Free Markets, Free People
The President is in trouble, so the “New Normal” is what he’s trying to sell now, according to James Pethokoukis:
Even a talker as talented as President Obama can’t do the impossible: Persuade Americans that the three-year-old economic “recovery” is anything other than pathetic.
Growth is sinking back toward the recession red zone and unemployment’s firmly stuck at over 8 percent for 42 straight months.
It’s no wonder a new Gallup poll finds 75 percent of us “dissatisfied” with the direction of the country. Or that a CNN survey finds that twice as many Americans (39 percent) think the economy is still mired in recession than think it recovering (19 percent).
So Obama isn’t even trying to make the “Morning in America” case for his re-election. He now concedes that “the economy isn’t where it needs to be” and that “we have a lot more work to do.” But he’s quick to add that the Not-So-Great Recovery isn’t his fault, saying: “Throughout history, it has typically taken countries up to 10 years to recover from financial crises of this magnitude.”
Obama, you see, is a believer in the “New Normal,” a phrase popularized on Wall Street, where gloomy economists cite the slow growth, high unemployment and high debt that supposedly afflict countries after severe banking crises.
The two implicit points Obama wants those who buy into (and I use “buy into” purposefully, because this is political snake-oil) this paradigm are a) he’s not at fault and b) it takes a long time to climb out of these sorts of holes so he should be given more time as well.
Well, it may not be his fault per se, but that’s irrelevant. He’s had 3 plus years to do something about it and his efforts to this point have been an abject failure. In fact, it does a disservice to the word “abject” to characterize them that way since abject doesn’t begin to describe the depth of that failure. This president and his administration are clueless and incompetent. When you add the desire to push their ideological agenda regardless of the economic circumstances it becomes even worse.
Instead of concentrating on the economy for the first two years of his presidency, he used that time and the energies of an all Democratic Congress to pass … health care? And then, when voters kicked his political rear and that of the Democrats by putting Republicans in the majority in the House in 2010, suddenly everything was the GOP’s fault.
As for the second point, yes, relatively speaking it does take a long time to climb out of these sorts of holes. That is unless you are ignoring the economic first law of holes – if you’re in a hole quit digging!
This administration has made recovering from this crisis infinitely worse than it had to be. For instance, instead of turning to proven fuels, an infrastructure that exists to exploit them, and creating jobs, he and his administration played the “green card” and threw billions at companies that soon went under or created jobs at multiple millions of dollars spent per job. Meanwhile, federal land was closed to oil and gas production and the Keystone XL pipeline was shelved.
As for shovel ready infrastructure jobs … well ask the Chinese how well they’re enjoying your tax dollars while Obama prattles on about “outsourcing jobs”, ok?
There is absolutely no reason to buy the snake-oil he’s trying to sell or accept this as the "New Normal”. That’s failure talking, and we simply don’t have to accept it.
James Pethokoukis provides us with the quote (a little context when you hear all the “sunshine and roses” employment reports):
[T]o restore the job market to the state it was in back in 2007, before the recession, would require the creation of 14.8 million jobs in today’s terms, a daunting task to say the least.
FRED supplies the graphic:
The valuable James Pethakoukis weighs in with some new numbers to again shatter one of the myths that surround the “income inequality” nonsense that OWS and its ilk (*cough* Democrats *cough*) are pushing. One of those myths is that middle class income has “stagnated” in the last 40 years. And that’s because, per the OWS crowd, the rich have basically
stolen taken ended up with the money generated. Those pushing that premise are citing economists Thomas Piketty and Emanuel Saez study which claims the taxable income of the bottom 99 percent increased by just 12 percent from 1970 to 2008.
That premise and those claims are under serious assault. In fact, the University of Chicago’s Tino Sanandaji finds that there has been pretty significant growth in middle class income. His summary of what he found:
My simple method is combining the best income-distribution estimate (from Pickety&Saez) with the best income-growth estimates (from GDP numbers). This method shows that that between 1970-2008 the real per capita income of the “Bottom 99 Percent” grew by 80%, and the income of the “Bottom 90 Percent” grew by 60%.
80%? Last time I looked that was a bit higher than 12%. Oh, and plenty of charts, etc., to explain the difference at Pethakoukis’ site.
And there is statistical backup for Sanandaji’s findings:
From 1975-2009, real per capita GDP increased by 90 percent vs. 17 percent growth in real median household income, as measured by the Census Bureau.
On top of that:
These calculations are in line with new research from University of Chicago’s Bruce Meyer and Notre Dame’s James Sullivan, who find that “median income and consumption both rose by more than 50 percent in real terms between 1980 and 2009.”
Conclusion? If the premise is that one of the reasons that upper income increased in that period is because middle class income stagnated, the premise just isn’t supported by reality. Income is not a zero-sum game. And one of the points on the pro side of capitalism is it lifts all boats – as demonstrated here.
James Pethokoukis provides the reasons. As you’ll note, economically, they’re not rocket science, but they certainly are something that the left seems to want to ignore in focusing its solutions to the debt problem on getting tax increases included.
One – the economy will not tolerate a tax increase at this time. It is simply not in the shape in which it can shrug a tax increase off. And it certainly won’t matter if the tax is only on “the rich”. As someone once asked, “ever get a job from a poor man?” The increase in revenues generated by taxing the rich (or anyone for that matter) will not offset the loss it will generate in hiring or expansion of business. Pethokoukis points out that the economy is in incredibly fragile shape at the moment. Thus:
…[T]he economic recovery is sputtering with stall speed fast approaching. Now would be a terrible time to penalize investors and business, both big and small, with new taxes.
Common sense 101.
Two – Tax revenue isn’t our problem when it comes to debt. Spending is the problem. Yet as I pointed out Saturday, the solution the left seems to prefer involves nothing but tax revenue increases or tax increases. What they’re less inclined to do is focus on the spending problem and make appropriate spending cuts. “Greek heroin” is the reason. Take a look at this:
By 2021, the the CBO says, the annual budget deficit would be 7.5 percent of GDP and by 2035 a truly monstrous 15.5 percent. Throughout this period, tax revenue would be 18.4 percent, right around the historical average. But spending would be 25.9 percent in 2021, 33.9 percent in 2035 vs. an average of roughly 21 percent. It’s spending that’s way out of whack, not revenue.
That means that if the so-called “Bush tax cuts” (they’re just the current tax rates) are left in place, that’s where we find ourselves in 2035. As Pethokoukis proves, it isn’t tax revenue that’s the problem. Unless you believe that it’s the government’s money in the first place and they have every right to determine how much you get to keep.
Let’s go with that. Let’s see what happens if the left gets its way:
But let’s say all the Bush tax cuts were left to expire, as was AMT relief. Assuming no economic fallout, according to the CBO, revenue would be 23.2 percent of GDP by 2035. Three problems here: a) even with all those tax increases, the annual budget deficit would still be nearly an unsustainable 10.7 percent of GDP in 2035; b) the U.S. tax code has never generated that level of revenue and almost certainly can’t without a value-added tax; and c) there would be tremendous economic fallout. Axing all the Bush tax cuts would chop three percentage points off GDP growth, according to Goldman Sachs, certainly sending America back into recession. Tax revenue would again plummet.
Spending, not tax revenue, is the obvious problem.
Common sense 101.
Three – boosting economic growth is the fastest way to increasing tax revenues. However there’s one problem to that as far as an intrusive government is concerned. It has to get out of the way.
Pethokoukis and I part ways a bit here as he endorses a consumption tax vs. an income tax and further endorses raising the revenue percentage of government’s part of the GDP to 19%. Can’t go there with him even if Rep. Paul Ryan’s plan is similar. I’m not so much against a consumption tax (it at least taxes what you consume thereby not penalizing you for what you save, nor do you get double taxed assuming the income tax goes away) but I am against such an increase in the tax percentage. I think very aggressive cuts in government spending plus fairly massive deregulation (and the obvious cuts in compliance spending by businesses that would save) would yield a fast recovering and growing economy. Granting an increase in the historic percentage of GDP that government has taken opens a door of precedence I don’t want opened. It is time government lived within its means and understood that that economic growth takes precedence over government growth – every time.
It is spending – uncontrolled and wasteful spending – that is our problem. Not tax revenue. Government must be cut and cut fairly severely. That’s something the heroin addicts don’t want to hear. So they spin out solutions which always end up in one place – “the problem is revenue, we need more revenue”.
No. They don’t.
And the GOP, if it is to have any credibility with voters come 2012, had best not cave on this point.
Again, Common Sense 101.
James Pethokoukis is hearing the rumors of something which might put a number of you in the situation where you’re paying down your neighbor’s mortgage – all in the name of politics. I’ll let him explain:
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
Essentially Fannie Mae and Freddie Mac would be the vehicles for this $800 billion bailout. As mentioned above, the “$400 billion limit” for financial assistance to the two institutions was waived by Congress. And, HARP has been extended. The ability to do what Pethokoukis is hearing certainly exists.
As I mentioned in the previous post, the election this November isn’t shaping up well for Democrats. And the administration knows that without the majority in the House and Senate, its agenda is dead. As Pethokoukis points out, the midterms are expected to be a blood bath for Democrats and this sort of a move may be seen as a last hour way to change that outcome. The GSEs (Freddie and Fannie) are about the only “levers” left for the White House to pull. And with the economy slowing and the President’s approval ratings tanking, those levers are looking mighty tempting:
The mortgage Hail Mary would be a last-gasp effort to prevent this [loss of House and working majority in Senate] from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.
And, of course, it would be a backdoor “stimulus” that many on the left think is needed.
It may not happen, but as pointed out, the rumors are pretty darn strong with Wall Street firms privately warning their clients it is a distinct possibility. It would be an incredible move that, given the mood of the country, could backfire spectacularly if done. But the political calculation may be that if Democrats are supposed to lose badly in November anyway, why not try.
The financial consequence? Bah … we’re talking politics here, the “religion of the left”. They’re likely to do whatever they think is necessary, consequences be damned. And we’ll be left, as usual, holding the bag.
Raising taxes is the preferred method of increasing revenue to the government (see “Zombie Government”) by both Obama and the Democrats, according to James Pethokoukis. He lists 5 reasons why Obama will raise taxes on everyone:
1) Obama knows the budget math doesn’t work.
2) Obama seems to prefer tax hikes to spending cuts.
3) Obama has already tried raising taxes.
4) Obama’s advisers are for higher taxes.
5) Obama doesn’t seem to think high taxes are harmful.
Pethokoukis explains each of his points in his article, but I listed them in short form so you could easily see that together the 5 create the atmosphere and ingredients necessary for the perfect tax storm. It is obvious to anyone that the 10 year budget proposed by this administration is outrageously expensive and without adequate revenue to implement it. What is also obvious, given the first Obama budget, is there is no desire to cut spending.
That leaves government with few choices for raising the revenue necessary to pay for the planned fiscal profligacy. International interest in our debt instruments is at a low. Mortgaging off the future of our grandchildren is much harder to do now. That leaves the administration with very few alternatives, all dealing at some level or another with taxation. So prepare to hear about increased taxes relatively soon – Turbo Tax Tim Geithner has already floated the “middle class tax” balloon. And of course there are any number of other sorts of taxes – sin taxes, fees, etc. – that the creative minds in Congress will explore and implement.
Yup, the tax man cometh, all the while telling us we have to cut the deficit the administration has run up. They’ll tell us it requires “hard choices”. Of course the only “hard choice” will be when to enact sweeping tax increases so they’ll be the least damaging politically.
Bottom line: The belief in the need for higher, European-style taxes (like a VAT) fills the policy cloud that surrounds Obama. It’s hard to overstate this. It’s right up there with global warming. Obama knows he faces a looming fiscal crisis and higher taxes will be his weapon of choice. To paraphrase Mondale, “Obama will raise middle-class taxes. He won’t tell you (yet). I just did.