Another major sector of our economy that is faring poorly in 2011 is Government.
The reason the employment numbers so far this year look poor is because of lay-offs at all levels of government – Federal, State and local.
The private sector has actually added jobs, even if the numbers are not awe-inspiring. Public sector employment is being downsized as Governments struggle to bring their wage costs, retirement promises and medical expenses in line with declining revenues. Over the long haul, that is good. The smaller the public sector relative to the entire economic pie, the greater the opportunity for growth, profits and prosperity. That is a truism of capitalism.
But another economic truism is that government deficits act as a stimulus to the economy. That does not mean that they are not a matter for concern. Over time, no government, company or individual can endlessly run deficits. But to force gargantuan Federal spending cuts during a period of economic hardship can have the perverse impact of worsening unemployment and prolonging economic stagnation.
Fortunately for the economy, much of the private corporate sector is vibrant. Many public corporations have strong balance sheets, good earnings growth and are globally competitive. In large measure this is because they were aggressive in cutting costs and conserving cash during the recession – a process that continues. Now is the time to eliminate corporate tax loopholes. That does not mean doing away with sensible, legitimate business costs (such as the R&D tax credit and the very valid use of corporate jets). Rather it means leveling the playing field for all corporations by undoing the myriad special deals that corporate lobbying by the most powerful companies has achieved.
Another tax loophole that must be addressed relates to the taxation of dividends. The logic behind reducing the high tax on dividends was economically sound and President Clinton signed the bill into law. But the unintended consequences of that event have been hugely detrimental to the coffers of the Federal Government, as billionaires have been able to shelter what is de facto earned income through corporate structures that treat their gargantuan incomes as dividends. No less a beneficiary than Warren Buffett has admitted as much, and he says that the system needs to be fixed. That should be easy to do. It would be far more powerful than eliminating the deductions for (1) mortgage interest which middle class Americans use to their benefit and (2) charitable deductions which help to serve the needs of so many of disadvantaged.
With the issue of a potential default just two weeks away, Congress is now trapped. Republicans and Democrats must not put the national interest at risk. The patriotic stance is to do what is right for the country and raise the debt ceiling. Once that is done, Congress must then go to work on restoring a sense of fairness in our tax code by eliminating loopholes and making the wealthy pay their fair share.
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.