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Bush Faces Economic Challenges in 2005
hughbetcha
Member Posts: 7,801 ✭✭✭
This article was written exclusively for the February issue of Southern Business Magazine by Dr. Tony Spiva, professor of economics at University of Tennessee. Dr. Spiva is a regular columnist for SBM, and a frequent contributor to the History Channel and Southern Business Now, on Charter Cable.
As business editor of the magazine I'm going to let my friends at gunbroker read the article first cause I think there are a few here who will appreciate Dr. Spiva's views. Please feel free to comment, I know you will! The article explains some of the challenges president Bush will face in the coming year.
While I support the president, it is pretty clear that his economic policies in the coming year will deserve a hard look, if for no other reason than the fact that he faces such tough problems. Some good news about social security for those who think Bush should leave it alone, it may last until close to end of century if our GDP grows fast enough.
NO EASY ECONOMIC PATH FOR BUSH IN 2005
By Dr. Tony Spiva
Four economic events will dominate the news in 2005. In
no particular order of importance these will be (1) the
budget deficits (2) the trade deficits (3) tax reform and
(4) social security reform. A brief comment about each, in
reverse order.
Contrary to the pronouncement by the President that
there is a "crisis" in Social Security the program is
solvent by any criteria until at least 2042 and probably
until 2054. The Social Security Administration in making
its projections 75 years into the future assumes a rate of
growth for the U.S. economy that is unrealistically low. We
would want the experts to be cautious in this forecast but
they assume a rate of growth in the economy of only 1.75%
per year. If you take any 75 year period in U.S. economic
history since 1870 and calculate the average rate of growth
in the real Gross Domestic Product it will turn out to be
3% per year.
To the extent that the Social Security
Administration underestimates our rate of growth they place
the time that the trust fund is exhausted too early. Ten
years ago that time was 2032. It has risen by a full decade
since. Currently the calculation of the benefits a person
on Social Security will receive at retirement is indexed to
the wages that person earns in the years just preceding
retirement. The calculation is indexed to wages in order to
try to replace about 80% of those wages upon retirement.
If,instead of indexing that benefit calculation to wages,
the calculation was indexed to the consumer price index it
would guarantee benefits without any other changes until
about 2074.
Privatization is a bummer. If you don't believe
that I suggest you take a look at the privatization scheme
introduced some years ago in Great Britain that is much like
what President Bush is proposing. It has turned out to be
very much more expensive that was anticipated and is, on
balance, a disaster.
The President wants to move away from taxation on
incomes toward taxation on spending and while we don't yet
have the details of his program for reform it will probably
propose a flat tax on incomes at a low rate and the
addition of a value added tax much like those widely used in
the euro zone. I don't have any problem with a combination
of flat tax on incomes and a value added tax but I would
remind you that this type of change would, once again,
produce major benefits for rich people. The two tax cuts of
the Bush administration have already shifted the tax burden
significantly away from rich people and on to the backs of
the middle income tax payers and I hate to think the tax
structure will get even more regressive than it already is.
Both tax reform and Social Security reform are going to
face formidable obstacles in Congress even though the
President enjoys a majority in both houses and I think the
changes that will ultimately emerge in the form of new
bills for the President to sign will be minimal. Don't get
your hopes up for a tsunami type change in either program.
The trade deficit for all of 2004 is going to be a bit
over $600 billion which means that the rest of the world is
going to have to lend us close to $3 billion per DAY every
working day of the year. We already owe the rest of the
world a ton and we will continue to have to borrow and the
rest of the world is getting more and more anxious about
lending to us every day. So, the dollar will lose value all
during 2005 and we can only hope that the decline in the
dollar is slow and orderly. If there is a run on the dollar
and it collapses we are all in big trouble. Keep your
fingers crossed.
As I write, the expenditures of the Federal government
are running at 20.5% of the Gross Domestic Product and the
tax structure is generating revenues at the rate of 16% of
the GDP, ergo, the budget deficit is equal to 4.5% of the
Gross Domestic Product NO MATTER HOW FAST THE GDP GROWS NOR
HOW HIGH IT GETS. That is, contrary to what President Bush
tells us, you cannot grow out of a structural deficit like
what we have right now. To reduce the budget deficit we
have only three choices: cut government expenditures,
increase government tax revenues or do both of those
together. I have to add that the expenditure cuts and/or the
revenue increases are not measured in billions of dollars
but in hundreds of billions of dollars. On the expenditure
side if you add Social Security, the Department of Defense,
interest on the national debt and health care you have
absorbed about 85% of all expenditures and these areas are,
for political if not economic reasons, uncuttable.
So what will President Bush cut, by hundreds of billions? No child
left behind? Homeland security? If you are going to raise
tax revenues you have to raise tax rates. By a lot. The
Bush administration is absolutely not going to raise taxes.
Ergo, the deficits will continue. The deficits of the past
two years have been very much financed by borrowing from
the rest of the world that is growing weary of it.
The President has a busy economic agenda for this year
and next. I wish him success but I have to believe that he
will not succeed. Sorry about that.
--30--
For more information about Dr. Spiva or Southern Business Magazine, click on southernbusinessmagazine.com
As business editor of the magazine I'm going to let my friends at gunbroker read the article first cause I think there are a few here who will appreciate Dr. Spiva's views. Please feel free to comment, I know you will! The article explains some of the challenges president Bush will face in the coming year.
While I support the president, it is pretty clear that his economic policies in the coming year will deserve a hard look, if for no other reason than the fact that he faces such tough problems. Some good news about social security for those who think Bush should leave it alone, it may last until close to end of century if our GDP grows fast enough.
NO EASY ECONOMIC PATH FOR BUSH IN 2005
By Dr. Tony Spiva
Four economic events will dominate the news in 2005. In
no particular order of importance these will be (1) the
budget deficits (2) the trade deficits (3) tax reform and
(4) social security reform. A brief comment about each, in
reverse order.
Contrary to the pronouncement by the President that
there is a "crisis" in Social Security the program is
solvent by any criteria until at least 2042 and probably
until 2054. The Social Security Administration in making
its projections 75 years into the future assumes a rate of
growth for the U.S. economy that is unrealistically low. We
would want the experts to be cautious in this forecast but
they assume a rate of growth in the economy of only 1.75%
per year. If you take any 75 year period in U.S. economic
history since 1870 and calculate the average rate of growth
in the real Gross Domestic Product it will turn out to be
3% per year.
To the extent that the Social Security
Administration underestimates our rate of growth they place
the time that the trust fund is exhausted too early. Ten
years ago that time was 2032. It has risen by a full decade
since. Currently the calculation of the benefits a person
on Social Security will receive at retirement is indexed to
the wages that person earns in the years just preceding
retirement. The calculation is indexed to wages in order to
try to replace about 80% of those wages upon retirement.
If,instead of indexing that benefit calculation to wages,
the calculation was indexed to the consumer price index it
would guarantee benefits without any other changes until
about 2074.
Privatization is a bummer. If you don't believe
that I suggest you take a look at the privatization scheme
introduced some years ago in Great Britain that is much like
what President Bush is proposing. It has turned out to be
very much more expensive that was anticipated and is, on
balance, a disaster.
The President wants to move away from taxation on
incomes toward taxation on spending and while we don't yet
have the details of his program for reform it will probably
propose a flat tax on incomes at a low rate and the
addition of a value added tax much like those widely used in
the euro zone. I don't have any problem with a combination
of flat tax on incomes and a value added tax but I would
remind you that this type of change would, once again,
produce major benefits for rich people. The two tax cuts of
the Bush administration have already shifted the tax burden
significantly away from rich people and on to the backs of
the middle income tax payers and I hate to think the tax
structure will get even more regressive than it already is.
Both tax reform and Social Security reform are going to
face formidable obstacles in Congress even though the
President enjoys a majority in both houses and I think the
changes that will ultimately emerge in the form of new
bills for the President to sign will be minimal. Don't get
your hopes up for a tsunami type change in either program.
The trade deficit for all of 2004 is going to be a bit
over $600 billion which means that the rest of the world is
going to have to lend us close to $3 billion per DAY every
working day of the year. We already owe the rest of the
world a ton and we will continue to have to borrow and the
rest of the world is getting more and more anxious about
lending to us every day. So, the dollar will lose value all
during 2005 and we can only hope that the decline in the
dollar is slow and orderly. If there is a run on the dollar
and it collapses we are all in big trouble. Keep your
fingers crossed.
As I write, the expenditures of the Federal government
are running at 20.5% of the Gross Domestic Product and the
tax structure is generating revenues at the rate of 16% of
the GDP, ergo, the budget deficit is equal to 4.5% of the
Gross Domestic Product NO MATTER HOW FAST THE GDP GROWS NOR
HOW HIGH IT GETS. That is, contrary to what President Bush
tells us, you cannot grow out of a structural deficit like
what we have right now. To reduce the budget deficit we
have only three choices: cut government expenditures,
increase government tax revenues or do both of those
together. I have to add that the expenditure cuts and/or the
revenue increases are not measured in billions of dollars
but in hundreds of billions of dollars. On the expenditure
side if you add Social Security, the Department of Defense,
interest on the national debt and health care you have
absorbed about 85% of all expenditures and these areas are,
for political if not economic reasons, uncuttable.
So what will President Bush cut, by hundreds of billions? No child
left behind? Homeland security? If you are going to raise
tax revenues you have to raise tax rates. By a lot. The
Bush administration is absolutely not going to raise taxes.
Ergo, the deficits will continue. The deficits of the past
two years have been very much financed by borrowing from
the rest of the world that is growing weary of it.
The President has a busy economic agenda for this year
and next. I wish him success but I have to believe that he
will not succeed. Sorry about that.
--30--
For more information about Dr. Spiva or Southern Business Magazine, click on southernbusinessmagazine.com
Comments
"I won't be wronged, I won't be insulted, and I won't be laid a hand on. I don't do these things to other people and I expect the same from them." - John Wayne
All of the points have been addressed. The article is nothing more than liberal garbage
"I won't be wronged, I won't be insulted, and I won't be laid a hand on. I don't do these things to other people and I expect the same from them." - John Wayne
Very insightful, Tx Shooter, the only problem with your analysis is that Dr. Spiva is a conservative Republican economist.
I agree with the article. However Spiva makes it out that the rest of the world won't continue to loan us money and that a potential run on the dollar is very near. I don't see it that way. The rest of the world DOES NOT want a run on the dollar, the weaker the dollar gets the more economical it becomes to manufacture goods in the US. The rest of the world wants those jobs in their countries not in the good ol USA. Ergo they will continue to play ball and inflate their own currencies at the rate we inflate ours. The EU could have let the weakening dollar create a huge imbalance with the Euro, but once they had a 30% gain they started to inflate the Euro because they didn't want to price themselves out of the manufacturing business.
The rest of the world doesn't want to see a run on the dollar anymore then we do.
I agree. No matter how weary the rest of the world might be of lending to the US, we are the best credit risk in world and we are the biggest market for their goods.
Not trying to start an argument here, just looking for something a little more in-depth than "it's liberal B.S."
This country is gone to chit and there ain't no coming out of debt unless we start a Revolutionary War.