The Economic Situation


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The Economic Situation

  1. 1. The Economy: No easy fix without accountability, discipline, and sacrifice Preamble The economic situation we’re in is not a new challenge but one that began decades ago.The housing bubble was only aneconomic early warning indicator.An indicator that should havewoken even the most accomplished sleeper. Regardless of the event that propagated all of theseeconomic challengesinto motion,it is imperativewe act with a sense of urgency and cooperationin order to preserve our economic strength, security, and global leadership. The purpose of this brief overview of our economic system is to inform and invigorateour curiosity regarding the importance and impact economics has on our daily lives.Furthermore,every citizen should investigate each of the entities discussed below to gain a betterunderstanding of the system, the pieces, and the path we are currently on as a nation. The System (Complex with Many Moving Parts) For the most part, the entiresystem is based on taxation. Taxes are the main source ofrevenue for the federal, state and local governments.Federal income taxes are collected fromconsumers and businesses. State and local revenue is derived primarily from property and salestaxes. Some funding is allocated from the federal government backto state and localgovernments. The Treasury is the responsible agency for the collection of revenue via the InternalRevenue Service (IRS). The Federal Reserve is responsible for expanding and contracting themoney supply to banks in the system and raising or lowering interest rates.Consumers and businesses as well as the federal, state and local governments drive the economythrough the purchase, trade, and leverage of products and services.Wall Street (the Market) is theinvestment and open trade system for most of those products and services. The Government (Policies and Direction) The U.S. Government is the largest employer in the country. Although governmenthiring has offset some of the private sector employment losses it is not a sustainable option toend unemployment issues. Additionally, the government continues to borrow and spend at anextremely rapid pace and as a result has run up an enormous national debt and budget deficit.The interest on borrowed money continues to accrue at a rapid rate. State and local governmentsare also experiencing economic and financial woes propagated from the federal government aswell as from self-inflicted injuries and creative budgeting efforts. Recent criticism includesgovernment size, spending rate, excessive borrowing, economic policies,war costs, unionsupport, social programsor entitlement funding, and industry bailouts. The Silent Factor (Least Understood with a Huge Impact) The Treasury and the Federal Reserve are two entities with very little visibility andunderstanding as to how they impact the economy and the financial profile of the country. The
  2. 2. Federal Reserve consists of 12 banks. They are private, non-government entities. The FederalReserve pays back the investors with interest on the money that is borrowed. In a nutshell, theTreasury issues bonds at some interest rate to the Federal Reserve who in turn writes a check andgives it back to the Treasury. The Treasury in turn deposits the funds into various banks andmakes the funds available to the government who in turn pays contractors, workers and its bills.Additionally, the Federal Reserve provides funding to the banking system which is based on afractional reserve banking process. The banking systemprovides loans and cash to businessesand to the consumer. The IRS collects taxes from the consumer to pay back the Federal Reservewith interest.Recent criticism includesquantitative easing or economic stimulus to boost theeconomy, excessive foreign investment, individual tax rates, and small business taxes. The Political Factor (Agendas and Budgets) Political parties present their own complexity and baggage to the challenge. Each partyhas its own agenda. Party political platforms and agendas differ as much as night and day. Thecurrent political system enables decisions based on a political majority not necessarily whatmight be the most optimal solution. Policies are instituted by the majority.Recent criticismincludes unwillingness to compromise, no approved budget agreement, lobbying clout, fiscalcliff, and unnecessary spending hidden in submitted bills. The Business Complex (Products and Services) For the past several decades the outsourcing and off-shoringof work has intensifiedinorder to reduce costs and to respond from Wall Street pressureof maximizing profits. As aresult,certain jobs have been slowly disappearing setting off a series of related andcascadingevents to include increased and displaced unemployment, personal bankruptcies,housing market devaluation and so on. However, this is not the sole cause of the entire economicsituation we are experiencing. Businesses have curtailed or deferred investments and reducedhiring because of the uncertainty of federal economic policies, economic uncertainty, and risinghealth care costs. Recent criticism includes hording cash, off-shoring of jobs,increase incorporate profits, executive compensation, and benefits reductions. The Market (Investment and Capital) From an investment and capital standpoint, Wall Street continues, and will continue to,push for higher and higher financial performance from publically traded entities. Although someview this as greed, it’s what makes the business cycle wheels turn and opens up opportunity forinvestment, capital, and financial performance within the country and globally.Recent criticismincludes enforced regulatory policies,greed, and the major cause of the financial system collapsebecause of the lack of investment oversight. The Consumer (You and Me) This is perhaps the most confused of the groups. Understanding the complexity of the
  3. 3. economy and associated financial impacts, sound bite media reporting, and of course the politicalfactor all make it nearly impossible to separate fact from fiction. Media, experts, and politiciansspew millions of sound bites that are only partially correct. Reading and analyzing the federalgovernment’s websites would present the consumer with the empirical data that would assist inunderstanding of the trends leading us to our current economic situation. Recent criticismincludes borrowing too much, living out of one’s means, and lack of financial understanding andresponsibility. The Result (A Serious and Complex Situation) The entire process is much more complex than the brief explanation provided abovewhichalmostseems the entire system iscounter intuitive. The Federal Government, Treasury,Federal Reserve, Political Parties, Business, The Market and Consumers all have a part in thehealth, welfare and solvency of the country’s economic system, its progress, and its failure.As aresult of government economic policies established decades ago, an extremely high deficit anddebt, the lack of employment, the taxation system, household debt, unfunded obligations, and anumber of other key factors have forgedan unsustainable path toward growth, security, andstability. The Solution (No Silver Bullet) So what can be done to fix the challenges we are facing? Can whatever we do be fixedall at once? How long will it take to fix it? Unfortunately, these are simple but very complexquestions. So what can be done to fix the challenges? Some experts believe this cycle will self-correct and others predict complete failure and devastation. In any case, the entire economic andfinancial system must be considered. The cause and effect implications are so great that eachpart of the system impacts all others. Additionally, some of these fixes are going to challengethe political and cultural fabric of the country. There is not one fix or silver bullet that willenable a positive course correction. Can whatever we do be done all at once? Simply no. Just like excessive personal debtunless you have the cash to immediately pay it off it will take a period of time. Whatever thegovernment decides to do however, the recovery needs to be carefully planned with a multi-yearimplementation strategy and plan. How long will it take? It could take decades. Much similar to personal debt if you havea number of credit lines that are at the maximum then a minimum payment structure will takeyears to pay the credit line off. Remember, interest keeps on accruing. Some scholars, like Michael Porter, believe the economy will transform itself into SocialEntrepreneurship and further away from our current capitalistic system.Although this theorycould unfold, we must consider what happens between now and then from a realistic point ofview.
  4. 4. The Summary (You be the Judge) There are a number of agents and participants in the economic system. It is very complexwith many competing and moving parts. The solutions applied must be well thought out andstrategically planned and implemented over a period of time. More importantly, the entiresystem needs to be evaluated to include all of the participating parts. All solutions or policieswill have to be accomplished with little to no impact to national growth and stability. We musthowever, continue to innovate and educate our workforce in order to maintain our globalposition. It will take sacrifice, discipline and certainly accountability from each of the majorentities in order to solve the economic and financial challenges we currently face. What’s yourstrategy or solution(s) to mend the economic challenges we now face?Dr. Phil Burian’s career spans over 30 years of technical and leadership positions ingovernment, industry, and academic environments. His diverse background coupled withoperational experience gives him an extremely broad insight from a technology, programmanagement and business perspective. His framework of vision, objectives and strategy; people,process, technology; productivity, performance and innovation form the foundation of strongorganizational leadership. He is currently the Chair of the Business and ManagementDepartment at CTU Sioux Falls. Dr. Burian and his family are the owners and operators ofDiamond Burian Ranch in South Dakota, and has a current Klout score of 44. Connect with him.