On October 3rd, President Obama and challenger Mitt Romney will debate the economy in their first of three presidential debates. It’s the key subject on the minds of voters according to almost every poll this election cycle. But the American economy is no small thing; what exactly is the economy?
The debate will be addressing many parts of the American economy. The debt of course will be one part, but even that is influenced by more than just the budget or government spending. Like many things these days in politics, the big issue is going to be boiled down into small bites. Each will likely be the opportunity for 30 second soundbites that will benefit the election campaigns, but lack detail.
Starting from one of the most popular subjects there is the national debt. It currently stands at just under $16.1 trillion, in 2008 at this same time it was $10.3 trillion. The growth of the debt is a matter that cannot be avoided. Which directly lends itself to the fact that there has not been a single budget passed by Congress since President Obama was elected – both being issues relating to the ability of the President to create bipartisan legislation and stewardship of the nation. Romney will attack and President Obama will defend on this.
What is less likely to be discussed is what is going to happen to the debt once interest rates increase. Either due to inflation, additional downgrades to the national creditworthiness, or a multiple of other factors separate or combined, the interest rate will eventually rise from the current .25% towards the recent average of 4%, or more likely the historical 6.24%. We ran estimates on the outcome of a gradual increase interest rates, as well as at the recent and historical averages, over the next 5 years:
4% increase – total of $5.88 trillion added to national debt (increase of $3.66 trillion from projection)
6.24% flat rate – total of $7.615 trillion added to national debt (increase of $5.39 trillion from projection)
According to US Debt Clock, at current rates, the US Gross Domestic Product (GDP) will be slightly over $17.2 trillion four years from today. Thus on the most conservative expectation, debt will outweigh GDP by roughly $4 trillion. In our most modest example the result is $23 trillion in debt, the worst case is $27 trillion or $10 trillion more in debt than GDP.
Put into terms the average American can relate to: You make $17,000 a year, your debt is $27,000 a year. How long will you be able to survive on that?
Worth talking about? Yes. Will it be discussed? Unlikely. Neither candidate has a solution, and the only idea on the table that has any support (the Ryan Budget, as President Obama’s budget proposals received 0 votes each time it was presented to the Democrat-led Senate) only slows the rate of unsustainability, not ending it. It is the one subject neither candidate or political party will address or present to the other as a challenge.
Taking a step back, let’s review the GDP. It’s an important figure. It reflects the efforts of the employed, and influences the interest rate. Since being elected, the GDP (on a quarterly basis) even after revision has never topped 4.1%. In fact it has only exceeded 2.6% twice, the fourth quarter of 2009 and fourth quarter of 2011. The total growth of GDP since President Obama has been elected is 1.47% to date (2.18% of we exclude the first half of 2009, blaming it on President G.W. Bush as some pundits insist). As of 2011 the U.S. was ranked 183 out of 185 nations in GDP growth, with Panama and Haiti far outpacing the U.S. looking at just the North American region of the world. The GDP in the second quarter of 2012 is 1.3%.
Moving on, there is the unemployment rate. Each candidate will quote the current 8.1% figure. President Obama will focus on the fact that jobs have been created and that the rate is reducing. Mitt Romney will focus on the fact that the reduction is attributed to the fact less people are looking for work and being counted as unemployed. Both are accurate facts.
In 2008 there were 13 million Americans out of work, 10 million of which counted in the unemployment rate. Today there are 22 million out of work with only 12 million counting. This is lower than the peak unemployment in 2010, but hardly an improvement. Romney is sure to tackle this, with President Obama highlighting that it would have been worse if not for his plans.
Key to the unemployment rate is the Obama Stimulus (as opposed to the G.W. Bush Stimulus) which was heralded as the cure to the recession in 2009. Several parts of the Stimulus failed, like the Making Homes Affordable Act which was ended a year and a half after inception, and a key component has yet to be defined – “saved jobs”. Without question President Obama will denote how the Stimulus saved jobs, without explaining what a “saved” job is or how it is quantified. For some reason, neither the press nor Romney will ask for the definition.
Another issue sure to be addressed in the debate is corporate tax rates. The business world has been vilified in the recent election cycle, Wall Street and greed being almost synonymous terms of late. But a healthy private sector provides a healthy GDP, tax income, and increases in quality of life. Currently the U.S. has one of the highest corporate tax rates in the world.
According to the CATO institute,
… the highest statutory tax rate in the world, with a combined federal-state rate of about 40 percent.”
This tax rate helps to account for the exodus of 46 of the Fortune Global 500 company headquarters from the United States, between 2000 and 2011. In fact, of the 34 Organization for Economic Co-operation and Development (OECD) nations – which includes America – the U.S. is the highest corporate tax. The average for OECD nations is 25%. President Obama has promised a reduction in corporate taxes to 28%, but increasing the number of businesses that must pay that rate. Mitt Romeny has promised to lower rates to 25%.
Of course this will be a big deal between the 2 candidates, debating how the 3% difference matters. What will not be address is how this may be a matter of ‘too late to the game’.
…30 [OECD countries] have lowered their statutory corporate income tax rates since 2000. The United Kingdom is scheduled to lower its corporate tax rate to 23% by 2015. Canada has lowered its federal corporate tax rate to 16.5% in 2011, with a reduction to 15% in 2013.”
What will be addressed, with assurance, is the now infamous quote of President Obama that “If you’ve got a business, you didn’t build that. Somebody else made that happen.”
On the subject of building, there is the situation of home ownership in the nation. The latest reported figure on foreclosures is for August with 191,926 new homes in foreclosure – up .82% versus July 2012. Currently 1.5 million homes are in foreclosure, down from 2011 with 1.9 million homes in foreclosure. The rate of mortgages in foreclosure or at least 30 days late in payment is 11.62%, up .29% from first quarter 2012 but down .92% versus second quarter 2011.
Since the failure of the Home Affordable Modification Program (HAMP), a program that utter failed to aid homeowners as determined by Congressional Oversight Panel on December 13, 2010
The Panel now estimates that, if current trends hold, HAMP will prevent only 700,000 to 800,000 foreclosures–far fewer than the 3 to 4 million foreclosures that Treasury initially aimed to stop, and vastly fewer than the 8 to 13 million foreclosures expected by 2012.”
there are [as of November 2011] between 1.5 – 10.3 million home mortgages in trouble, depending on the expert you ask. Any discussion of the economy must address this problem – that has only disappeared from news media headlines – in a manner that is actually feasible and effective.
The last option proposed, by President Obama, failed to get traction likely because of its failure both in scope and effectiveness. Mitt Romney is sure to seize upon this, though we are unaware of any counter-proposal from him at this time.
Which brings us to poverty and entitlements. They are both a drag on the economy. According to former House Speaker Rep. Nancy Pelosi, entitlements such as extended unemployment benefits and welfare are stimulus to the economy. Yet the poverty rate currently is holding at 15%, or 46.2 million Americans, a near two decade high.
Then again, Welfare pays better than an $8/hr job in 40 States, and more than a teacher in 9 States (as of July 2012). In fact, the average equivalent hourly wage for Welfare in the top 10 States in the nation is $13.68/hr. Thus we have 15 million Americans on Welfare at this time. Spending on Food Stamps virtually doubled from $34.6 billion in 2008 to $75 billion in 2011 with the Government seeking to enroll even more Americans (though Food Stamp enrollment has been increasing for a decade).
Still, unemployment is down from 9.9% when unemployment benefits were extended to 99 weeks. The number of people unemployed 27 weeks of longer is beginning to trend down. Thus the argument for extended benefits can be made, and will be. Though it is unclear if the result was because of the benefits being a stimulus as some proposed, or because of those that ceased being counted as unemployed. Which will be the line that Romney will surely take.
These are but a few of the issues that the economy covers. It is likely that questions and answers will touch upon all of the issues listed above (except the affect of interest rates). The issues go far deeper than we have touched upon, the complexity of interaction to large in scope to be covered in so few words – let alone during the debate. We hope that this has helped voters, as the soundbites of the debate will never cover the complexity of the issues nor the answers.
No matter the outcome of this debate, or all 3, voters should review both candidates positions on these and all issues of importance to each individual voter. Only in review of the totality of the statements, interviews, voting record and debates will voters identify the candidate that best matches their views on who should lead the nation, and in what direction. We, at M V Consulting, don’t care who you vote for – just that you make an informed decision.