Hopefully you experienced a bit of recovery in the bottom line of your 401K. U.S. stocks were up on good employment news. Over 243,000 jobs were added to our economy last month, the largest increase since April, 2011. This good news doesn’t mean we are out of the woods yet, but it is encouraging.
What happens to the economy near term will depend on what congress does this year. The president says he wants the payroll tax cut passed, but even if that tax cut which was designed to help middle income Americans is passed, there is other legislation pending that will offset any tax saving from the payroll tax cut in 2013.
The Bush tax cuts will expire in December, 2012, and if they are not extended could offset the one thousand dollar saving of the payroll tax cut. The fixes for the alternative minimum tax is also due to expire, and it too could offset the tax saving of the payroll tax cut. So one hand of the federal government can give us the payroll tax cut, and the other hand may take it away.
Increasing taxes will not help the anemic recovery. The democrats want tax cuts for the wealthy removed from the Bush tax cuts before they will vote to renew them; of course the republicans will oppose that, so extending those tax cuts isn’t a sure thing.
The alternative minimum tax was supposed to punish the rich and instead added an additional tax burden to middle income wage earners. Congress designed a temporary fix to prevent middle income wage earners from being taxed more. That fix is going to expire unless congress acts on it.
These problems underscore what the republican primary candidates have been saying out on the campaign trail; our tax system is unfair, unwieldy, far too complicated, and a burden for economic activity.
Although the Bush tax cuts expire in December; after the elections in November, their effect can be easily calculated by business, and will affect the 2012 economy.
Other factors affecting the economy include the likelihood of more federal reserve spending, and hopefully a natural bounce in our economy the politicians and the Federal Reserve won’t be able to mess up.
We discovered during QE-1 and QE-2 that the stock market was driven higher and some financial companies benefited from the Federal Reserve spending. The GDP appears to grow as one of the components of GDP is government spending. In other words, the more the government spends the more it appears the economy is growing. If government spending was removed from the GDP calculations there would have been far less economic growth reported.
When the government spends money it removes money from the economy in the form of taxes, and then spends it for social services, and military spending. If the money government spends was spent in the economy it would produce even more goods and services.
According to Benjamin Disraeli; "There are three kinds of lies: lies, damned lies, and statistics." All of these have been employed in reporting our economic situation.
Any constructive fixes for the economy will have to wait until after the 2012 elections.
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