By Chris Buchheit on June 28, 2010

Lately, the phrase, “Spending our way out of recession” has been repeated over and over. I honestly never understood it, and it does not seem to be having concrete benefits.

What this country needs is good ol’ trickle down economics.

Trickle-Down Economics is, in my opinion, one of the most assailed economic thought processes in the country right now. Right next to Socialism, that is. To be honest, I never quite understood the criticism and in fact, I believe trickle-down economics is what this country needs for the economic recovery.

Ronald Reagan used trickle down economics in order to bring the United States out of the recession. Basically, the theory believes that if the higher tax bracket of wealth-owners is subjected to a smaller tax percentage, it will increase the amount of jobs and the income of employees.

There is one basic principle behind this theory: the fact that the wealthiest people in this nation are the ones who own the businesses, and thus control the number of jobs in the private industry. When times are tough, businesses need to cut costs, and more often than not, this occurs with layoffs. It only makes sense to cut taxes on businesses in order to maintain the upkeep.

However, there are criticisms of supply-side economics, as this system is often called. One criticism is that it’s basically “giving money to those who don’t need it.” I take offense to this criticism because it is based on one flaw – that the people who have the money didn’t have it in the first place. This criticism assumes that other people are having their money taken away from them and given to richer people.

That is not the case. People should be rewarded for their hard work – not be forced to give it to Uncle Sam.

It is my bet that trickle down economics would be able to pull us out of this recession much quicker than “spending out way” out of it with money we simply do not have. Let the private industry pull us out of the recession the natural way – any public driving force will simply cause more problems.

If you disagree with my analysis, please let me know! Comment away!

By Chris Buchheit on June 27,2010

Normally, I would consider myself an optimist. So it’s hard to imagine my lack of trust in our government in terms of fiscal responsibility. Yep, you guessed it. It’s a rant for this post.

In the latest G8 summit, the leaders from the eight most advanced nations in the world: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States, discussed economic issues, and Lord knows there are plenty of them to discuss. What with Greece enveloped in protests and our financial industry supposedly in the dumps, it would be surprising to say the least if the G8 didn’t have something interesting to discuss.

But what strikes me as odd about these meetings are all the promises of balancing federal budgets – and that it took a near meltdown of the world economy for them to realize the importance of a balanced budget, it seems.

As I’ve stated in previous blogs, the importance of keeping a balanced budget cannot be stressed enough. Having good financial practices is the way to a good economy. However, our leaders find it necessary to “spend their way” out of recession. That never made a lot of sense to me. We tried that method during the Great Depression, and the only way we got out of it was because of increased demand for industrial products because of WW2, like tanks, guns, and bullets, for example. The government cannot create demand – it can only cause it to rise artificially. In the short term, it looks great, but in the long term, it can be crippling. Look at the government’s Cash for Clunkers program and its recently-unfunded mortgage program.

Simply speaking, the government, along with the other G8 nations, has no intention in balancing the budget anytime soon. They have made their intentions clear: to spend our way out of economic decline; instead we ought to be decreasing taxes on the people that actually create jobs – the business owners and those in the private sector.

In short, the fate of the economy rests with the fiscal responsibility of the family unit and with the individual – we all know we can’t wait for our leaders to get it right.

By Chris Buchheit on June 18, 2010

Amidst all the economic disparity people have witnessed lately, Americans fear that the turmoil will not improve, but instead get worse again. In what would be dubbed a “double dip” economy (like the alliteration?), the conditions would worsen again.

In my last blog I wrote about what double dip recessions are and discussed them from an historical standpoint. However, what do economists say about this recession? What are the chances that our GDP could go negative in a future quarter before the economy fully recovers?

According to a money.cnn.com article, in spite of the oil spill, the European financial criss (cough Greece cough), and jobless rates being finicky, economists seem to believe that the economy appears more stable than earlier. In fact, many are saying that there is less of a chance of a double dip economy now than there was a year ago: now the chances are at 20% instead of 25%.

But why?

These economists cite the fact that Europe approved their own bailout package, but mostly the fact that many US businesses reported profit growth. However, the article doesn’t attempt to trick you into thinking that economic matters are fine and dandy – unemployment is still high and, as I reported in my last blog, jobless claims spiked upwards recently.

On the other hand, according to a second article from seekingalpha.com, Andy Harless, the chief economist from Atlantic Asset Management, acknowledges the fact there is little literature on economic forecasts, especially regarding double dip recessions. For a recap, I reported in my last blog that there have only been three double dip recessions in American history since 1854.

Paul Krugman of the New York Times has a pessimistic view of macroeconomic advisors, who believe that the chances of a double-dip economy are close to nil. Krugman says, “When short-term interest rates are up against the zero lower bound, a positive term spread tells you nothing...”

Even though there does not appear to be a definitive answer on this particular question, the economic solution for all families is universal: be sure to budget your finances responsibly, spend within your means, and take care of your fiscal responsibilities. That way, in spite of double dip economies, families can plan for the worst and not be as beholden to economic circumstances.

Read the articles for yourself:

“Double Dip Recession: What Are the Odds?”
<http://money.cnn.com/2010/06/09/news/economy/double_dip_recession/index.htm>

“Chances for a Double-Dip Recession: Key Quotes”
<http://seekingalpha.com/article/210555-chances-for-a-double-dip-recession-key-quotes>

By Chris Buchheit on June 17, 2010

And now for something completely different. Nah, not really. Time for some financial stuff. This time – what causes double dip recessions and what is the likelihood that we’re headed for one? In this first blog of a new series, I will examine the characteristics of double dip recessions, and discuss them from an historical perspective to show how rare they really are.

Many people fear that we are headed for a double-dip, but based mainly on a lack of consumer confidence, and not necessarily based on a pure economic data. For example, jobless claims spiked last month.

According to an Associated Press article <http://finance.yahoo.com/news/New-jobless-claims-up-sharply-apf-1639241920.html?x=0> jobless claims rose “sharply”, indicating that layoffs are still happening. Many economists believed that the government’s official numbers might be artificially high in terms of job creation, because the government touted several million jobs created, but merely on a very temporary basis. Therefore, perhaps due to the falloff of census-related jobs, we are seeing a spike in jobless claims.

For this reason and many others, people believe we are headed for a double-dip, but first of all, what is a double dip recession, and what causes them?

Speaking by the book, a double-dip recession is when GDP growth starts negative (the initial recession), then increases again as the economy recovers, but finally the GDP goes negative again in the subsequent quarter. According to this article <http://www.minyanville.com/businessmarkets/articles/Kostohryz-double-dip-recession-recovery-obama/1/8/2010/id/26285>, double dip recessions have only occurred three times in American history since 1854 out of the 33 economic recessions since that time: in 1913, 1920, and then again in 1981.

But what has caused them historically? The answer lies in the nature of economies in general, which grow in a cyclical fashion. It takes a complete reversal of “inertial forces” to cause a double-dip recession, and this would mean that the economy would have to stop dead in its tracks very early in the recovery phase.

Apparently the chances are pretty slim that this will happen to this economy.

In my next blog, I will discuss more about double dip economies and the exact chances that our economy will fall again.

By Chris Buchheit on June 16, 2010

In a surprising twist of events, people who cannot afford expensive houses still do not have the money to pay them off.

As many economists predicted, the government’s mortgage subsidy program has simply delayed the inevitable. Now that the program has run out of money, homebuilders believe they will not be able to contribute to the economic recovery.

According to an Associated Press article, applications for building permits fell in May in spite of “promising economic data.” I believe this lapse in home construction is tied to the government’s now defunct mortgage-subsidy program. The same article states, “Homebuilders are feeling less confident in the recovery now that government incentives for buyers have expired.”

The tax credits on mortgages and home-building was simply adding fuel to the economic decline. In certain cases, it might allow those people who have fallen on hard times to pay off their houses, but in many other cases, it simply reinforces spending beyond peoples’ means. In other words, some people might have been encouraged by the program to buy houses, and once the subsidy ran dry, they still could not afford the houses.

The result? A longer-drawn out decrease in housing sales.

Specifically speaking, the subsidy kept the high-end housing market artificially high while the low-end and mid-end markets suffered from the economy. If you’ll recall, those markets, thanks to Fannie Mae and Freddie Mac, were some of the direct causes of the economic recession. Now that the subsidies have worn off, the high-end market is taking a dive.

While the numbers are not nearly as bleak as they were several years ago, they are still not where construction workers would like them to be. The article points out that house-building is a crux on the economy. Each house guarantees at least three jobs per year and provides a lot of money to state and federal governments. On top of that, the housing market creates dependencies to other markets, such as the home appliance industry and even lumber yards. With the housing market taking another sustained drop, it may be possible that the economy will face a double-dip recession, but economists remain optimistic.