By Huxley Nixon
Washington has been dancing around the elephant in the room for the past six years and it is NOT the Affordable Care Act! It’s much BIGGER – a loss of confidence in our SYSTEM and the elected representatives and leadership that are supposed to do what is best for the WE (as in the people) versus the ME (as in my re-election). We are a nation whose uniqueness was founded by immigrants who came with little and created the “American Dream”.
Post WWII US Economy
We are a consumer driven economy (70% in 2012) and we depend on a large and strong middle class that is able and willing to consume these products and services. A key indicator of the health of the economy is the Real GDP (total of all goods & services produced in a year adjusted for inflation). This indicator shifted from a Product (manufacturing) driven economy to a Service driven one in the 1970’s with much of US manufacturing being sent offshore. Economists feel a healthy GDP growth rate is between 2% and 4%. Below 2% cannot sustain a strong employed labor force and above 4% for multiple quarters lead to inflation, thus reducing buying power and creating unsustainable bubbles in the economy.
What Affects Good Economic Health?
1. Demographics – growing labor pool
2. Regulatory and Tax environment – minimal restrictive regulations on business and tax structure to promote growth
3. Uncertainty – bad for growth, job creation and stable economy
4. Poverty rate – High rate negatively effects growth and stability
5. Participation Rate of Labor Force – Higher the better, measures the percentage of working age individuals in the labor force.
Economic Growth has been the engine that has allowed us to mask many sins of the past. The Baby Boomer generation (1946-1961) created a population surge (approximately 80 million) that was a huge contributor to strong sustained economic growth between 1970 and early 2000’s. Unfortunately, approximately 12,000 boomers are turning 65 every day since January 2011 and will continue to do so until 2030. The US total population in 2012 was 313.9 million and its Growth Rate is declining (.7 of 1% in 2012, US Census Bureau).
In addition to becoming an aging population, we have been reproducing at a Sub-Replacement Fertility Rate for the past four decades. It takes 2.1 births for each female (replacement fertility rate) to sustain a population in industrialized countries. Except for 2007 (2.12 rate) and 2010 (2.1 rate) the US has NOT reached this replacement rate since 1971 and we would not have had any increase in our population over the past four decades were it not for immigration (legal and illegal). Europe and Japan’s fertility rate (two of our largest trading partners) is currently approximately 1.6 and they have not been above 2.1 since WWII.
We have created failed social programs to help those in need with well-intentioned safety nets but instead of helping these individuals get back on their feet and become self-supporting citizens, our system has encouraged them to live off of expanding government programs where many no longer have any incentive to get a job. The family unit is in tatters (current percentage of population married was 51% in 2010) and the percentage of children born out-of-wedlock was 40.7% in 2011. Key results by race: Non-Hispanic white – 29.1%, Non-Hispanic Black – 72.3%, American Indian/Alaska Native 66.2%, Asian – 17.2% and Hispanic – 53.3% (National Vital Statistics Reports, Vol 61, No. 5, Oct 3, 2012).
Poverty & Labor Force
As of 2012 there were approximately 154 million citizens of working age (18 yrs – 64 yrs) with 13.7% below the poverty line, thus not paying taxes. Citizens below the poverty line were 25 million in 1975 and 46.2 million in 2011 increasing a drag on GDP.
Exacerbating this is the rapidly dropping Labor Participation Rate (those of working age dropping out of the labor force). 63.2% of Americans had a job or were actively seeking work in 2011 (lowest rate since 1978), down approximately 11.4 million since 2000 (The US Bureau of Labor Statistics: “TBLS”). When these individuals are added to the unemployment number – ACTUAL UNEMPLOYMENT is 14.4% versus the 7.3% reported by the TBLS in August 2013.
The rapidly expanding cost of funding entitlement programs for the aging and under-employed population can be seen in the graph below and what it will do to the growth rate of our national debt as a percentage of GDP if left unchecked. We only have to look to our largest trading partner – Europe and the PIGS (Portugal, Italy, Greece and Spain) to see where we are heading. Between the end of WWII and 2008 our debt as a percent of GDP has been around 35% – as of October 2, 2013 it was 100.46%! (Federal Reserve Bank of St Louis)
The U.S. is experiencing a double whammy – the increased cost of funding entitlement programs for the rapidly aging population at a time when the labor pool is shrinking and fewer citizens are paying taxes and contributing to GDP growth.
The facts mentioned above leaves me to believe the US is at crossroads and rapidly approaching a point where we cannot reverse the irreparable harm of an ever-increasing DEBT as a percent of our GDP, especially when our future economic growth will be lower than in the past. Here is a summary of where the author feels we are today:
1. Demographics – declining labor pool. The US has not had positive “Fertility Growth Rate” but two times since 1971. Immigration Policy and Regulatory reform uncertain.
2. Regulatory and Tax environment – dramatic increase in business compliance regulations, tax increases (Affordable Care Act, Dodd Frank, and largest tax increase as a percent of GDP in 2013).
3. Uncertainty – Rapid acceleration of US Debt (100+% of GDP) while US economic growth slowing! The declining buying power of US middle class will continue.
4. Poverty rate – number below poverty level has increased 85% to 46.2 million since 1975 and Medicaid recipients have doubled since starting the implementation of the Affordable Care Act.
5. Participation Rate of Labor Force – 2011 it was 62.3% (lowest since 1978).
The DEBT CEILING is not the problem – the DEBT is!
After the near meltdown of our economy in the fall of 2008, Congress, the President, US Treasury and Federal Reserve moved quickly to avert disaster. In fact, President Obama in 2010 established an 18 member, blue ribbon bi-partisan committee (Simpson-Bowles) to address measures to pay down the huge increase in the US DEBT as a result of the economic Stimulus Bill and looming demands facing the treasury to fund “entitlements” for our aging population and the expanding social programs targeting the under-employed and poor. They came up with a proposal that addressed the debt and “entitlement issue” through a combination of simplifying the tax code (lowering rates and eliminating many popular deductions) and a gradual increase in the eligibility age for Social Security. It would stabilize the National debt by the end of 2014 and reduce it by 60% by 2023 with debt elimination reached in 2035. Unfortunately, it did not receive the support of the necessary super majority of 14 of the 18 members (it received 11 – 60%) to send it to Congress for approval.
Some in Congress are suggesting this model be used to address the current crises. We CANNOT allow our country to default on its debt or other existing promises risking another (even worse) recession. Individuals, companies and state and local governments cannot print money so they MUST not spend more than they receive or they eventually will go out of business. The President and Congress should temporarily fund the Government for 60 days to buy time to pass true reform legislation reducing the Debt to reinstall confidence lost by the American people and this should be the No.1 priority for all! Maybe a good start is to “dust off” the Simpson-Bowles Outline – truly a Bi-Partisan solution that no one will be completely happy with – BUT it puts our financial house in order and places critical social programs on sound footing for future generations.
Since 1960 the US has ONLY taken in more that it spent in 4 of these 53 years (1997-2001) and our debt as of September 30, 2013 was $16.96 TRILLION! Since Congress established a statutory limit on the US Debt in 1917, it took 80 years for the debt to reach $6 Trillion in 2001. WOW!
Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary. He is founder of the M&A MARKETPLACE by CHC (www.mamarketplace.com) where the buyer pays all success fees and the process is only 120 days. For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.
DISCLAIMER: Opinions and conclusions in this post are solely those of the author unless otherwise indicated. This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship. For those desiring additional information please visit our website www.mamarketplace.com.