4 More Years?

Regardless of where you fall on the political spectrum, one thing seems to be certain – we can’t take another 4 more years of what we have had for the last three and a half.

It has been reported that disposable income has declined in the US by $1,315 in the last 3 years, and almost $4000.00 since 2009. That is the worst 3 year recording in American history (http://www.cnbc.com/id/44962589). This would include the era of the Great Depression. We also have the Misery Index at its highest level since 1983 – which was the starting point of the Reagan Economic Recovery.

There is nothing in human history that suggests Americans should remain upwardly mobile, or that growth continues forever. Perhaps we should simply accept lower standards of living? But the American value system of a protestant work ethic, free markets, and individual liberty has always allowed for economic recovery and renewal. It is not that this time is different – although the economic factors certainly are. This time is not different as it relates to solutions, we simply have chosen not to employ the right answers.

What are those right answers? Lower taxes, less government, and less spending. Sounds so easy, right? Well obviously not, there is more to the problem than that. But that is the requisite starting point. And it’s not just lower taxes. Lower taxes will not solve the debt problem. If they do not produce better growth rates, then they would only exacerbate the debt problem.

But we do need a flatter, fairer tax rate. We must start with the proposition that the money you earn is yours, not the governments. The media and even some conservatives have casually accepted the phrase “tax expenditures” when an individual or person receives a tax deduction, or exemption. That language is wrong, for it presumes that the money belongs to the government in the first place. Across the board tax reform, as recommended in President Obama’s Simpson/Bowles Commission, is a fairer way to tax individuals. We should also lower the number of tax brackets. Eliminate deductions. That will make the tax collection system simpler and fairer. This will help with understanding and certainty, and this will allow small businesses and the free market environment to flourish.

And it’s not just less government. It is a radical reduction of government. The elimination of entire departments. Government must be returned to the people. Why does the federal government tell you how to educate your child? Is that not best reserved for the state and your local school district? Why does the federal government fund studies in foreign countries on matters unrelated to your well being? I could go on, but you already get the picture. Government should be at the state and local level to insure efficiency and fairness. These are not platitudes, they are historically proven models of governing.

But that doesn’t mean the local government will get things right either. State and local governments are failing to balance their books just as much as the federal government has failed in that respect. Ironically, in state’s with large Democratic majorities and with essentially Democratic government for generations, seem to be struggling the most (see Illinois, California, New York).

So we need less spending? More people are hurting out there and the economy does not seem fair – banks get bailed out but your home is underwater. I share your sentiment. But free markets did not do this to you, and in all reality, neither did the bankers. The GOVERNMENT ordered banks for several decades to make loans with limited credit standards. If they did not lend into neighborhoods where poor credit histories existed, they would have their bank charters pulled and prevented from expanding. The GOVERNMENT instructed Fannie Mae and Freddie Mac to purchase and/or underwrite many of these loans. The GOVERNMENT bailed out the banks, and made many of the banks which were solvent and did not want the money to take the federal bail-out anyways. (An excellent accounting of those pivotal days in 2008 can be found in Andrew Ross Sorkin’s “Too Big To Fail,” or watch the HBO special of the same name).

While many people may be reliant on government support due to the economic downturn, that does not mean the solution to getting a job is MORE government support. The government takes from someone else to give to itself, or another, it does not create or sustain markets. If you and I landed with the pilgrims hundreds of years ago, no government was involved for you and I to exchange whatever we could grow or hunt – and that constitutes a market. The principle remains the same today. We have tried GOVERNMENT support at historic levels, obscene levels of borrowing and spending for the last 3 years. As my blog suggests at the beginning, the economy is getting WORSE, not better!

The American people need to accept that markets run in cycles, and that historical context is not going to change. The stock market in the US has run in 16-18 year cycles, from before the automobile and since the computer. We had an 18 year bull run, largest in history, from 1982 – 2000. We are therefore in the midst of another 16-18 run – but to the downside. This means markets will most likely end up flat by the time we are through it. All the government intervention has done has prolonged the pain, and driven up our debt.

What does this information mean for your savings, for your retirement money? Well, first of all, if part of your retirement is an expectation of receiving Social Security, you need to rethink that position now. Social Security 10-15 years from now, if not sooner, will be means tested, and most likely, any benefits you receive will be dramatically reduced.

And your portfolio? While the millions of people who have 401k‘s and IRA‘s will see different outcomes based upon a myriad of factors, the stock market itself will remain a place of constant up and down volatility, and of substantial risk of loss. The best answer for your portfolio is a market-linked CD, or an index annuity. That way, you get the gains of the market (subject to caps and time limitations) with none of the losses.

So we will get through it, after all, we are Americans. America is stronger than the mistakes of our elected officials. And I am an American with a Capital “A.” But when you go to vote, even if you are one of the few in which the last 4 years have been okay, or even good – think about these questions: do you feel like this is the America that you want? Does it feel like the people in charge know what they are doing? Do you believe we can afford the amount of debt we have – and if not, where do you think they will take the money to pay for it? Important questions. Exercise your right to vote, but do so looking for the candidate who is the most fiscally conservative. America cannot afford another 4 years of the same.