Wednesday, October 27, 2010

Business Jets and Elections

Molly Mullins reports on a talk by Michael Scheeringa of Signature Flight Support, which operates 103 fixed base operations around the world. At the today’s Wichita Aero Club meeting, Scheeringa reassured her that “It’s a very resilient industry.”  She blogs, "The good news is that the market has begun to recover, although recovery has been muted.

"But Fortune 200 companies are flying as much today as they did in 2008, he said. It’s the small business owners who are not using business aviation as much."

That sounds like good news, but we need to see the orders before we know the rebound is truely here. Wichita needs a business jet revival.

Furthermore, she relates his judgement that "The political climate has caused uncertainty in the tax structure of smaller businesses. And that leads to uncertainty about income and generates a lack of confidence." Moreover, "That lack of confidence impacts the business aviation industry in Wichita and elsewhere."

Which brings us to the mid-term elections. The pundits are predicting big Republican gains, perhaps recapturing the House, picking up a half dozen Senate seats, and assorted governorships and state ledgislative seats. The latter is especially important given the redistricting that follows the decinimal census.

The economy hit bottom in June, 2009, but the unemployment rate is actually above where it was at the trough. Economic growth ahs resumed, but Americans are still mired in misery.

Comes November 2nd, the President will be blamed.

But is it just?

President Obama campaigned on the need to fix the economy. That created expectations among the voters. Not surprisingly, the voters wanted those expectations to be met.

What happened?

The nation's economic problems were essentially long term in nature (huge and chronic trade imbalances, lack of domestic saving, misallocated resources from the credit boom.) Yet the President focused on short term solutions: fiscal stimulus. Worse, he delegated the job of designing the solution to Congress.

Then, with the economy being far from fixed, the President switched his priority to changing the health care system and its financing. Reallocating resources for a sector equivalent to 17% of the whole economy (four times the size of the auto industry) predictably set off a debilitating dog fight between the winners and the losers. To make matters worse, the President delegated the design to Congress.  Will Rodgers once predicted that "no one's wallet is safe when congress is in session."

If voters are angry with the President's economic policies, their anger is understandable.

After they express that anger on November 2nd, the President should address the source of that anger and ask the American people for a second chance. He should warn them that our problems are long term and there are no quick fixes. We must realistically face America's secular economic decline before it is too late and put forth the painful policies that will reverse our strategic decline. The tea party activists who are focusing on the size of the federal deficits have unwittingly brought to fore a very real problem. The U.S. can only use deficits to attack weakness of demand if the dollar remains the world's reserve currency. And the more it uses the deficits to stimulate the economy the closer we are to losing the dollar's reserve status. When foreigners stop taking our dollars, our options close and we start looking more like Greece and Spain.

Moreover, without significant policy changes there is a very real threat in the medium term. The perceived erosion of the rule of law (think of the treatment of GM's bondholders), the costs of the healthcare system reengineering, and the prospect of tax hikes if the Bush tax cuts expire have eerily recreated the conditions of 1936. These set the stage for the Roosevelt recession of 1937. We avoided the financial collapse that trasformed the recession of 1929 into the Great Depression. Now we have recreated the conditions for the 1937 recession, a recession whose severity was exceeded only by the contractions of 1929-33 and 1920.

President Obama should take advantage of his party's upcoming defeat to embark on a new program of economic leadership.

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