THE FISCAL CLIFF

Today (November 26, 2012) the dominant subject in the New York Times, Wall Street Journal and Washington Post was about the “Fiscal Cliff”. I decided to use the Internet to see what was going on in the United States. The front-page story was local murders but I did pick up three interesting stories.

In the “Oklahoman” has a serious concern about the shortage of electricity, which is limiting crude oil refining.

In the Chicago Tribune there was an article about John Deere doing a major upgrade to the Moline Illinois plant.

The Bismarck Tribune had stories about their newly elected senator (Heitkamp, D), the need for Infrastructure in the oil patch and the doubling of cash deposits in the Williston bank. The Bismarck Tribune also had a story about John Deere making a major expansion to a plant in Valley City North Dakota, adding 100 new jobs.

A columnist from the Washington Post, Robert J Samuelson, best sums up the Washington and New York attitudes. His column in the November 25 paper was titled “Why the recovery is feeble”. He reported the reason given by Bernanke “speaking to the New York Economic Club “ was “The financial crisis and Great Recession scared the wits out of most Americans — not just consumers but also corporate managers, bankers and small-business owners. They are reacting accordingly. They’re cautious, risk-averse and defensive. They’re spending less and saving more.”

This is true except for companies for example, John Deere, Apple, Ford, and Continental Oil. So why are these companies doing very well but Federal Reserve Chairman Ben Bernanke thinks the recovery is feeble!

Reading Bernanke paper it becomes apparent he is looking backward and comparing this most recent recession with previous recessions. In previous recessions the economy slowed down, in the 2008 recession parts of the economy stopped, other parts were reset to a new economy.

The housing market after a slow down that started in 2007, stopped by 2008. It is just starting to recover in 2012. The financial markets collapsed in 2008 and went through reset with a major change of buying and reselling financial certificates, a non value added activity.

A change that was in process prior to 2008 was the personal service industry. This is the bellhop to carry your bags. Workers at John Deere traveling to Valley City do not need someone to carry their bags or starch their shirt. But for Bernanke who stays at hotels in New York or Washington does not experience this change, a change that was accelerated in 2008. People who do not have job skills for other employment filled many of the jobs eliminated by the reset economy.  

The reset and rapid change is eliminating some jobs and the many of the new jobs requiring skills that the displaced possess. A few examples follow.

As I look out the window of my home I see wind farm twenty miles away generating electricity for 2300 homes like mine. If these homes did not use CFL bulbs like mine, only 1600 homes would be supplied. But most homes are converted to CFL bulbs or will be soon. The wind generators are eliminating coal-mining jobs. But this is only part of the energy story. The price of natural gas was over six dollars a therm (100,000 BTU) at the wellhead in 2007, with the currant price hovering in the two-fifty dollar range. This has caused power companies to generate the maximum amount of electricity with natural gas. New generating capacity is being added using natural gas and coal projects are being canceled, displacing more workers.

In 2008 General Motors filed for bankruptcy and was taken over by the Federal government. Prior to 2008 a hot seller was a SUV. The EPA mileage rating for a Suburban was 12 MPG. Today GM is again a private company and they sell an equivalent vehicle, a crossover called Traverse, which is rated at 19 MPG. Simple arithmetic says that that the Traverse will travel 7 miles further on a gallon of gasoline or use 58% less gasoline.  There are other shifts in the energy picture that is affecting the economy.

In 2004 I purchased a 2004 Prius with an EPA rating of 46 MPG. It replaced a 1996 Chrysler minivan with an EPA rating of 18 MPG. I could now go 28 miles further on a gallon of gasoline. When I first purchased the Prius, it was a novelty, now they common and is a Toyota “best seller” worldwide.

In 2004 Ford motor did not have a vehicle with an EPA rating over 30 MPG. Today they have a mid size luxury car that is rated 37 MPG HI way and an equivalent hybrid at 47 MPG. In fact Ford has two Plug in hybrids that exceed an energy equivalent of 100 MPG.

What is all this has to do with the Fiscal Cliff? Before I discuss that, I would like to report about an assessment of our (USA) economy by the “Economist” magazine. They assessed our K-12 education as poor and deteriorating. Or to be more blunt, we are on a path to become dumber. We are further depleting our intellectual capacity with immigration restrictions, which is compensating for our deteriorating educational system.

The present path to resolving the Fiscal Cliff, which includes tax increases with broad swiping, spending cuts, would be a disaster. Yes we have to raise taxes and yes we have to cut spending but they must build the economy

First, spending cuts. Defense cuts at the Pentagon. Cancel F-35 employment, appoint Petraus Secretary of Defense and implement more drone defense like he used in the CIA.

Second, increase tax revenues. To day cash is being horded because many of the rich are trying to look backward and not forward as reported by Bernanke. Income not invested should be taxed. Income invested should not be. For example, capitol gain reinvested should not be taxed, and if reinvested within a specified period, tax refunded. Other creative tax programs need to be developed to prevent the stagnation of money.

A tax that should be increased is the gasoline tax. As MPG is increased, tax collection monies are diminished. Gasoline tax is needed for infrastructure investments. As the price of a gallon of gasoline increases, consumers will buy more high mileage cars. This will also reduce our carbon footprint, a deterrent to global warming.

And important investment we need to make is in infrastructure. An early Federal Government infrastructure investment was the Erie Canal that opened up the upper Great Lakes. Today we are guided by GPS in our auto travel, farming and air travel as a result of the federal government research labs. There are many other examples of investments that have been made to the benefit of all and then taken over by the private structure, resulting in increased economic activity.

And the most important investment we need to make is in our educational system. Each year we continue to fall back the problem will become more severe.

As we search for the solution to the fiscal cliff, a change we need to be sensitive too, population growth. In the United States, population has doubled in the last fifty years. While population growth rate may be slowing, population growth is both the solution and a problem.

Alvin J Cotter

12/01/2012