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A few times each week I am asked by clients and colleagues what my biggest concerns are in our current marketplace. One that has really been resonating with those that I speak with is the unprecedented shift in economic power from the private sector to Washington DC and how this fact could impact the commercial real estate market. Our CRE market (and the ecomony for that matter) needs job creation which does not seem to be on the minds of those with the economic power today.While most Americans and businesses are cutting expenses and being prudent about spending under current economic conditions, the present administration has continued the reckless spending habits of the Bush administration. I am not criticizing Democrats or Republicans but all elected officials who are spending our way into serious trouble. If you read StreetWise regularly you know that I do not discrminate when objecting to policy inplementation.During W’s 8 years, the supposedly fiscally conservative President, oversaw a GDP increase of 15% while he allowed government spending to increase by 58%! The present administration’s stimulus plan is full of more pork than a butcher shop with only 11% of the $787 billion targeted toward infrastructure which is truly stimulative. A number of those on Capitol Hill had agendas other than stimulus and they were the ones shaping the package. Additionally, there are trillions in various programs which are in various stages of deployment and when there is that much cash being thrown around, you are kidding yourself if you don’t think waste, fraud, abuse, incompetency, inefficiency and corruption will exist. History has shown us that this is normal regardless of the party in control. The risk is, however, much greater under a unified government such as we have now. The midterm elections should be quite interesting.We must remember that politicians do not grow economies. The truth about growth is that it is the product of millions of decisions made by millions of people about what to produce, buy and sell. Politicians can influence decision making by increasing or decreasing incentives about what we produce, buy and sell ( like offering to paying $4,500 for cars that may have been worth an average of $500). Regardless, they cannot control today’s global economy.In the most recent cycle, since output peaked, our GDP has contracted by 3.9%, the steepest decline since World War II. Many economists believe that our economy is at an inflection point at which we may need to shift to an export based economy as opposed to continuing to rely on a consumer based economy.  We have had decades of growth led by consumer spending which, along with residential investment, grew from 67% of GDP in 1980 to 75% of GDP in 2007. During the credit crisis, $13 trillion of wealth has evaporated. We have seen an implosion of the shadow banking system and a tangible shift to thrift.In 1980, the savings rate in the US was 10%. In 2006, the abuse of credit cards and readily available mortgage equity withdrawl catapulted us into a savings rate of -4%. During this period, we saw all borrowing in the form of household debt grow from 67% of disposable income to 132%. Today, the savings rate has risen to 6%. This 10% swing in the savings rate alone has eliminated $1 trillion from our total annual output. The stimulus, along with other government programs, combined with dramatic declines in tax revenues have created record budget deficits, now projected to rise to about 13% of GDP. To put this into perspective, this $1.8 trillion deficit amounts to $3.4 million per minute, $200 million per hour and $5 billion per day. Our federal debt is now 60% of GDP and it is projected to hit 82% by 2019. At some point the spending must stop.Moreover, the off balance sheet obligations of the US associated with Social Security and Medicare put us in a $56 trillion financial hole. Both of these programs are looming train wrecks if there are not fundamental changes made to the way they are structured. Fannie Mae and Freddie Mac liabilities are also off balance sheet whollops to our financial picture – add $7 trillion more.We are presently faced with 4 looming deficits: a budget deficit, a savings deficit, a value-of-the-dollar deficit and an economic leadership deficit. Political careerism must give way to the implementation of real solutions.So why do I care about all of this political mumbo-jumbo? Because our real estate market needs real solutions. We need the government to focus on creating incentives for small business. We have been led out of the last 7 recessions by small businesses which have created two-thirds of all new jobs. Anti-business sentiment on Pennsylvania Avenue is not stimulative. We need small businesses to thrive. That will create jobs and those jobs will allow residential tenants to move from a one-bedroom apartment to a two-bedroom, or from a two-bedroom rental to purchasing an apartment or a single family residence. The additional jobs will create demand for office space and the increased economic activity will increase room rates and occupancy levels in hotels. New jobs will put disposable income into the pockets of Americans who can go to retail stores and purchase goods which will allow retail tenants to pay better rents and open new locations. Small businesses have the power to create these valuable jobs. Where are the incentives for small businesses?The massive deficits we are experiencing (at all levels – federal, state and city) will certainly create pressure for tax increases but tax increase are not the answer. We are all cutting expenses, why can’t the government – at all levels? If they can’t, we could be in this soup for quite a while.

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