Commentary by J. David Rauch

Up and down goes the price of oil and the stock market.  Gold and our debt are only going one way…up!  Our focus has shifted from raising the Federal Debt ceiling back to jobs. The debt ceiling debate was a charade.  There was never a chance of default and all the politicians knew it.  But all the bluster in Washington (and Sacramento) makes us take our eye off the main goal.  Our collective goal “should be” to create more new jobs to put some of the 25,000,000 out of work Americans back to work.  Without jobs there is no new housing, no new jobs that accompany housing (refrigerators, marble counter tops, etc., et al), no new HOA’s to manage, no new HOA’s to maintain, less taxes coming into the US and California’s depleted treasury and more money being borrowed by the Fed’s to pay for China’s continued 9% GDP growth. There has been very little  done by Washington to start the job creation engine. Even Obama’s new $447 B American Job Recovery Act lacks any focus on fixing Housing.  Economist Mark Zandi states that “That’s probably the biggest missing ingredient here.”  Further, it appears that Washington and Sacramento seem to be doing everything possible to stifle job creation.  Let’s hope the Fed’s and Sacramento don’t wait until November 2012 to begin working on creating jobs.  I know where we can start.  Why not take a lesson from the world’s fastest growing economy (China) and eliminate our minimum wage laws? With 25,000,000 people looking for work it’s criminal to keep them from working by installing an artificial financial barrier to obtaining a job; there are thousands of out of work teenagers and older folks who would love to work for $5 per hour.  Then, we need to lower our corporate tax rate to a flat (no corporate tax loopholes) rate of 15%.  It’s the only chance we would have to compete on the world’s labor marketplace.  Why not poll American’s small business owners and ask them what Federal and State regulations must be removed before they hire again?  Be that as it may, “PROSPERITY WILL NOT RETURN TO AMERICA UNTIL JOBS RETURN TO AMERICA”.  But of course we would have to get our National Labor Unions to agree to any plan. And we all know who is the spokesperson for US labor unions don’t we?

The “ultimate question” however is just how much debt can a country, company or household bear before that debt becomes an albatross.  In an excellent article entitled “When Debt Gets in the Way of Growth” David Champion outlines the work of three economists who draw this line in the sand. “Debt is good for growth because it allows people and companies to transfer money over time. By borrowing, you can mobilize your earning capacity to buy a car that you can’t pay for in cash right now. That’s good for the economy because it means that more people can now buy cars, so car companies will employ people to build them and so forth. But if you start borrowing too much, then you become vulnerable to financial distress. If you lose your job, you will struggle to pay off the car loan, so you will cut your spending, and may even have to sell some other asset to help pay off the loan. The challenge, of course, is working out just how much debt you can safely take on before it becomes economically counterproductive.

At the national level, this is what Stephen Cecchetti, M.S. Mohanty, and Fabrizio Zampolli decided to find out. They gathered 30 years of data on levels of household, corporate, and government debt for the world’s major developed economies, and they subjected the data to regression analyses against economic growth. What they found was that once government debt amounts to more than 100% of GDP, corporate debt more than 90%, and household debt more than 85%, further indebtedness reduces a country’s ability to grow.”  To read the article click here:  http://blogs.hbr.org/hbr/hbreditors/2011/09/when_debt_gets_in_the_way_of_g.html

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