The Dangers and Opportunities for America's 2019-2020 Economy
The November 6, 2018 United States national and state elections are over except for the disputed North Carolina 9th congressional district. Democrats now have a much stronger political hand by gaining control of the House of Representatives as well as many state houses and governor positions. Still the Republicans hold on to substantive power despite this 2018 election rout.
Many people feel that divided government such as the situation we have just entered is advantageous because it curbs any excesses on either side of the political divide. This is true but it usually leads to governmental gridlock and the resulting legislative inaction.
I realize that most people see our economy as a booming one and are happy with government becoming inactive allowing the good times to continue to roll. Unfortunately there are some ominous storm clouds developing in both our national economy and the world economy.
The housing market has stalled to a crawl. International trade is slowing and President Trump's nascent trade wars threaten to bring this whole system down. The financial markets are showing extreme volatility more often to the down side than up. Is governmental inertia advisable in the face of these economic head winds? I sincerely think not.
I have been arguing in my most recent articles that we are currently enjoying the wave of an inflated economy. It is extremely out of balance and in danger of breaking down in rapid order. Lately I have been thinking deeply about this situation as well as how the newly politically ascendant Democrats should proceed now that they have acquired some governmental power.
The Democratic party appears to be divided as to what policies they should be advocating for and what legislation to present. I intend to write about what policies they should propose that are reasonable and possible in this highly charged and partisan political morass. Any extreme idealistic economic stances will be put in abeyance by myself within this article. Or at least I will try to do so.
The immediate problems we face with our economy are not totally unlike those we saw in 2007-2008. Remember, most of us did not see that severe recession and financial meltdown coming at that time.
I will begin this article by outlining how our economy has steadily strengthened since 2008 and recently peaked. Then I will detail the troubling signs that are flashing and signifying severe problems for our economy both short and long term.
Finally I will state my policy proposals that I feel the Democrats should pursue to strengthen the economy and protect it from collapse. I will only advocate policies at this time that Republicans in Congress and President Trump might get on board with. I know there is enormous mistrust on both sides but the economy is nearing a breaking point. This is the time for all sides to choose pragmatic solutions over partisan grandstanding.
The story and origins of the booming 2018 United States economy came out of the ashes of the 2008 U.S. financial meltdown. The resulting extreme recession was caused by many factors but the common denominator was the economy being sharply out of balance.
The housing market had skyrocketed at a pace not seen since the 1950's with no perceptible reasons for it. All regulatory bodies had abstained from overseeing this party resulting in a deluge of loan money flowing into this market under none of the economic and financial principles which our country had usually operated.
The Federal Reserve cut interest rates and kept them very low after the 9/11 terror attacks which fed into this loan frenzy. They finally decided it was time to raise these rates in 2006 and this housing boom fell like a house of cards within a year and a half.
Our current economic atmosphere is not the same as 2008 but it is eerily similar. The Fed once again kept the interest rates low after the 2008 financial implosion and indeed cut them to rock bottom. They only recently began to raise them and the effects can already be seen in our current housing downturn.
Do not get me wrong. The raising of the Fed interest rates are necessary to avoid future inflation and further economic imbalance. My argument is that the Fed has once again raised these rates way too late in this cycle. Once again the housing market has slowed precipitously.
This time the slow reaction does not have to be nearly so catastrophic. The housing market became overheated but not nearly to the degree it did between 2002 and 2006. This current rise was a more natural one though still quite inflated. Unfortunately, this time, spending policies within the federal government are much more exaggerated reducing our curative options.
The Barack Obama administration inherited a horrible economy in 2009 with a financial system on the brink of collapse. They responded by passing a modest spending stimulus bill that kept the economy afloat. They also initiated a lot of controls on the financial system culminating in the Dodd-Frank Act in 2010.
The economy stabilized and soon began to grow albeit slowly. This pace continued through the rest of the Obama administration and was growing even brisker over the final two years of his tenure. Strong financial controls remained throughout via the Dodd-Frank act possibly slowing growth but ensuring the stability of the financial markets.
Donald Trump won the 2016 United States presidential election. He was about to implement policies that were to soon boost the American economy dramatically for the short term but with serious long term consequences.
Both candidate Donald Trump and President-elect Donald Trump clearly signaled a strong desire to eliminate most regulations on business and allow them to run their operations as unfettered as possible. This policy extended to Wall Street. The financial markets began to skyrocket in price the day after Trump was elected. This was in direct anticipation of the soon to be favorable business environment that Donald Trump had promised.
The Trump administration also helped to pass a huge tax cut bill that benefited the wealthy and corporations to a much larger degree than the rest of the citizenry. This almost immediate injection of funds into our economy further accelerated the rise in the financial markets.
Unfortunately it appears that this Trump economic jump start may be short lived. The fundamentals of the stock market had already been strong with excellent earnings reports across most business sectors. The Trump administration moves kicked them into overdrive.
Predictably, the national budget deficit has soared due to the Trump tax cuts. This combined with the belated Federal Reserve rate hikes has stalled the housing markets and increased volatility in the financial markets. A recession has not hit yet but all of the preliminary factors are signaling the onset of one.
The time is now for our governmental leaders to mitigate, forestall or avoid a recession or worse. Our current political climate is extremely polarized and dysfunctional. What can realistically be done to take action to improve our structural economic conditions? Is anything possible in this political state of play?
The first point I would like to make is that President Donald Trump likes to look like a winner in the public's eye above almost all else. This personal orientation could very possibly place him in a mental state where he might be inclined to compromise. I find this part of the President's personality to be disturbing but advantageous in getting some legislation done to improve our economic condition.
The Democrats are now in control of the House of Representatives. The President should be more inclined to deal with them if he wants a public victory. Of course, he may also gridlock the entire process if he feels slighted or his political polls change. I want to hope for the more positive response from the President to further our nation's economic conditions.
One of President Trump's largest unfinished goals is to attain a significant infrastructure bill. This is a prime area where all sides can agree on a substantial and effective piece of legislation.
The President's plan involves a heavy partnership between the federal government, business, and the states to accomplish this. Democrats will probably favor a plan more heavily tilted to federal planning and funding. Compromise should not be difficult to arrive at under these circumstances.
A second area of possible compromise is much less obvious and to many counter-intuitive. This area is healthcare which voters ranked as their number one issue in the 2018 campaigns. Even Republican candidates campaigned to protect those with preexisting conditions from losing their healthcare insurance. This is after voting to repeal the Affordable Healthcare Act which would have done just that.
Repeal of this law is now out of the question after the 2018 election. Why not strengthen the popular parts instead? The Supreme Court upheld this law in 2012 and also ruled the individual mandate to be constitutional. They also struck down the the requirement for states to expand medicaid to help cover its lowest income citizens.
Initially the vast majority of the Republican controlled states rejected the medicaid expansion for their states. Many of these states have succumbed to their constituent wishes and have arrived at the realization that this medicaid expansion is beneficial to their voters. Currently 35 out of our 50 states have expanded medicaid under the Affordable Healthcare Act.
I believe this healthcare program including medicaid expansion and protecting those with pre-existing conditions is becoming much more popular in all fifty states. Both sides are seeing that this policy can be a winner at least in part and for some in its entirety.
The sticking point in all of this is that the individual mandate is what makes this program work economically. President Trump and the Republican Congress eliminated this part of the law in December of 2017 to take effect in 2019. Some type of accommodation and amendment must be agreed upon to make this all economically viable. Otherwise all other compromise will be rendered moot.
President Trump appears to be keen on lowering drug prices. This is certainly a priority for Democrats also. Maybe the two sides could work on allowing foreign companies to provide these critical medications to Americans as long as it is monitored for quality. Also a compromise on on allowing interstate healthcare insurance would be vastly beneficial in lowering drug costs as well as all healthcare costs.
Another area for compromise could surprisingly be immigration reform. President Trump desperately wants to build his border wall next to Mexico. Democrats want the Deferred Action for Childhood Arrivals (DACA) to be renewed and possibly strengthened.
The President has signaled in the past his willingness to compromise on this issue. He has agreed to deals on this issue verbally in the past with both sides getting some of what they wanted. The President has also always reneged on this when members of his far right base have strongly argued against a deal. Maybe the time is coming soon to accept a deal with Democrats who are now in control of the House.
I now would like to turn to the subjects of the budget deficit and the rapidly growing wealth gap in our country. They are connected in many ways and they must be addressed. We certainly need more revenue to both cut the deficit and pay for needed programs to fortify the economy and to help the lower and middle classes in this country.
Is this possible both politically and economically? I believe it should and could be. Possibly only in small parts but maybe in larger ways. Firstly, the wealthy and business received a huge windfall in the last tax cut. How about now eliminating all or most of the tax loopholes that these groups have used to evade taxes for years.
These loopholes have gathered over the years and total in the hundreds of billions of dollars across all industry sectors. This should be tax revenue opportunity number one and it would only be fair to the public at large.
Another tax revenue source could come in an area that is strongly trending in many states. This source is the legalization of marijuana. Several states have legalized it already or at least are allowing it for medical uses. Many more are considering this change. A huge impediment to this trend is the continuing federal prohibition of marijuana use and sale.
Most conservatives and libertarians want government out of our lives as much as possible so this idea should be a no-brainer. Governments can tax its sales and regulate it like alcohol to preserve public safety and keep it away from minors.
There is another source to raise needed revenue for the government and solve a growing problem. It is one I have often advocated for but know will be very difficult to pass in this time of political gridlock. Yet it is critical to consider it now. This is the raising of the income threshold on social security and medicare taxes.
My rationale for implementing this is simple. The steady progression of baby boomers on to retirement age has created a growing deficit between taxes received and outgoing benefits.
The maximum income level that these two taxes stop at has risen very slowly the past few years. They have barely risen to the pace of inflation. The rate of new retirees on the other hand has been skyrocketing. A significant increase in this income threshold level could become palatable to Republicans if it is implemented to sunset when the retiree bubble is over.
The rate of millennials entering the workforce is growing but slower than the baby boomer retiree rate. This job market condition will begin to invert in a few years so maybe this increase could sunset in ten to fifteen years.
Sensible sources of raising revenue to close our budget deficit are critical for the long term economic health of the United States. Of course, I would never had proposed and passed the Trump tax cuts. Their repeal would be most advantageous to cutting this deficit and reversing the wealth gap in this country. Unfortunately this will not happen before the 2020 national elections.
The Democrats appear to be a party becoming divided between their moderate members and their newly ascendant more liberal wing. Is this actually the case? Is this positive or negative for the party if it is true?
There is a schism in the Democratic party right now but I do not feel it is nearly as bad as many pundits are pronouncing it to be. It is also not unusual for this to be the case for the party out of power. They are united in their opposition to President Trump and are sorting out their messaging. This situation is being crystallized in their process for choosing a 2020 Presidential nominee.
The Republicans had a similar split in their party going into the 2016 national elections. They had seventeen Presidential candidates with policy goals ranging from moderate right to very conservative. Ultimately they won the 2016 Presidential election. What can we read from this?
A national election cycle, especially for the out of power party, can benefit from a wide ranging and heated debate in deciding its party's policy goals as well as its Presidential candidate. It is a healthy process and usually helps unite the party. But there are pitfalls and obstacles to overcome.
Donald Trump won the 2016 Republican Presidential nomination and united his party. The process was nasty but the GOP emerged together and ready to oppose Hillary Clinton in every possible way. It led to victory but at what cost.
The GOP adopted the policies and accepted the behavior of President Trump hook, line, and sinker. The old Republican party does not resemble the current party in almost any way. This transformation has led them to some important legislative and judicial victories. It has also led them to major drops in the polls as well as being routed in the 2018 elections.
My view is that the Democrats must learn from these 2016 Republican outcomes. A diverse and vocal debate among many candidates can sharpen their message as long as they come together after the election. The winning candidate should not be accepted if he or she has a flawed character and adopts policies out of step with the party as a whole just for the sake of winning.
I believe that Speaker Nancy Pelosi has set a correct tone and standard for the party. She has stood up to the President firmly and beaten him over his border wall demands. She has accepted all of the new members whether they are very liberal or moderate. They have been given important committee seats. She has admonished them when they speak badly and are out of step with Democratic values.
The Speaker has also sensibly taken the impeachment debate off the table until the Mueller report is issued. She believes and I agree that the 2020 election will probably decide this debate.
Hopefully the Democratic party as a whole will adopt this course during the 2020 campaign season. This will make for a much stronger and diverse party and a United States that will have all of its economic groups represented and all of its values upheld.