Our Sour Economic Narrative

Friday, 26 Oct 2012 09:30 AM

By Tom Hutchinson

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This is a particularly tricky time for the market. The U.S. economy is teetering right now, with signs of both worsening and improvement. The global economy could improve, as China undergoes a robust recovery that spreads to other parts of the world, or it could get worse, as Europe continues to deteriorate and drag the rest of the world down with it.

Either scenario is just as plausible at this point.

Meanwhile, tremendous uncertainties regarding the presidential election outcome as well as the fiscal cliff create a market stuck in neutral, waiting for clarification. In the next month or two, as the election and fiscal cliff get resolved, the near-term direction of the market should become much more clear.

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But all that will be clarified is the next short-term leg of the market.

Even after all the smoke of these near-term uncertainties clears, the main problem that has dogged us for the last several years will still stubbornly remain — a sour economic narrative.

Ultimately, the main impediment to strong and sustainable economic growth is a persistently negative view of our economic future. The narrative is one of anemic growth for the foreseeable future, with a good chance of crisis down the road.

Most businesses don't want to expand and hire into that narrative. They simply want to play things close to the vest, minding the cost side of the equation and building up cash reserves that will enable them to weather a future storm. As a result, economic activity remains subpar and unemployment hovers at unacceptable levels.

The country desperately needs policies focused on changing the overall narrative.

First, the slow-growth situation needs to be fixed. The economic recovery that has followed the financial crisis is the worst in the post-war era, averaging about 2 percent gross domestic product (GDP) growth per year and trending downward. The recent level of economic growth has been called "the new normal," which means this lousy economy is going to stay that way.

The problem is that 2 percent or worse GDP growth is insufficient to maintain the current system. The economy has to expand much faster than that just to soak up the 23 million or so unemployed. As well, the current level of economic output is providing insufficient tax revenue, resulting in $1 trillion-plus deficits every year.

Regardless of who wins the election, the necessary task will be the same. The economy needs big reforms to tackle the big problems. The economic-growth pump needs to be seriously primed.
The economy needs to be unleashed through large-scale tax reform, an aggressive energy policy and sweeping regulatory reform to foster a strong pro-business environment. A confluence of reforms and momentum needs to show the world that "the U.S. is back."

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The shackles of the last several years must be taken off the economy, so that economic activity spikes and the economy appear to be in the early stages of a U.S. boom. Businesses in the United States and around the world need to believe that U.S. expansion should be undertaken immediately before everybody is breaking the door down.

Then there's the "good chance of crisis down the road" problem. The skyrocketing debt needs to be addressed with budgetary discipline and long-term targets. Entitlement reform needs to be seriously undertaken and the Fed's money printing must be rolled back.

Our future could either be horribly bleak or the 21st century could again belong to the United States. The stakes couldn't be higher and the answer lies in our ability to change the current economic narrative.

About the Author: Tom Hutchinson
Tom Hutchinson is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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