Pessimism will pass by mid-year, economist tells local businessmen

Likening the last financial year to an "unbelievable roller coaster ride," economist Robert Genetski addressed several hundred people this morning at an annual economic forecast breakfast in Arlington Heights, sponsored by Midwest Bank.

"If you look at a graph of stock market performance for the past year, all of the wiggles look like an electrocardiogram and for the last couple of weeks, it has looked like the patient is in cardiac arrest," he said in his opening remarks.

But by the end of his talk, he had given his audience reason to be optimistic about the future, as long as political leaders adhere to the classical economic principles of low taxes, free markets, stable prices and protecting individual property rights.

"Even God doesn't ask for more than 10 percent. Doesn't it make you wonder who some of these politicians think they are?" he quipped.

Genetski is a policy adviser to The Heartland Institute, a public policy research group based in Chicago, and head of his own consulting firm, Classical Principles, based in Michigan.

He blamed an overly restrictive monetary policy on the part of the Federal Reserve last spring and summer for the current situation, combined, of course, with the subprime mortgage problems.

And since it usually takes six to nine months for Federal Reserve interest rate adjustments to be felt, he said that it will be the middle of 2008 before we truly start to see the positive effects of the Fed's recent moves.

"I expect weakness in the first half of the year and then I expect things to start to turn around by the second half," he stated.

"So if you need to borrow money, I suggest you do it between now and the middle of the year at a fixed interest rate and for as long a term as possible. Next year I believe that interest rates will be much higher," he said.

Stocks are currently selling for only half of what Genetski believes they are worth, so it is a good time to buy. He expects that stocks will begin to rise in about three months as the market begins to anticipate the recovery.

"The stock market is always risky but I don't believe that there is any greater risk now than we have had in the past. This current perception of great risk will pass," he stated.

Housing, on the other hand, will take longer to recover, according to Genetski. He believes it will take another full year or two to work off our excess inventory of houses.

Over the past 25 years, Genetski said, American productivity has risen an average of 2.5 percent per year.

"This is because we have had a huge reduction in the tax rates that were penalizing people for their productivity," he said.

Capital gains tax rates have fallen from a high of 50 percent in 1978 to the current rate of 15 percent. Income taxes have fallen from a high of 40 percent to the current rate of 25 percent. The country has also reduced barriers to trade, he said.

"Looking at the upcoming election, I must say that all of the Democratic presidential candidates have plans to raise taxes significantly and both (Republicans Mitt) Romney and (John) McCain were vigorously opposed to the 2003 tax cuts so I think that it could be easy for them to abandon their pledges to cut taxes," Genetski said.

Unless Congress takes countermeasures, income tax rates, capital gains tax rates and the taxes paid on interest income are all due to increase in 2011. And if that happens, "productivity will deteriorate considerably," he said.

As for the current plan endorsed by President Bush and Congressional leaders to issue checks to people to boost the economy, Genetski called it "ridiculous."

"This is not a tax cut," he explained. "It is more of a one-time gift and as such, is more akin to government spending than to a tax cut. With this move, they are not telling people that they are going to let them keep more of their money because they are doing extra work and taking risks in order to create wealth that helps the country. That is what happens with a tax cut."

"Demographics are also working against us with millions of Baby Boomers retiring and drawing on their Social Security and Medicare benefits at a time when there won't be very many people between the ages of 21 and 65 paying into the system," he said.

"There is a solution, however. There are millions of workers south of the border who want to come here to work and pay taxes. I predict that in the future instead of building fences, we will be building welcoming centers."

Responding to an audience question about health care, Genetski asserted that half the money currently being spent could be saved if people had to pay for routine care themselves. Then they would shop around for the best price instead of figuring that someone else was paying for it. That is the idea behind health savings accounts.

"Insurance is supposed to be for catastrophic events," he explained.

"If you put the government in charge of our health care, you better start exercising and eating better because you don't want to get sick and have to rely on them," he said.