This article originally appeared in my regular column in a local newspaper. — JH
I’ve been sulking ever since the elections. Just about everything and everyone I voted for lost. Locally the opposition Republicans ran mostly bad candidates and lost everywhere. But so did the Democrats and they won. For the record I am pro-fiscal sanity and pro-civil liberty. The Republicans aren’t even pro-fiscal sanity anymore (they say the words, but …) and they are weak on civil liberty. The Democrats are fiscally clueless, but for the most part are pro-civil liberty.
To give you an example, I voted for California Prop 34 to eliminate the death penalty. Yet my fellow Californians, overwhelmingly Democrats and mostly liberal, voted to keep the eye for an eye thing. This is despite evidence that it has no deterrent effect and there have been too many innocent people snuffed. Whatever.
Nationally the incumbent Obama won over a hapless Mitt Romney. Four more years … of stagnation, class warfare, and clueless economic policy. Not to mention the nationalization, in effect, of the health care industry. One of the better observations of the election was from liberal curmudgeon Jonathan Chait who noted that the 47% are actually the 51%. See his recent piece in New York magazine, “We Just Had a Class War (And One Side Won)”. The “rich guy” lost.
Post election it’s all very dreary. Obama continues to demand that rich people pay their fair share even though they already pay most of individual income taxes. The top 10% percent already pay about 60% of taxes; the top 25% pay 87%. The “bottom” 75% pay only 14% of taxes; the bottom 50% pay only 2.7%. So, to resolve our fiscal crisis, the rich are required to pay even more, yet the numbers show that Obama’s proposal only raises another $70 billion a year (per NY Times); a drop in $1.1 trillion fiscal deficit bucket.
History has shown that you can only tax so much before the economy stagnates or tanks. This is the “Rahn Curve” calculation. That “so much” is much debated. Some economists say it’s 15% of GDP, others say it’s somewhere between 20% and 25%. According to most data we are already at that point (24% [OECD]; 26.9% [Heritage Foundation]).
This leads to some unpleasantness economically and politically. Here are some economic fundamentals. Government doesn’t create wealth. By this I mean that only individuals and businesses create wealth. Wealth is something tangible, like your labor, machinery, raw materials, consumer goods, and capital. Money is just a way to get these things. Government spends your wealth. You may think that’s OK because you get some of it: Obamacare, Medicare, Medicaid, AFDC, Social Security, Food Stamps. Just remember someone has to pay for it. It in order to pay for it, someone has to create wealth, and that someone is us, not government.
Here’s my point: the more government takes from the economy, the less wealth creators have to do their thing. At some level that burden becomes a drag on the economy. I say that is now.
So we have a situation where the economy is stagnating—slowest recovery yet—and your government(s) want to take more money out of the economy to pay for things that the 51% want. I think you can start to see the formation of a feedback loop here: falling revenues plus increased government deficit spending requires more revenue to bail out the 51 percent’s economic hardship; the more they take, the more the economy stagnates and the more revenue is demanded by the government to help the needy. Etcetera.
Here is my second point: there is no political will to change this system that generates massive deficits. In other words, we are doomed.
Several weeks ago I listened to Messrs. Simpson and Bowles at UCSB discuss their work on the National Commission on Fiscal Responsibility and Reform, the members of which were appointed by Congress. With all the common sense that these gentlemen displayed, the best they could do is cut the national debt by $118 billion per year. That sounds impressive, but if you take the amount of national debt that was added on since the beginning of W. Bush’s second term (+$8.8 trillion) it would take about 75 years to get back to the 2004 debt level ($7.4 trillion). Not very effective.
We now have the Fiscal Cliff staring at us. Mandatory cuts in spending, including the military, and automatic tax increases. Obama says we need to tax the rich in order to get a deal; Mr. Boehner says no new tax increases. Personally I don’t think we’ll get an agreement and instead they will do the politically expedient thing which is to kick that can down the road by postponing any cuts and extending the Bush tax cuts.
The reality is that spending will never be seriously cut, taxes will never be seriously raised, and we’ll see deficits continue for a long time. The public debt? It will never be cut.
What does that mean for us? Here is what will happen:
- Much debate in Congress will only yield superficial reforms.
- The Fed will continue to monetize federal deficits by printing money.
- Because of Fed money printing, more capital will be destroyed and long-term economic stagnation will result.
- Federal spending will continue, deficits will weaken the dollar even more, and more capital will be taxed out of the economy and spent on things the government wants but which will not create any lasting positive economic impact (so-called “fiscal stimulus”).
- Interest rates will remain at rock bottom levels while modest price inflation will eat away savers’ capital making them poorer. Add to that stagnation and this is what is called “going Japanese.”
- Despite the Fed’s money pumping, money supply is now collapsing which will result in near term negative growth: we may already be seeing this, but it will probably take a few more months to impact the economy.
- As a result, the Fed will be pressured to print money at an even greater rate which will further decay capital, stimulate financial assets, and lead to even more stagnation or recession.
It’s not good new folks, but it is reality though you may not wish to hear it. I believe Cassandra was killed because of her unpopular forecasts, but maybe she was Keynesian. Before you dismiss me as the village idiot, you should know that my macroeconomic forecasts have been very good.
This is why I sulk.