Is it Time to Start Celebrating?
Last Updated on Friday, 29 January 2010 11:59
Written by dbhalling
Friday, 29 January 2010 11:59
The fourth quarter GDP growth was reported at 5.7% growth. Most economists believe this growth was mainly due to inventory rebuilding and government spending. Both are likely to fall off in this year. It is not possible to continue government spending at its present rate and once inventories are rebuilt to more normal levels companies will slowtheir production. The best news for the economy is the election of Scott Brown as Senator from Massachusetts. This is likely to lead to gridlock in Washington, which will allow businesses to plan for the future without the uncertainty of radical changes in regulations or taxes. If gridlock does prevail, then the economy will recover but growth will be moderate. I expect that if the Federal Reserve does not raise interest rate substantially, we will see inflation start to pick up around the fourth quarter of 2010 but no later than sometime 2011. This combination of moderate growth and increasing inflation will be similar to the stagflation of the 1970s and will not substantially reduce the unemployment rate. If the Federal Reserve does raise interest rates enough to quell inflation, then we fall into another recession.
The 800 pound gorilla in the room of the US economy this decade is Medicare and Social Security. Our nominal federal debt is $12.3 trillion. This represents a debt to GDP ratio of about 86%. While this number is large, it was higher after World War II, when it peaked at 120%. However, at the end of World War II we did not have large unfunded liabilities associated with Medicare and Social Security. If you include the approximately $60 trillion in unfunded liabilities into the debt to GDP ratio, the ratio is 505.6%. This is clearly unsustainable. The effects of the unfunded liabilities are likely to be felt before the end of this decade and will dwarf the financial crisis associated with housing market in 2007-2009. This will lead either to massive inflation or default on our debt and unsustainable tax rates.
If we want the economy to grow and create jobs, we first need to reverse those changes in our laws in regulations that are inhibiting innovation. Since 2000, we have passed a number of laws and regulations that are killing innovation in the US. The incredible innovation of the 90s was based on technology start-up companies built on intellectual capital, financial capital, and human capital. All three of the foundations have been under attack since 2000. Our patent laws have been weakened reducing the value of intellectual capital. Sarbanes Oxley has made it impossible to go public reducing financial capital for start-ups and the FASB rules on stock options have made it harder to attract human capital to start-ups. The Decline and Fall of the American Entrepreneur: How Little Known Laws and Regulations are Killing Innovation, explains these problems in more detail.
Reinvigorating our economy by encouraging innovation will reduce the problems associated with Social Security and Medicare. It will also make it less painful to restore fiscal discipline to our government. If we do not do not resolve these issues of innovation, fiscal discipline, and entitlements, the US will suffer a severe economic downturn this decade and the US position as economic, military, and political leader of the world will end.
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- The Science of Economic Growth: Part 2
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- The History of Patent Damages
- Repeal of Sarbanes Oxley and Dodd Frank Proposed
- Justice Breyer: Patent Ignorance
- New Ex-Parte Appeals Rules from the USPTO
- Mark Twain’s Birthday: Thoughts on Patents
- US Brain Drain