Is the Economy Recovering?
August 20, 2009
Many news reports that I am seeing lately are touting the notion that the economy is in recovery and happy days are here again. I am not sure how these conclusions are being drawn.
The economic indicators that have come out are only showing that the economy is going down at a slower pace than it was a few months ago. While this may indicate that we are finding a bottom to the current economic problems it does not signal that things are bouncing back. In my opinion two things need to happen to spur a recovery.
- The housing market must bounce back
- The stock market needs to reach 12,000
The reason these two markets need to bounce back is that most of our wealth is tied up in our homes and our retirement accounts. This wealth has been diminished over the last 2 years and has dampened consumer confidence. If you’ve watched the value of your home sharply decline or your retirement take a beating it becomes likely that you will be more cautious about how you spend your income. The buying habits of the consumer have changed to reflect people’s increasing nervousness with their financial security. People have become more frugal and that dampens demand in the economy.
If consumer demand drops off it leads to businesses having to revise their plans and this has resulted in increased unemployment. The job loss trend will not be reversed until people get some confidence that the wealth they have amassed in thier homes and retirement plans is secure. If people feel good about these assets they will start spending money again.
So how can government help stimulate these two markets?
I would consider expanding the tax credit for new home buyers to anyone who is purchasing a home. The current tax credit only extends to new buyers and quite frankly it is very difficult for a brand new buyer to secure financing to purchase a home.
The government should also consider lowering taxes on investment income and capital gains. If you lower the cost of capital you increase the incentive to start investing again and thereby get the markets moving. It has also been shown the lowering the capital gains rates increases tax revenues, so the government comes out ahead as well.
