Government Should Help, Not Hinder, Recovery

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From increased home sales to an increase in national productivity, the economy seems to be fighting back to recovery – despite all the bad news coming out of Sacramento and Washington.

However, there are well-known obstacles that threaten to block recovery, including rising unemployment and continuing distress in the real estate industry, whose most obvious indicator is the continuing tide of home foreclosures in this housing-dependent region.

But there is another obstacle to recovery not often cited in press reports: our own government.

Our consumer-oriented economy is dependent upon a stable housing market as a base to any economic expansion. If consumers don’t feel comfortable spending money – or worse, have no money – there can be no recovery. With the brisk pace of home sales in July (four times the amount of sales year-over-year), the housing market has not only leveled in value, but may show a slight increase, based on the amount of buying.

The other factor, rising productivity, means businesses will increase their profits, since their workers are working both harder and more efficiently. The last time this occurred was the mid 1990′s, when both unemployment and inflation decreased. At that time, the government was split. Republicans controlled Congress and Democrat Bill Clinton controlled the White House. As the two parties stalemated over taxes and spending, the private sector flourished, culminating in the largest economic expansion in the history of the country.

The opposite occurred in the late 1970′s. As the Carter administration created new programs and kept the tax rate high (the top tax rate was near 70%), unemployment and inflation skyrocketed. Productivity fell and the housing market went stagnant, as mortgage rates for home loans often exceeded 18 percent.

President Obama has likely triggered a series of increased taxes associated with the “cap and trade” bill passed by the House a couple months ago and tax increases aplenty should healthcare “reform” pass. He’s promising unprecedented benefits and government intrusion while claiming that 95-percent of Americans won’t pay increased taxes (Reminder: Over-taxing the people who pay the most taxes discourages them from investing, leading to trickle-down misery).

Even if neither of these misguided programs is ultimately approved, the Bush tax cuts of 2001 are set to expire next year, resulting in the largest increase in taxes in United States history ($1.6 Trillion). Since there is no resolution on the first two issues, people can’t effectively plan their tax liabilities more than six months out.

And if the state manages another tax increase at the same time as the Bush tax cuts expire, our local and state economies could be thrown into disarray. This would result in another drastic decline in consumer spending and the financial markets while all levels of government would see sharp decreases in tax revenues.

If past performance is an indication of future returns, then it is entirely possible that, on top of more massive tax increases, the state will confiscate more local government monies in an attempt to come close to balancing its books. Cities and counties, which rely heavily of redevelopment money and gas tax revenues, could see the state swallow much of the money local government uses to provide vital services close to home, like police and fire protection and road maintenance. Even though we dodged the bullet on the latter proposed taking recently (thanks to legislative Republicans), gas tax dollars are currently being “deferred” while the state hedges its bets in the coming months.

Some local governments, like San Bernardino and Riverside Counties, are determined not to be obstacles, but rather are attempting to be facilitators of recovery. While unsold or foreclosed homes in the Inland Empire are stifling personal wealth with decreased property values, the two counties have a new program to combat the housing downturn. That program is the Inland Empire Economic Recovery Corporation (IEERC), of which I‘m a co-founding governing board member.

The IEERC is partnering San Bernardino and Riverside counties with the Sierra Capital private equity firm and other investors. Its mission is to assist the private sector in stopping the spread of blight, slowing the decline of real estate values, creating jobs for Inland Empire companies and residents, and promoting owner-occupied housing rather than rentals.

The IEERC is expected to exist between three and five years, or until the housing market recovers. The houses most likely to stay unsold are those most sought-after by the IEERC. Since the banks have to invest money to bring these to lendable conditions, the IEERC would assist banks in recovering blighted properties. The goal of the IEERC is to buy these houses, renovate them, and resell them within 120 days. The goal is to restore 400 houses per year.

This is one example of local government doing what it can to help expedite the return of prosperity for its constituents. Now, if only the state and federal governments would stabilize the tax base and the business climate, we could see a return of certainty, confidence and the prosperity of the past 13 years.

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