One of the goals of our blog is to provide pertinent information to investors and to provide transparency on the MCS investment process. MCS has received several questions regarding Wednesday’s blog, specifically on reducing taxes and increasing spending which must seem counterintuitive.
Speaking about taxes, spending and politics combined remind me of the brilliant book and movie by Frank Baum, The Wizard of Oz, especially the line “Lions and Tigers and Bears-Oh My.” Since our office is physically located close to Washington DC, we know talking about politics is a sure way to get people fired up, scared and sometimes even angry; and politics can make people focus on the “OH My”, instead of a solution to the problem.
MCS speaks from a Capitalist bent. Republicans want taxes cut -Democrats want spending increased so the blog should have appealed to both sides but that was not our goal. For clarity, that blog had no political bent and was strictly from a economics and financial standpoint. When an economy is in trouble and not functioning efficiently and effectively, the two primary factors that could dramatically alter that direction are massive tax cuts and huge spending programs.
Forget about the Deficit and what the mainstream media touts for just a minute. An efficient government will always run at a deficit between 1-3% of GDP. US GDP is projected this year at $17T and the projected deficit is $600B-$700B, thus the US deficit would be between 3.5-4%.
If both programs, tax cuts and infrastructure spending, are implemented simultaneously what would happen during the course of the year is that the deficit would increase more rapidly, initially. The cut tax impact is immediate and the purchase of goods and services would not kick in until mid-year or after. For 6-12 months the deficit would increase until the actual spending could ramp up; it takes time.
The second year is when the benefits would be significantly noticed. At that point, the country would be entering full employment due to hiring millions of people to support the infrastructure spending. Full employment pushes wages up and increases prices. (Just think of the increases to companies like Home Depot and Lowes alone!) Thus there is a lag time initially until the taxes from the newly hired workers flow into the government coffers.
Once maximum employment is reached, the government should begin to reduce or eliminate the tax cut. From that point forward they would be taxing everyone at the old rate, money is flowing in and the deficit plunges into an acceptable range of between 1-3%. Once the infrastructure projects begin to wind down after many years, additional funds can then be directed back to other agencies of the US, the military, homeland security and the CIA just to mention a few. This is not a new concept and should sound familiar. It is in essence what happened over the past 100 years and is part of the economic cycle.
Deficit spending when controlled to remain under 3% of the GDP is an extremely effective economic tool. It is easy to get distracted by the media and their polarized views. Almost nothing is black or white, good or bad (even lions and tigers and bears.) It may help to think of the deficit in relation to your own family debt.
A family needs debt at certain points of time for a mortgage, business or education loans – it is the management of the debt that is important. Properly managed debt can work to your advantage, but managed improperly it is disastrous. The US is at a critical juncture in respect to our economic numbers including unemployment, GDP, housing, wages, consumer demand, you name it. When an economy is struggling it’s necessary to increase demand, not just provide additional bail outs of banks and corporations that benefit those few. Just to recap:
1.) Money spent on infrastructure creates demand for goods and services which then increases jobs.
2.) Jobs provide income to people to purchase those goods and services at a greater rate whether it is for homes, cars, vacations, durable goods, consumer discretion, etc.
3.) Jobs create more tax dollars that go back into the government coffers.
4.) Corporations create higher taxes because the actual demand is increased and they have increased revenue and earnings.
5.) Higher taxes help lower the deficit, when managed properly. (A combination of corporate and individual taxes account for approx. 85% of all revenue to the government, other collections make up the additional 15%.)
This is a non-partisan statement based entirely on economics and finance. However, as we all know, basic economics and finance are politically unviable for either party in Washington DC today; we should know we live here.
DISCLOSURE: Opinions and estimates offered constitute the judgment of MCS and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
This article was written by Metropolitan Capital Strategies CEO Sharon Snow and Chief Investment Officer David Schombert.