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Guest Post by Daniel Wilson

With an election rolling around the corner, President Obama is out on the campaign trail touting himself as an economic savior for the homeland. Though, it’s hard to imagine how anybody could possibly run on an economic record as lousy as his own. After all, the majority of Americans still believe the economy is in a recession.

Technically, the recession ended in the second quarter of 2009, but the so-called recovery has been too weak to reverse much of the catastrophic damage done to the average household during the recent economic collapse. For example, since the alleged recovery began real gross domestic product growth has averaged an anemic 2.4 percent, with 1.9 percent for the first quarter of 2012.

Given the depth of the economic contraction from the financial crisis, economists would expect a much larger rebound in growth rates. Historical evidence compiled by many economists, including Milton Friedman, clearly shows that deep economic downturns are followed by rapid expansions. For instance, at this same point in the 1980s recovery following  the deep contraction at the start of the decade, GDP growth averaged a much more robust rate of 6 percent.

What about on the jobs front? The picture remains the same, no real recovery to speak of. True, the private sector has added 4 .3 million jobs over the past 27 months, which is around 160,000 jobs a month. However, that’s hardly enough jobs to keep up with the growth in the labor force and private sector jobs are still 4.5 million below their 2008 peak. Hence, employment statistics continue to remain in the dumps.

For instance, the unemployment rate has been above 8 percent for over 40 consecutive months, the longest since the 1930s. The labor presentation rate has plummeted to multi-decade lows as millions of discouraged workers have stopped looking for work and are no longer part of the official unemployment rate. In fact, if you calculate the unemployment rate using the same labor participation rate held on January 2009, the unemployment rate would be 10.9 percent.

So what’s holding back the economy? John Taylor, a prominent economist from Stanford University, believes the current administration is most to blame through their interventionist economic policies. Taylor argues that the increased regulatory burden of government over the last few years, including but not limited to, Obama care,  Dodd- Frank, an overzealous EPA and NLRB, have stifled business expansion, causing resources to remain idle instead of being used in productive manners that foster job creation. To validate this view, a recent poll done by the Chamber of Commerce found that 74 percent of small businesses say that Obama Care makes it harder for their business to add employees. Another recent poll by Gallup found that the number one problem small businesses face is complying with government regulations. Just since 2008, the amount of federal workers employed in regulatory activities has increased by 20 percent.

Another blatant impediment to a genuine economic recovery is the profligate spending in Washington D.C. The increase in federal outlays since 2008 did not stimulate the economy, but rather sedated it. The more the government spends, the less the private sector can invest.  As Milton Friedman put it, a government taxes what it spends, so spending increases have the real effect of higher tax rates on the private sector. Since governments have no resources of their own, they have to obtain their fundings by robbing the private sector of its capital. That is, when governments spend money, whether through taxing, borrowing, or inflating they displace resources from the productive sector of our economy and squander it on wasteful projects, such as Solyndra.

A recovery built to last must come from the only productive part of our economy, which is the private sector, not the public sector. In order to allow the private economy to fire on all cylinders, producing a recovery strong enough to reverse the damage done from the recent financial meltdown, the federal government must remove its grip on the economy with large-scale cuts in spending and onerous regulations.

Daniel Wilson is a recent graduate of James Madison University and holds a degree in economics.

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Guest post by Daniel Wilson.

United States gasoline prices are up over 13 percent since the start of the new year, standing at a national average of $3.92 a gallon. On a seasonal basis and in nominal terms, gas prices are the highest ever.

High and escalating gas prices have become a major political issue with numerous politicians and pundits in the media quickly coming to false conclusions on the issue.

One of the most common fallacies perpetrated by politicians on both sides of the aisle is that investors speculating in futures markets cause prices to rise and fluctuate dramatically.

Typically so, politicians have it backwards, speculators actually play a vital and important role in the economy. Speculators make markets more liquid by adding additional buyers and sellers, thus aiding transactions and improving efficiency. Also, speculators actually make markets less volatile. In order for speculators to make money they have to buy low and sell high. Buying at a low price, increases the low price, and selling at a high price, lowers the high price, causing the market price to have a lower variance in the long run.[1]

In addition, a recent study by the Federal Reserve Bank of Dallas demonstrated that speculators didn’t contribute to the run up in oil or gas prices over the last decade.[2]

Another common myth about gas prices is that the big oil companies control and manipulate prices upwards in the name of greed and corporate profits. This myth runs wild within the Democratic party, many of them have recently scolded the oil companies for price-fixing gas and oil to profit at the expense of everybody else. Oil companies control gas prices like grocery stores control cereal prices. Measured by profit margins, oil companies rank 114 out of 225 different industries.[3] Big oil companies, like Exxon Mobil only earn seven cents per gallon of gas. Compare that to the $.50 a gallon excise tax that’s embedded into the price of gas that local and federal governments collect.[4] In other words, governments are collecting seven times more in taxes than oil companies make per gallon of gas. So, the next time you fill up at a gas station, ask yourself, who’s actually greedy, big oil or big government?

One of the most conspicuous causes of higher oil and gas prices, that often goes ignored, is the depreciating value of the U.S. dollar on international exchange markets. People generally accept that individual prices go up or down based on changes in supply and demand. However, they fail to understand that the value of the dollar, in which goods are priced, is also determined by supply and demand. Therefore, when the Federal Reserve system prints excessive amounts of money for misguided political and economic reasons, the supply of US dollars increases, which then reduces the value of the dollar. Over the past 10 years the US dollar has lost 35 percent of its international exchange value. This means that commodities, such as oil, that are sold in international markets denominated in dollars, have to go up in price since the value of the dollar has fallen. To sum this up, when the value of the dollar falls from an increase in its supply, everything priced in dollars becomes more expensive, it’s called inflation.

Measured in Swiss francs, a strong currency, the price of oil has risen to a less extent. For example, since 2010 the price of oil has risen by 15 percent in Swiss francs, but 30 percent in US dollars.[5] Measured in terms of gold, which has historically been used as a monetary unit, oil prices are below their 40 year average.[6] Both of these measurements indicate that a large portion of higher gas prices are due to a falling U.S. dollar.

The Joint Economic Committee released a study showing that just a 10 to 15 percent appreciation in the dollar would lower gas prices by 43 cents.[7]

Politicians should stop wrongfully blaming big oil companies and speculators and worry about the real problem that threatens this country’s economic future and that’s the declining dollar. The resurgence of a strong greenback would lower gas and oil prices more than any other political solution.

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Guest post by Daniel Wilson

In the name of class warfare politics, President Obama released a budget with $1.7 trillion in tax hikes over the next decade targeting successful earners, including small businesses, corporations and entrepreneurs. These taxes may only apply to individuals and businesses earning more than $200,000 a year, but will adversely affect every American, including college students.

In a jobless recovery with over 13 million Americans out of work, the last thing you want to do is impose higher marginal tax rates on job creators. Around 75 percent of tax filers in the highest tax bracket report business income, according to the Tax Foundation. [1] Higher taxes on businesses will most certainly destroy jobs. Businesses will have less after-tax income to expand production and employment. In addition, the incentives to make new investments in potential breakthroughs are minimized since you’re asking investors to take risks for a diminished rate of return from inflated confiscatory tax rates.

Take a look at the capital gains tax which Obama wants to raise from 15 to 24 percent. Capital gains taxes are paid whenever you sell an asset, such as a bond or a stock, for a profit. Higher taxes on capital gains will miss allocate resources by encouraging consumption over investing. Since investments are now being taxed at a higher rate, consumption becomes more attractive. Currently, the U.S. economy desperately lacks capital investments and way over consumes, so this only worsens that imbalance. Also, a higher capital gains tax chases capital overseas to countries like Switzerland that have no capital gains tax at all, destroying American jobs in the process. Lastly, everybody who owns stocks, which is roughly half of all Americans, will have a devalued portfolio from a higher capital gains tax. The higher tax lowers the reward from owning a stock, which then reduces the demand for stocks, causing the entire stock market to be worth less. Since savings and investments are the key to long-term economic growth the capital gains tax should be abolished, not raised.

Even though most economists believe higher taxes retard economic prosperity, the Obama administration is sold on the belief that the rich in this country, such as Warren Buffett and  Mitt Romney, need to pay an elevated tax rate. Obama wrongfully claims that very wealthy  individuals earning their income through capital gains and dividends get off with a lower tax rate than a secretary. This common fallacy completely ignores the double taxation of corporate income. Capital gains and dividends are taxed at a preferential rate of 15 percent because that same income has already been taxed at a rate of 35 percent at the corporate level. In other words, when a corporation earns a profit it has to pay corporate taxes on its earnings and then when the retained earnings are distributed to shareholders through dividends the income is taxed again at a rate of 15 percent.  In actuality, as The Wall Street Journal recently pointed out on January 27, 2012, Romney and Buffett have a tax rate closer to 40 percent.

As far as the rich not paying their fair share, the top 1 percent pays nearly 40 percent of all the income taxes while the bottom 45 percent pays nothing, according to the IRS. Also, a study by the OECD in 2008 showed that the richest 10 percent of households in the United States have the highest ratio of income taxes paid to the share of income earned, giving the U.S. the most progressive income tax system in the industrialized world.

Higher taxes on productive behavior is detrimental for society as a whole, living standards and economic growth become compromised when innovations and hard work get penalized by draconian tax rates. The rich already pay more than their fair share, and asking them to pay additional taxes will only derail the economy.

 


[1]
[1] http://www.taxfoundation.org/files/sr185.pdf

Daniel Wilson is a senior who is majoring in economics at James Madison University.

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Guest Post by Daniel Wilson

The true and classical definition of inflation is an expansion of the supply of money in an economy relative to the total amount of goods and services, resulting in an increase in the general level of prices. Milton Friedman, a Nobel prize-winning economist, described inflation as a monetary phenomenon, noting that a rise in the average price level only occurs when central banks print too much money. In the United States, the central bank is the Federal Reserve, created in 1913 under Woodrow Wilson.

Since the inception of the Federal Reserve System, the U.S. dollar has lost over 90 percent of its value. The legacy of the Federal Reserve is an ever declining currency and perpetual inflation. Under the classical gold standard, from 1870-1914, a period without a central bank and a strong tie between the dollar and gold, prices actually fell while the economy boomed, proving to be the greatest growth period in American history. One of the many great aspects of a free market is to lower prices in the long run as production and productivity increase the supply of goods and services. However, central banks can increase the supply of money faster than the growth of the economy, substituting inflation for deflation.

Today, inflation is commonly measured through the consumer price index reported by the Bureau of Labor Statistics. Since World War II, the CPI has averaged around 3.5% a year. This means the average price of goods and services doubles every 20 years. The most infamous spouts of inflation occurred during the 1970s after Richard Nixon closed the gold window in 1971. As a result of ending the last linkage between the dollar and gold, the money supply, measured by M2, grew at a much faster rate than in previous decades. The CPI averaged more than 7 percent in the 1970s, reaching a high of 14 percent in 1980. The complete removal of the gold standard eliminated the only constraint on the Federal Reserve’s ability to print money.

Unfortunately, inflation is still alive and well. Misguided policies by the Federal Reserve in response to the recent economic downturn have dramatically increased inflationary pressures. In the name of economic stimulus or quantitative easing, the Federal Reserve has basically printed money out of thin air to buy U.S. treasury debt. Stated differently, the U.S. government is printing money to monetize the deficit, which currently stands at a whopping $1.3 trillion.

Inflation is essentially a tax, lowering the rate of return on work, savings and investments. The inflation tax has a particularly disparate impact on the middle class, which has seen their incomes fall over recent years. In spite of economic stimulus, household incomes have actually fallen more during the recovery then the actual recession. Intuitively so, households’ net worth will diminish with a continuation of higher prices on consumer items and falling incomes.

Luckily, there are several ways households can protect themselves from higher inflation. If you have any savings, look to make some investments. A great investment strategy is in real assets, such as gold. At $1700 an ounce, gold still offers a great buying opportunity. There is no ceiling on the price of gold because there’s no floor on the value of the dollar. The combination of trillion dollar deficits and loose monetary policy as far as the eye can see, provides impetus for upward movements in its price. Goldman Sachs projects an ounce of gold to rise by 20% for 2012, while Morgan Stanley forecasts 30%.

Another investment households should consider is buying stock in mortgage real estate investment trusts. As long as the Federal Reserve continues its commitment to keep short-term interest rates artificially low, MREIT’s offer a great buying opportunity. Many MREIT’s provide a very high dividend yield; American Capital Agency Corp. (AGNC) is currently paying a 20% dividend.

In short, considering inflation, you’re losing money by keeping it in a bank account that pays 0%. Provided you have the means, look to protect yourself from inflation by investing in real assets like gold and high dividend yielding stocks. If you can, buy the dips, and sell the rips.

Daniel Wilson is a senior who is majoring in economics at James Madison University. 

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