Running on Empty
Posted by Michael A. Kamperman on June 19, 2011
In less than two weeks the economy will start to run on empty. The gas stations fueling the economic engine will begin to run dry. Significantly, the enhanced Medicaid stimulus payments to the states ends on June 30. This $90 billion support of state budgets will simply be gone. Plus, the Federal Reserve will end quantitative easing II on June 30. Basically the markets will lose $20 billion in extra liquidity per week. The economy is dramatically slowing even with these two support structures still in place. What happens when they end? Other parts of the stimulus program also run out before the end of the year. Unless a new deal is in place extended unemployment benefits are set to run out at the end of 2011. But this is not the only thing we are running out of. Many struggling families have survived the last few years by draining their 401(k)s and IRAs, running up credit card debts, and selling off assets. We don’t know how many families will run out of gas in 2011, but I suspect the number is in the millions. Many of these families are “self employed” running businesses that are no longer providing the family the financial support it needs. Meanwhile, Washington is debating more austerity cuts and convincing one another that the way to create more jobs is to spend less money.
In what economic universe does less demand create more supply? The answer is only in a virtual one. In the real world what drives business confidence it is not a balanced budget or lower taxes, it’s customers. Any business will respond positively to more and more people showing up with cash to spend. Confidence comes from demand. Yet strangely the message of the day is businesses would create more jobs if Washington would just get out of the way and quit the spending. The very spending that is lifting up demand, not dragging it down. Just ask all the school teachers told to hit the pavement this coming fall if federal spending matters.
The debate has moved so far toward the austerity movement that AARP has come out supportive of raising the retirement age as long as their current members get every dime promised to them. Social Security is not in trouble, yet even AARP is folding to the misguided pressure to cut federal spending. The best way to cut the deficit is to create new tax payers that are either sitting at home collecting unemployment benefits or sleeping at home with Mom and Dad. We don’t need to raise taxes. We need to raise taxpayers. The old saying is it takes money to make money. It’s going to take federal spending to create demand to create new taxpayers. Right now the federal government is moving in the opposite direction. Worse, those arguing for more cutting are winning the debate in the minds of the American people. Like in Star Wars, we need an Obi Won to help us.
