Sulking In America

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.

EmailPrintFriendlyShare

16 comments to Sulking In America

  • JB McMunn

    Presidents are not powerful enough to fix economies or heal social rifts even if they had the requisite skills. If Romney had won we would still have stagnation, class warfare, and clueless economic policy. I doubt he could have repealed ObamaCare (not enough Senate votes) but he could have crippled it.

    The Titanic has already hit the iceberg. All we did was vote for the captain who would preside over the inevitable consequences. If Romney had won then his big supporters would have received priority boarding for the life boats but Obama won so his big supporters get priority boarding instead. Congress will argue about The Omnibus Iceberg Act of 2013, which in the end will defer everything to 2014.

    Unfortunately most of us are third class passengers and we will be receiving anvils marked “flotation device”.

  • D

    Buy gold.

    And quality farmland.

    Out of the US.

    Have an exit plan.

    One day you may need it.

    • Hans

      Very good advice, D!

      “I’ve been sulking ever since the elections. Just about everything and everyone I voted for lost.”

      Holy Cow, Mr Harding, we must live in the precinct..

  • Janeb

    Great article. The only possible good news is that the US may face a crisis sooner rather than later. Otherwise, the rot continues….till … See Europe and soon Japan. That is the future.

  • Joe

    of course we could always TAX the tax evaders fairly

    CORPORATIONS need to pay fair share

    APPLE paid just 2.74% of profits in 2011

    time for 20% AMT on REPORTED GLOBAL PROFITS – see no PERSON is being taxed now

    and we’ll even give them deduction for taxes paid to OTHER COUNTRIES

    or they could turn over their IRS TAX FORMS

    take your pick

    btw this INCREASES REVENUE BY over $1 TRILLION PER YEAR

    of course we need to LIMIT GOVT SPENDING 1st

    • D

      Don’t tax corps, repeal ALL corp taxes. Take the money out if K Street. Add a few more layers to the personal tax rates to pick up what you lose at the corp level. Attract foreign investment as well. Plus easier to grab from individuals who cannot buy special favors Un the tax code.

    • morganovich

      joe-

      1. that would not make any sort of material difference. it’s not even a drop in the bucket.

      2. what would make a difference is getting the % of americans paying taxes back to a normal level. in the 80′s 14% of americans paid no net income tax. it’s now 47%. there’s the big hole that has opened up.

      3. your data on apple is nonsense. apple had 32.4bn in pretax profits in 2011. they paid 8.3bn in income tax. that’s 26%. you are off by a factor of 10 in your claim.

      http://finance.yahoo.com/q/is?s=AAPL+Income+Statement&annual

      perhaps not all that tax was paid in the us, but not all of apple is a US company. what is it you propose, that we make them pay tax where they do business AND in the us and double tax them?

      • I.M.Skeptical

        Actually, Apple (and many other corporations) hides a lot of their income with the ‘Double-Irish-With-A-Dutch-Sandwich’ tax-avoidance arrangement. And several other schemes.

        See this for a explanation of what happens:
        http://www.nytimes.com/interactive/2012/04/28/business/Double-Irish-With-A-Dutch-Sandwich.html

        And also here:
        http://en.wikipedia.org/wiki/Double_Irish_arrangement

        These companies are able to avoid paying tax on a huge portion of their income which is taken offshore. Who can blame them for doing this when it is completely legal! I would do it too if I could! That’s where the unfairness is. I can’t do this as a small business.

        Regardless, ultimately any tax it is going to be paid for by the consumer in the form of prices of products and services, so you might as well just tax the consumer/individual directly, and keep taxes low-or-nil on corporations to spur economic growth to the maximum extent possible.

        Step 1, We should absolutely attempt to minimize tax on the individual, but we need to shrink/limit the size of government.

        Step 2, need to convince 51% of the population that this is the way to go.

        Problem solved. No more sulking.

  • LB

    Nobody talks about the “crowding out” effect of government spending. You artfully stated that this effect is already stunting growth (and the pool of savings, or Investment in the economic vernacular, needed for growth).

  • [...] 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.  [...]

  • Chris Goodwin

    (Some of) you Yanks (I’m a Brit, by the way) had a chance to do something positive, productive, honest, morally correct, – and you blew it. You Republicans could have selected Ron Paul, and he would have blown Obama out of the water. But you are hypocrites, and cowards. As you sew, so shall you reap.

    I’m out of the Euro, out of Sterling pretty much, into Gold and silver. Wake me when it’s all over.

  • morganovich

    a question:

    while i agree with much of what you said, how do you arrive at the notion that “taxes will never be significantly raised”?

    if nothing happens before year end, dividend taxes will soar as will inheritance taxes, and the huge whopper, cap gains which goes from 15% to 24%. tack on some increases in the tax brackets as the bush tax cuts expire, and this looks to me like a very significant rise in taxes.

    correct me if i am wrong, but i think it is the largest hike in taxes in US peacetime history.

    worse, it’s targeted directly at investment and the key engines of economic growth.

    perhaps we are just differing here on what constitutes “significantly” but this seems very significant to me.

    it may not increase tax receipts significantly (and will likely shrink them in absolute terms over 5 years), but in terms of what i am looking at happening to my tax bill, it looks pretty nasty.

    worth remembering: the clinton tax hikes did nothing. taxes as a % of gdp remained mired at very low levels and growth was punk. it was the cap gains cut by the gingrich congress that upped the tax receipts both as a % of gdp and even more so in nominal terms as gdp grew faster as well.

    it set off an epic boom.

    we have never seen a hike in cap gains like this. i think the nastiness of the impact is being underestimated.

  • I.M.Skeptical

    What you write is all true Jeff.
    Sulking is only natural when you can see that we are headed for perilous times. It seems that most folks (the 51% that voted for the incumbent) failed to understand that when “the rich” are taxed into poverty, then the “no-so-rich” become the new rich, and then they are taxed in to poverty, and on down, everyone is in poverty. Perhaps the 51% voted the same way because they never think they will be rich and will not affect them. Nothing could be further from the truth.

    We have seen this type of ‘tax the rich’ scheme with the Alternative-Minimum-Tax (which is neither alternative, nor minimum) where it only affected a handful of people maybe 100 people nationwide originally, but now is hitting many millions of taxpayers, and continues to ensnare more and more folks, but these people are not rich by any reasonable definition. Even with indexing for inflation, the AMT-patches have not really kept pace with real inflation. As inflation/currency-debasement effectively lowers the threshold for a specific income to be branded as “the rich”, then soon everyone will be in the branded as rich. Taxing the rich is how it starts, and eventually everyone is hit after debasement has run it course.

    The taxes on the rich mob has won the day, but they will end up losing too in the long run. Meanwhile the local economy in DC continues to boom.

  • Jason Z

    One question, did you vote for W in 2000?

  • Stephanie

    Please explain the sequence of how QE/money printing destroys capital. I don’t follow. Do you mean it encourages malinvestment? Thank you.

  • Neville

    I think a prolonged period, at least a decade, of stagnation and inflation is already “baked into the cake”… Remember the 1970s? I do. And if the US does not get its affairs in order very soon, we will have set the stage for much worse.

    Stagflation has already begun, along with an accompanying decline in the US’ geopolitical power and influence. Much of the world already realizes this, and they are slowly but steadily preparing for a future in which the US is still an important power, but no longer a superpower. How do I know? I read a number of respected foreign papers; I have intelligent friends and family overseas, and I live abroad part of the year. Truly, this is very clear to almost everyone outside the US who is paying any attention at all…

    As the US’ economic decline (in real, inflation-adjusted terms) continues it will also erode the US’ military capabilities (just as it did in the 70s). Couple this with a moral decline in far too many of our people, which is simply an extension and furthering of what began in the 1960s, and we have a perfect recipe for the long-term decline of America.

    Looking forward over the next 20 – 30 years, I do not think America will suffer a catastrophic collapse. Much more likely is a more-or-less steady decline, punctuated by periodic crises: one or more dollar crises; debt and interest rate crises, possible challenges from up-and-coming powers, and so on.

    What to do? For most Americans, emigration overseas is simply not an option… if you do live abroad, you are still a US citizen and liable for US taxes (which will go higher in the future).

    If you have enough money, many countries will accept you as a permanent resident, and a few will even put you on a path to citizenship. But most Americans simply don’t have that kind of money, and most of the countries where you would want to move are pretty choosy about who they let in – you must have lots of money, or a significant family connection there.

    So, the very rich can move abroad if it gets bad enough; they may even be able to take another citizenship, move all their money overseas, give up the US citizenship, and avoid US taxes altogether (assuming the gov’t doesn’t enact laws restricting capital flight). If you’re not rich, but have a spouse or (perhaps) other family who are foreign citizens, emigration might be an option for you – it may be worth considering.

    In the meantime I have a well-hedged and well-diversified portfolio, some money already overseas, and a home and citizenship waiting for me in Singapore if my family and I decide to “board the lifeboat”. We do keep the “lifeboat” more-or-less ready, just in case.

    By the way, Singapore is a great “lifeboat”: tropical climate, very low taxes, efficient gov’t, stable democracy, 1st world standard of living with a cost of living lower than the US. And it’s very clean, very safe, and the food is great!