few that could have a major positive impact:

• Mandate reductions in government spending to core necessity levels.
• Reduce taxes on individuals and corporations.
• Reduce interest rates further.
• Congress could mandate voluntary reductions in the consumption of oil based fuels, and other carbon based energy sources.
• End Congressional and Presidential candidate calls for a withdrawal of U.S. forces from Iraq.
  
• Congress could pass a binding resolution committing the USA to stay in Iraq for as long as it takes to stabilize and rebuild Iraq, to defeat Al Qaeda, and to defend the USA's economic interests in the Middle East.
• Congress could pass a bill to invest at least $20 billion per year to help Iraq accelerate the development of its full oil production potential.
• Congress could provide greater incentives for the rapid construction of nuclear and clean coal fired power plants.
• Congress could provide incentives for a conversion of vehicles to electric or natural gas fired power systems.
• Permit ecologically safe drilling in ANWR and offshore USA.
• Permit investment of a portion of individual social security funds into equity investments that would provide capital investment dollars to stimulate the economy, and produce additional tax revenues to meet the looming baby boomer retirement crisis in social security and Medicare.
  

If all the above measures were adopted, the price of oil would fall dramatically and Americans would immediately have a lot more cash to invest in consumer goods and capital investments that drive economic growth.

Unfortunately, too many American politicians are more interested in demagoguing these issues and concepts to their personal political advantage than doing what is best for the American economy.  The $152 billion economic stimulus package may be a positive for the economy in the short term, but it does not address the vast majority of the core causes of our economic growth problems.

Please proceed to the "THE DEMOCRATS" tab for further analysis.