Real cause of economic woes

March 30, 2009
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We have all heard about how the economic bubble burst due to the mortgage crises. Many people could no longer afford their mortgage payments, which led to lower home prices, increased non-performing loans and the ripple effect on the rest of the economy.

But I have yet to hear too much noise about what really caused the bubble to burst. Yes, we can all play the blame game and blame George Bush (if you are anti-Bush) or Bill Clinton (if you are pro-Bush). But the real cause of the problem is the price of gas. It does not take a genius to come to that conclusion when you look at the numbers.

From January 2005 to July 2008, the average price of gas (all grades) in the USA went from $1.85 to over $4.15 a gallon. There are various estimates of the amount of gasoline (not diesel) consumed in the U.S. in a year, ranging from 140 billion gallons to 160 billion gallons. Assuming the lower estimate, and multiplying it by the differential between $4.15 and $1.85 ($2.30 a gallon), one gets about $325 billion more that consumers had to pay out of their pockets on an annual basis. And while industry would have consumed some of the gasoline, the increased cost to them eventually gets passed on to the consumer, one way or the other.

People still had to go to work and, while they might have cut back on their discretionary driving, the additional cost could not be sustained out of their take-home pay. As a result, people started defaulting on their house payments. This, in turn, caused the mortgage deck-of-cards business to start collapsing, and once it reached a certain momentum, it was impossible to stop. Gas prices have gone back down again but the damage has been done.

On a balance of payments basis, the U.S. imports approximately 3.7 billion barrels of oil a year. When oil reached nearly $150 a barrel versus an already inflated $50 per barrel during 2007, the net outflow of our currency to foreign countries is approximately $350 billion a year. That is money that is just sucked out of our trade balance and enriches other countries at the expense of the U.S.

Why is it that the U.S. has anti-monopoly laws on its books but we just accept what OPEC does to us? I make my living by negotiating lower prices for my clients with their vendors. As soon as I am able to create a competitive environment, my success rate is almost 100 percent in obtaining lower prices for my clients. Whether we pump the oil or not, we should develop our own oil resources so that we can keep OPEC in check. The U.S. consumes about 25 percent of the world’s oil production. While we in America see that as a weakness, as a customer, it gives us considerable clout as long as we have an alternative. OPEC needs America as a customer. If the price goes over a certain price, we should have the ability to curtail our foreign purchases and increase our own production at short notice. This would have the impact of bringing the price down again.

Imagine if we could become independent due to alternative energy and never have to import a gallon of oil again. The oil-producing countries would be economically devastated. We would be blamed for creating financial chaos in those countries, and our guilt and charitable nature would result in sending those countries billions of dollars in aid.

Eventually, we do need to develop alternative forms of energy. And sooner, rather than later. But to think we can get ourselves out of our short- and medium-term dependency on oil, we are just fooling ourselves. The only way to stop other countries sucking us dry is to have the threat of opening the faucet on our already-equipped oil resources.

And one last point. We already have price control on utility companies, numerous Blue Cross entities and some other types of industries. Why not have price caps on gasoline that could be modified according to a certain formula? That way, the U.S. oil companies cannot continue their price gouging for unwarranted reasons. I regard myself as a capitalist, but this is an exception I could live with. Oil prices are what have caused the current problem and we need to prevent it from happening again.

The U.S. has been losing manufacturing jobs for decades. We cannot compete on wages alone with countries such as China, India, Pakistan, Korea, Japan and Mexico to name a few. And quite frankly, we do not want to be wage competitive and hope to remain a first-world country.

We need to do something dramatic in order to have a significant impact to bring manufacturing jobs back. And the answer is radical but simple: Eliminate all U.S. corporate income taxes, on a permanent basis, for all goods manufactured in the U.S. Similar tax exceptions can be made for service jobs that are serviced by American workers.

Think about it. Not only will this be a huge incentive for American companies to bring the work back to our shores, but hordes of foreign companies will relocate their manufacturing facilities to the U.S. The resulting increase in jobs will result in a huge jump in the number of people being employed. This, in turn, will result in more personal income tax revenues being generated and a reduction in welfare costs, as well as a reduction in crime as more people will have the opportunity to provide for their families. The increased income tax revenue will eventually exceed the amount lost from the elimination of corporate taxes. And in this economic climate, not too many corporations will be paying corporate taxes due to the losses they are sustaining anyway — so the breakeven point will occur much sooner in a depressed economy. This is the perfect time to make the change.

What about other countries eliminating corporate taxes as well, in order to compete once jobs start coming to the U.S.? Besides our political stability compared to most low wage countries, we also have an educated, stable, trained and re-trainable work force.

In conjunction with the elimination of corporate taxes, import duties need to be revised and enforced, especially with those countries that have taken advantage of our open markets while having restrictive markets in their home bases. The U.S. is the biggest consumer market in the world. Yet we import way more than we export. The potential for local manufacturing is huge.

I am all for free trade. It helps keep prices competitive and quality high. But the rules need to be applied both ways. We need to restore America as a manufacturing leader while maintaining open international trade with those countries that compete on a similar open and fair basis.

What America needs now and always is jobs. Eliminating corporate taxes will have an immediate effect in reversing the trend. Sure, the details will need to be worked out. But unless one can see the big picture first, it is impossible to develop a road map to success.

Michael Parry is the founder and president of Parry, Murphy and Associates, a West Michigan-based management consulting firm.

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