The Entrepreneurial View #477
Main Street, Wall Street, Every Street?
by Raymond J. Keating
Unfortunately, bad economic news continues to spread. Yet, many of our elected officials in Washington, D.C., seem to have closed their eyes and crossed their fingers, hoping that a redistributionist rebate check scheme will somehow make a difference.
On March 21, the New York Times ran a front-page story titled "Slump Moves from Wall St. to Main St." That's technically not correct. After all, the economy first started to hurt on various residential streets, as housing took a downturn. As that slump dramatically deepened and persisted, Wall Street got hit with mortgage-backed security woes. And in recent months, we've seen the economic troubles expand.
The Times article noted that "some economists fear [a recession] will last longer and inflict more bite on workers and businesses than the last two recessions which gripped the economy in 2001 and for eight months straddling 1990 and 1991" - perhaps persisting into next year.
Two other points in the Times article are worth noting:
• "For the country as a whole, recent data shows that the economy is deteriorating at an accelerating rate. From September to January, average home prices fell 6 percent compared with a year earlier. Consumer confidence has been plummeting. The private sector shed 26,000 jobs in January and 101,000 in February, while those out of work have stayed jobless longer, according to the Labor Department. Now, the broader discomfort is filtering into cities and towns that only recently seemed beyond reach."
• "Many economists forecast that overall consumer spending will slip 1 percent for the first three months of the year. ‘That's a wow,' said Robert Barbera, chief economist for the trading and research firm ITG. ‘Outright declines for real consumer purchases are unusual.' What is shaping up as the second recession of the 2000s is the product of declines in home values, which play a far bigger role in most Americans' personal finances than the stock market."
Barbera is absolutely correct. It is quite rare for consumer spending to actually turn negative. This is pretty grim stuff.
Some key data released on March 26 were far from cheery as well.
The Commerce Department noted that orders for nondefense capital goods excluding aircraft were down by 2.6% in February, following a 1.8% decline in January. As for shipments, they were down 2.1% in February, after a 0.4% fall in January. These are bad signals for first quarter GDP growth, as well as for the economy and job creation looking ahead.
Meanwhile, sales of single-family homes were down by 1.8% in February on a seasonally adjusted annualized rate, and down by 29.8% compared to February 2007. The February level was the lowest since February 1995.
Unfortunately, the housing mess needs to continue to play out in the marketplace. When prices adjust sufficiently, housing will turn around.
But there are other issues in play here. For example, federal government revenues recently reached levels of GDP that always point to an economic slowdown or recession. Quite simply, the government is taking too much in taxes. For good measure, a huge tax increase looms in the not-too-distant future (at the end of 2010) that would jack up taxes on personal income, capital gains, dividends, estates, and capital investment made by small businesses.
Can our elected officials institute policy changes that would make a positive difference for our economy? Absolutely.
For example, making those destructive tax increases on the economic horizon go away would be a good start. How about eliminating the capital gains tax, or at least indexing gains for inflation? Why not offer expensing of capital expenditures as an option to all businesses? Why not lower the corporate income tax rate, which is now among the highest among developed nations? And how about halting all new government regulations, and even deregulating in order to lower unnecessary costs on entrepreneurs and businesses?
See, there's a lot Congress could do that would help the economy. The burning, simple question, of course, is: Why don't they?
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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
