Good riddance 2009.
Editor's note: This is adapted from a recent speech to the Florida chapter of the International Council of Shopping Centers.
Good riddance 2009.
Someone please assure us it was just a bad dream. It was certainly surreal.
Who ever would have thought:
General Motors ... now owned by the taxpayers. Merrill Lynch ... with its bronze bull on Wall Street and the very symbol of American capitalism ... gone. We now have a federal “pay czar.”
More: Florida's unemployment rate is now 11.5%. The Gulf Coast's unemployment rate averages 12.6%. (Just for context: During the 10 years of the Great Depression, the U.S. unemployment rate averaged more than 12% a year.)
This is all so surreal. But it's also real.
How are we ever going to get back on the “Road to Prosperity”?
History is our guide.
Economic Land Mines
Before we get to the solutions, it's useful to put the economic picture in a clear context. While economists are declaring the recession over, there are still a lot of economic land mines out there that threaten to explode.
So sit back a few minutes and see if you can absorb the magnitude of what we lived through just in 2009. It's stunning and frightening:
Start with Karl Rove, President Bush's chief of staff, who summarized the national economic picture on Nov. 27. “Since taking office in January,” Rove wrote in The Wall Street Journal, “Mr. Obama pushed through:
• A $787 billion stimulus;
• A $33 billion expansion of the child-health, S-chip program;
• A $410 billion omnibus appropriations spending bill;
• An $80-billion car-company bailout;
• An $821-billion cap-and-trade bill (only through the House so far);
• He is urging Congress to pass a nearly $1 trillion health-care bill.
After Rove wrote, Obama introduced another measure: He wants to take another $50 billion of borrowed money for Stimulus II.
Altogether: $3.2 trillion in new spending — in less than a year.
Just for comparison, when George Bush — no fiscal champion — left office, the U.S. government was spending $400 billion more a year than it was taking in.
Now we're talking about doing eight times that.
Economist David Malpass in Forbes: “... Even under the administration's unlikely modeling, projections show the nation's marketable debt growing from $7 trillion to $21 trillion by 2019.” And that doesn't include, Malpass wrote, the present value of unfunded liabilities in Social Security and Medicare, which are $100 trillion each.
• USgovernmentspending.com shows our nation's entire history of the gross public debt as a percentage of Gross Domestic Product.
In the Bush eight years, debt as a percentage of GDP jumped from 60% to 70% by the end of 2008.
In 2009, gross public debt jump to 90% of GDP. In 2010, it is expected to reach 98% of GDP.
In two years, it will have risen from 70% to 100% of GDP.
The only time that percentage has been higher was during World War II.
And of course, you cannot go a day without reading news about the value of the dollar and gold.
In a review of Charles Goyette's new book, “The Dollar Meltdown,” writer Michael Nystrom explains:
“'The Dollar Meltdown'” puts America's decline into a sweeping context that makes our collective outcome impossible to ignore: Plunging living standards, a steadily eroding currency and massive inflation in a nation that has lost its industrial base.
“If you think things are bad now,” Nystrom writes, “they're only going to get worse ... There is only one way out for our rogue state: Inflate or die.”
Richard Dugas, CEO of Pulte Homes, the nation's largest home builder, was quoted recently saying: “As we look out to 2010, we are expecting difficult conditions to continue.”
The Wall Street Journal followed Dugas' comment with this: “Meanwhile, more Americans who bought homes during the boom are falling into mortgage limbo. About 3.4% of U.S. households — or 1.9 million homeowners — are 120 days or more overdue on their payments, but not yet in foreclosure.
“That is up from 1.5% a year earlier.”
The percentage has doubled.
When you put all of the above information together, there's no way you can think that 2010 is going to be a “Miracle on 34th Street.” But here's the scary part: No one really knows what the outcome of all of this is going to be.
We all sense it cannot be good.
At a recent luncheon in Sarasota, Charles Krusen, president of Krusen Capital Management in New York, a hedge-fund operator, summarized his five-year economic forecast by saying he sees inflation-induced prices rising at an annual rate of 8% to 10% by 2013. Overall, he told his listeners, this is what he expects: “Higher taxes, higher interest rates and a lower standard of living.”
And that's just on a national level.
Florida, Gulf Coast Land Mines
We have our own land mines threatening to detonate in 2010:
Dick Morris and Eileen McGann, writing for Jewish World Review, noted recently that if ObamaCare is approved, new, required Medicaid spending by the states would add $910 million in new spending to Florida's budget.
Morris ventured to say: “Florida might not be able to avoid imposing an income tax if it has to meet so high an unfunded mandate.”
He exaggerates, but $910 million in new spending is no small land mine.
Two weeks ago, the Legislature voted to build a high-speed rail line from Orlando to Tampa with $2.6 billion of borrowed federal taxpayer money and $775 million of Florida taxpayers' money. That's just to build one leg, mind you.
And while those numbers are extraordinary in themselves, keep this in mind: In an assessment of high-speed rail projects in the United States, the Reason Foundation, concluded that every high-speed rail projection ever made in the United States was wrong. The costs have always been much higher than projected, the subsidies much higher than projected and the ridership much lower than projected.
Another Florida land mine. No, it's more like a bomb: Hometown Democracy - Amendment 4.
In November 2010, Floridians will vote on a constitutional amendment that, if approved, will add more regulatory burdens and costs to future development and redevelopment — on top of Florida's already overburdensome regulatory schemes. Amendment 4 will require referendums on scores of proposed land-use changes to local comprehensive plans. Every rational economist in the state says this will be an economy and job killer for Florida.
In spite of that, recent polling shows 59% of the voters support the measure. Sixty-percent is required for approval.
Let's not forget insurance. Florida still has a looming property insurance bomb — even though we have dodged a direct hurricane hit the past two years and even though State Farm Insurance announced it will continue to do business here (dropping 125,000 of its 810,000 homeowner policies).
Still, of Florida's 210 property insurers, 102 are losing money. What's more, Florida taxpayers remain vulnerable to bailing out the state's biggest insurer — the taxpayer-owned Citizens Property Insurance — in the event of a direct hit. And for the second consecutive year, the Competitive Enterprise Institute has given Florida an F- in its annual Property & Casualty Insurance Report Card — the lowest grade of the 50 states.
This is a big, economic issue. High insurance costs drive jobs elsewhere, making Florida less and less competitive.
Unemployment compensation insurance. Florida's unemployment insurance trust fund is broke. To refill it, the minimum rate will go from $8.40 per employee to $100.30 per employee starting Jan. 1. This means a 50-employee business with the minimum experience rating paid about $450 in taxes in 2009. In 2010, it will pay $5,015, a 1,094% increase. Talk about a job killer.
Population growth: No savior
Let's talk about jobs. In the past, Florida created jobs with population growth. We cannot count on that in 2010-2011.
During the 1980s, Florida's population grew 33%. In the 1990s, it grew 25%. From 2000 to 2010, Florida's population grew 19% over the previous decade.
From 2008 to 2019, demographers are forecasting Florida's population growth will slow even more — rising only 10%. In the next three years, Florida is expected to add 300,000 net new residents. We used to add that many in a year.
Last year was the first time in 40 years more people left Florida than moved in. And the same is expected for 2010.
When you look at the six counties along the Gulf Coast — excluding Charlotte, but including Pasco — this region is expected to add 208,500 people between 2009 and 2014. That's half the number of people the region added in the previous five years.
Demographers are forecasting less than 1% population growth here for each of the next three years. It used to be 2%.
You don't need a Ph.D. to understand what that means for the growth in in our economy and the growth in jobs.
More perspective: After the 1992 commercial real-estate recession, from 1992 to 1996, the Gulf Coast region's population expanded by 216,082 people, and the region added 172,420 new jobs.
Now look at today: From 2006 to 2009, this region lost 182,000 jobs.
If demographers are expecting net population growth here over the next four years to be only 127,550 people, just think how long it's going to take to create those 182,000 jobs and bring the jobless rates back down to 4% and 5%.
And how are we going to do that when we have an electorate and residents who continue to fight and oppose virtually any new development?
+ The Road to Prosperity
History has shown us the “Road to Prosperity” four times.
Four presidents — Democrats and Republicans — have shown how tax-rate reductions re-invigorate the U.S. economy and put Americans back to work.
The first time occurred in the 1920s, when President Calvin Coolidge persuaded Congress in 1921 to lower tax rates. They went from the highest marginal rate of 73% in 1921 down to 25% in 1925.
And guess what followed? The Roaring '20s — levels of affluence never seen in the United States. “The middle class and even many of the poor could, for the first time, afford radios and plumbing and hot water and trips to the movies,” wrote Arthur Laffer, Stephen Moore and Peter Tanous in “The End of Prosperity: How Higher Taxes Will Doom the Economy — If We Let It Happen.”
Between 1923 and 1928, while the economy boomed and tax rates fell, real tax collections nearly doubled.
Then came the crash of 1929.
If you read the history books of economic policy over the 30-year period from 1930 to 1960, the presidencies of Franklin Roosevelt, Harry Truman and Dwight Eisenhower and the congresses that served with them, kept U.S. tax rates at extraordinarily high levels.
Throughout the 1930s, Roosevelt raised taxes — and unemployment remained above 12%.
It wasn't until 1945, under Truman, that Congress finally cut the highest tax rates — from 94% to 85% (85%! Can you imagine?)
But that didn't last long. In 1950, Truman signed into law a bill that raised the highest tax rate back to 92%.
And then when Republican Dwight Eisenhower became president, he vetoed a bill that would have cut U.S. tax rates. No surprise: By the end of Eisenhower's second term, the U.S. economy was in the pits again.
Then along came a Democrat, John F. Kennedy.
In 1963, Kennedy spoke to the Economics Club of New York. At the time, the highest marginal tax rate was 91%, and the lowest 20%.
“It is a paradoxical truth,” Kennedy said, “that tax rates are too high today, and tax revenues are too low, and the soundest way to raise the revenues in the long run is to cut the tax rates.”
When Kennedy's tax cuts went into effect in 1964, the U.S. economy grew rapidly the next two years. The unemployment rate fell to its lowest levels in 30 years — from 7% when Kennedy took office to 3.6% in 1966.
And then, we did it again.
The Era of the Four Stooges
Laffer, Moore and Tanous refer to the period from 1966 to 1982 as the “Era of the Four Stooges of the American Presidency”:
• Lyndon Johnson — the Great “Welfare” Society, Vietnam and top tax rates of 77%;
• Richard Nixon — He was an economic disaster. Under Nixon, we saw the launch of the great regulatory state, the end of the gold standard, wage-and-price controls, uncontrolled federal spending and the start of out-of-control inflation. Unemployment doubled to 7%, and the federal budget increased 30%.
• Gerald Ford — Remember his buttons, “Whip Inflation Now”? Ford's great economic accomplishment: a windfall profits tax on oil, which promptly made domestic oil more scarce.
Unemployment rose to 8.5%. Inflation hit 11% in 1974, up from 5% the previous year. In 1975, inflation was 9.2%. Even though inflation dropped to 5.7% in 1976, American voters had had enough.
• Jimmy Carter — Another disaster. More price controls on oil and oil shortages. More inflation.
While the money supply increased at an 11% annual rate, inflation hit 9% in 1978, rising to 14% in 1980. And of course, we all remember the 21.5% interest rates on mortgages.
The Four Stooges indeed.
How prosperity returned
All of what the Four Stooges did should sound familiar. It's what Washington has been doing and talking of doing through all of 2009: more federal spending, expanding regulation, increasing the money supply. All of which will bring us higher tax rates, rising inflation and rising unemployment.
But once again, look at history after the Four Stooges.
The late Robert Bartley, editor of the Wall Street Journal during the Reagan years, described the economic growth after Ronald Reagan's 25% tax cuts in the title of his book: “The Seven Fat Years.” Wrote Bartley: “It was like we added another California to the economy.” Inflation fell from 14% to 3.5% by 1985. Real GDP growth averaged 3.2% versus 2% in the previous decade.
The National Bureau of Economic Research in 1999 declared the period of 1982 to 1999, which includes the Clinton years and the Gingrich Congress, “the longest sustained period of prosperity in the 20th century.”
And let's not forget George W. Bush's prescription for lifting the U.S. economy out of the dotcom crash and 9/11 recession of 2001. Bush pushed through cutting the dividend tax rate from 39.6% to 15% and the capital gains rate from 20% to 15%. The highest personal income tax rate fell from 39.6% to 35%. And the tax on business investment was lowered.
The stock market roared back in 2003, as soon as the tax cuts went into effect. This didn't just enrich Wall Street; it also enriched school teachers and middle-class retirees and others whose 401(k)s were invested in mutual funds.
Business investment also surged. After falling 4.8% in 2001, business investment grew 9.5% in 2005. And by 2007, the U.S. had regained all of the jobs and then some that had been lost in the dotcom crash and 9/11 recession.
This prompted Laffer, Moore and Tanous to proclaim that “1982 to 2007 was the greatest period of wealth creation in the history of the planet ... Adjusting for inflation, more wealth was created in America in the 25-year boom than in the previous 200 years.”
The message is clear
History has shown us how to get on the “Road to Prosperity.” Clearly, we're not going to get there unless we abruptly turn around and head in the other direction — at every level ... federal, state and local.
Studies have shown repeatedly that states and localities that have falling tax burdens always outperform states and localities with rising tax burdens. They always show higher economic growth, more job creation and higher incomes.
Florida is not going to be one of these states unless we can create a better insurance climate, continue to reform property taxes and defeat Amendment 4.
If we are to recover, Florida and the Gulf Coast need a better selling proposition. We must get the message across to our elected officials:
Florida has a great climate, but it must have a great business climate, too. Cut taxes, cut regulation. Give people and business the climate to come, stay and grow.
THE ERA OF THE FOUR STOOGES OF THE AMERICAN PRESIDENCY
Economic claims to infamy: He led Congress' passage of The Great Society, the start of the welfare state and Medicare, which is now one of the two biggest and most expensive government entitlement programs in history. The top personal-income tax rates under President Johnson were 77%.
Economic claims to infamy: Nixon was an economic disaster. He ended the gold standard, imposed wage-and-price controls and launched the great regulatory state. The federal budget increased 30% on Nixon's watch and unemployment doubled to 7%. Inflation in 1974 reached 11%.
Economic claims to infamy: Remember “Whip Inflation Now”? Ford pushed through a windfall profits tax on oil, which promptly made domestic oil more scarce. Unemployment rose to 8.5%. Inflation hit 11% in 1974. In 1975, inflation was 9.2%. Even though it dropped to 5.7% in 1976, voters had had enough.
Economic claims to infamy: Carter imposed more price controls on oil, which triggered infamous gasoline shortages. The money supply increased at an 11% annual rate. Inflation rose from 9% in 1978 to 14% in 1980. Mortgage-interest rates hit a modern, record high of 21.5%, crippling the housing industry.
Source: “The End of Prosperity”
THE FOUR PRESIDENTS WHO BROUGHT BACK PROSPERITY
Action: Cut highest tax rates from 73% to 25%.
Reaction: The Roaring '20s era of affluence. GDP rose 5.5% per year; U.S. tax collections doubled.
John F. Kennedy
Action: Cut highest tax rates from 91% to 70% and lowest rates from 20% to 14%.
Reaction: Jobless rate fell to 3.6%, lowest in 30 years; GDP rose 18.6% in two years.
Action: Cut tax rates 25%; top tax rate fell from 70% to 35%.
Reaction: Real GDP rose 3.2% vs. 2.8% during Ford-Carter. Family incomes rose 11%, inflation fell from 14% to 3.5%.
George W. Bush
Action: Dividend tax cut from 39.6% to 15%; cut highest personal rates from 39.6% to 35%.
Reaction: Business investment grew 9.5% in 2005; seven million jobs created.
Source: “The End of Prosperity”