The View From Here . . .

By Bob Morgan, Jr.

Whither the economy?

At present, economic conditions in the United States are difficult at best. Economists say we are in the 19th month of a recession and it has been more than 9 months since the financial panic of September 2008 created fears as to the stability of a number of key institutions. The unemployment rate has skyrocketed to 9.5 percent and climbing. Stock market prices have declined sharply in the last year, with the Dow Jones Industrial Average, which had hovered just above 11,000 before the September crash, now in the low 8000's range. The price of homes, typically the biggest assets of families, has declined significantly in most areas.

Of course, the administrations of George W. Bush and now Barack Obama have attempted to deal with the downturn. The principal legislation under Mr. Bush was the $700 billion bailout bill, which established the Troubled Assets Relief Program (TARP) that supported troubled (and some not so troubled) financial institutions and also was used to shore up the automobile industry.

Very early in Mr. Obama's tenure, Congress was persuaded to enact a $787 billion "stimulus" bill, whose huge pricetag was justified by a White House claim that it was going to "create or save" 3.5 million jobs. So far the results have been pretty dismal, with the unemployment rate spiking; administration critics have noted that about 2 million jobs have been lost since the enactment of the stimulus. Now the White House is asking for patience, stressing that the stimulus was a two year plan. One problem is that stimulus funds, rather than going directly for "shovel ready" projects, have frequently been used by state governments for short term needs (for example, Medicaid funding).

There are, of course, different views of when we come out of the recession. A pessimistic assessment was provided this week in The Wall Street Journal by publisher Mort Zuckerman, who cited statistics relating to shortened workweeks and long periods of average unemployment to predict job losses that may well extend to 2010 and produce a peak unemployment rate of 11 percent. A more optimistic take appears in an article by Chris Isidore on the CNN/Money website. Mr. Isidore's view is that reduced inventories and cut payrolls will start increasing profit margins and help fuel recovery, which could begin as early as the late summer. He also points to increased confidence among business leaders.

One thing that would not seem helpful in promoting recovery is the perception of an antibusiness climate in Washington, especially as it affects small business. This is a problem for the Obama Administration, which tends to focus on public rather than private investment. For example, the cap and trade bill, if enacted, will deter business growth by increasing energy taxes. While some proposed health care reforms might be helpful to startup businesses saddled with high medical costs, the draft House proposal imposes substantial payroll taxes on employers not offering medical insurance. And most crucially, as detailed in a Wall Street Journal editorial this week, the health plan proposal hits high income small business owners (even those offering health insurance) with tax surcharges, which coupled with already scheduled higher income taxes plus higher capital gains taxes, plus increased state and local taxes, puts the total tax burden at levels not seen for more than 20 years. Moreover, the unprecedented peacetime deficits (estimated by the Congressional Budget Office at $9.3 trillion until 2019) create the specter of inflation once the economy recovers. None of this is the way to encourage investment and restart the economy.