Let’s engage in some thought experiments. November 2 is less than a week away. The GOP is widely expected to take over control of the House of Representatives and has a decent chance at winning over the Senate. What might happen to the economy when this occurs?
The economy, while unemployment is way up, is not in a complete shambles. There is business activity underway. In the wake of the financial meltdown in 2008, most companies that survived have restructured and become, if not as profitable as they had been, at least are hanging in there.
Consumers, while having new-found thriftiness thrust on them, are beginning to spend discretionary income. Part of our practice follows the restaurant business and we’ve noted that much of the casual sector is beginning to show a bottoming out of same store sales over last year (coming, of course, from a very low base), and in some cases, seeing improvements, suggesting that consumers are loosening up a little bit.
Money center banks have recapitalized to shore up balance sheets following the mortgage meltdown. Most large lenders have raised fresh, albeit dilutive, equity over the past couple of years and have repaid TARP money taken down in late 2008. There is a current crisis in foreclosures that will further threaten profitability, but it is reasonable to believe that most banking institutions have adequately, if not over-reserved for bad loans in both residential and commercial real estate loan assets.
If there is a dark and unknown cloud on the horizon, it is that the other shoe hasn’t yet dropped in commercial real estate; look around you: there are plenty of boarded up storefronts begging for tenants. On a tony street near where I live, over 20% of the retail space is looking for new tenants. Many commercial loans are coming due over the next several years and lenders don’t have significant leeway to renegotiate these loans without an infusion of fresh equity that isn’t likely to happen. There is credit available for businesses, but it is credit that will be available only if it is secured by solid collateral.
Uncertainty is the biggest drag on the economy: Uncertainty with taxes, uncertainty with cap-and-trade costs, uncertainty due to Obamacare costs and regulations and general uncertainty surrounding an administration that seems hell-bent on punishing success and imposing costs and regulations on businesses of every size. This is what’s really harming employment decisions: after all, why should a business owner, making hard-nosed business decisions, want to hire without knowing what it will cost? Moreover, there is equity and quasi-equity capital to fund growth, but it will be on strike until the political class provides consistency and clarity.
What should the GOP do if it is able to capture one or both of the Houses of Congress in November’s election? I’ve laid out a case by saying that many fundamentals of the economy seem to be in battered but sound shape, and that there are basic policies a new Congress will need to put in place to help the economy begin to grow in a more robust fashion.
First things first: policymakers will need to create an environment in which businesses can operate with certainty that the rules aren’t (a) either ill or undefined, and, (b) subject to massive sweeping change (e.g., tax increases and cap-and-trade), and, secondly, roll back spending at the Federal level. Several other things can also be done that will help as well: Obamacare must be repealed (although little support will come from the administration) and market-based solutions should be enacted. Furthermore, signals to the states that no more bailouts are forthcoming will force states to confront their giant funding problems.
Congress can’t force the Fed to take anti-inflationary action or curtail dramatic quantitative easing (e.g., running the printing presses) or buying bonds (a direct violation of an independent charter), but it must force accountability rules on the Fed (audits, etc.) and bring about more transparency.
If the lame duck Congress doesn’t address it, HR1 should be an extension of the Bush tax cuts for at least another five years, if not permanently. Penalizing success has become a great left-wing standby that the polity rejected years ago as antithetical to realization of the great American dream. As JFK, Reagan, Bush 2 and countless countries around the world have understood, low tax rates promote capital formation, investment, and, ultimately, jobs. Assurance of a continuation of low tax rates will rapidly grow Federal and individual state tax revenues from higher overall incomes, consumption and investment. In the long run, Congress should consider a complete overhaul of the tax system to a flat tax.