Regardless of your party affiliation, the debate in Washington is alarming, dysfunctional and should give every American pause about what it bodes for the economy. Partisan debates aside, the laws of economics always trump passion. Let's look at the facts. US GDP is driven by four factors: Consumer spending (which accounts for about 70% of GDP), government spending, capital investments and net exports. Consumer spending has been on life support since the debt bubble burst in 2007. Today's number showing that consumer spending rose just 0.1% in the second quarter should come as no surprise. Unemplyment is at 9.7% nationally and even higher at the state level. While long term plans to bring down the national debt are highly necessary, cutting government spending with high unemployment and Q2 GDP growth at a recently revised anemic 1.3%, is counter stimulative.  

 Our economy depends on a well educated workforce, yet cuts to spending on higher education are being implemented at many levels of government. I think they're ill advised. The unemloyment demographics point to permanent structural changes in the economy. People with a high school diploma have a 14.7% unemployment rate--while those with a college degree stand at about 4.2%--the rate is even lower for those who hold master's degrees. This paints a picture of a workforce that's out of synch with what the economy needs to recover. We need to invest in our workforce yet in my state of California, increases in tuition for state-run institutions has put college out of reach for many young people. This is happening nation-wide.

Many in government are calling for cuts to so called "entitlement programs". Social Security is one such target. However, when the average American over the age of 50 has savings of just $69,000, how will we support these people in the future and more inportantly, what will cutting their benefits do to aggregate demand? (remember consumer spending makes up 70% of GDP). If you're employed, concerns about your future and the need to boost your savings is bound to curtail your spending, precisely when America's businesses depend on you to buy their goods and services.
 
Let's face it, none of us like higher taxes but so called "revenue enhancements" are needed to close the budget gap. The Democrats have proposed tax increases on the "rich" and the Republicans charge that this would penalize "job creators" and increase the unemployment rate. Some tax increases are necessary. Hedge fund managers, Wall Street bankers and high ranking corporate officers, who derive most of their compensation in the form of gains on stock portfolios or stock options, are taxed at the 15% capital gains rate. In addition, they don't create jobs and don't spend enough of their disposable income to affect GDP. Instead, we should tax their income as regular income and provide incentives to the real job creators--the owners of America's small and mid-size businesses to hire more workers. Investment and payroll tax credits come to mind. A healthier economy would be even better.
Calls for reduced government are also guided mainly by passion and not by logic. As a former Wall Street banker, I can tell you Dodd-Frank didn't go far enough.The investment banks that brought us Alt-A mortgages, subprime mortgage bonds and credit default swaps almost brought down the economy. Many banks are still reeling from the effects and according to studies by the National Federation of Independent Business, are still not lending to America's small and midsize companies. Stronger legislation needs to ensure this never happens again.
 
 So what's the answer? Politics are wrapped around the axle by a passionate minority over macro issues that will have little effect on the main street economy. A common misconception is that cutting the deficit will stimulate the economy. I think it will have the opposite effect. Instead, "we the people" need to pressure our legislators to stop their posturing and do the hard work we elected them to do. America needs a plan with both short-term incentives and long term objectives to get the country's economic engine running again. It will take a combination of spending and targeted fiscal policy in the form of tax breaks and removing government barriers to small businesses investing and hiring again. Much is at stake and if the current environment doesn't change on Capitol hill and in the local statehouse, we're in for a long bumpy ride.