There is some good news. Corporate profits are up. Almost 80% of S&P 500 companies are beating earnings forecasts. And, 70% are beating revenue forecasts. Until recently, the stock market has reflected this as investors got a big piece of their losses back.
The recent market set-backs are government driven. The token freeze on non-discretionary non-security spending was put together with higher taxes on wealthy Americans, reduced itemized deductions, a “financial crisis responsibility fee” paid by banks, higher taxes on companies doing business outside the U.S. , higher carried interest taxes on private equity, and higher taxes on oil and gas firms. Most of these taxes will be passed back to consumers.
What does all of this do? Discourages hiring. The auto industry is working off inventory. But, the government bashing of Toyota will cut sales for Toyota. Hence, jobs may be cut there. No one is buying Chrysler and GM is still getting a cold shoulder. If Ford doesn’t pick up the slack for Toyota, then we can blame over-zealous government actions against Toyota for more job losses. The higher minimum wage isn’t helping.
China may already be the number one economy in the world. They are the world’s largest exporter, have the 2nd largest economy, the 2nd largest stock market, and the largest car market. They are doing everything they can do to be smart. We, on the other hand, are doing everything we can do to grow government.
The receipts for the Federal Government are 15% of GDP. Next year they are expected to recover to the average of the past 60 years. Expenditures, however, are 25% of GDP. Higher by 6% than the average over the same period. This spells big problems down the road. And down the road is now only 6 years away.
In 2016 defense spending will be 19% of total government spending. Discretionary spending will be 10%. The balance, mandatory will be 71%. This is Medicare, Medicaid, Social Security, and much higher benefits for Federal employees compared to the private sector. At some point, soon, mandatory spending will have to be addressed. Not by increasing it by health care reform and growing government, but by reducing it by cutting government pay and benefits and cutting entitlements. How can any responsible leader look at this and recommend more entitlements and bigger government? Only a community organizer could do that.
That’s my state of the union message. The economy should grow this year if government doesn’t get involved. Taxes will go up dramatically and hiring will not. China has probably surpassed us as the world’s economic power. They have a strategy to grow the economy and increase employment in the private sector where the average wage is still $2,400 per year. We have a strategy to grow government and entitlements when we can’t afford those we have. If they haven’t surpassed us, they soon will.
