What the Next President Will Inherit

Gary North

June 14, 2011

One of the sharpest economic analysts out there is Peter Ferrara. He wrote an early warning on Social Security: Social Security: The Inherent Contradiction (1980). He has just written an article on the economy in 2013. He thinks the government is facing bankruptcy.
The recession has not gone away. Because recessions had always gone away fast, and because recoveries were strong, he thought Obama would be basking is glory today. He admits he was wrong.

In every other recession since the Great Depression, the overall trajectory of the economy has been dramatically better after two years. But not this time. Since the Great Depression, recessions have lasted an average of 10 months, with the longest previously being 16 months. Yet, in May, 41 months after the recession began, unemployment rose yet again, to 9.1%. America has now suffered the longest period with unemployment that high since the Great Depression.

Blacks (16.2%), Hispanics (12%), and teenagers (24%) are all suffering double-digit unemployment. Black teenagers: 40%. "The U6 unemployment rate, counting those marginally attached to the labor force who have given up looking in the Obama "recovery," and those stuck in part time unemployment for economic reasons, continued at nearly 16%."

While the Reagan recovery, a real recovery from a similarly deep recession, averaged 7.1% real economic growth over the first 7 quarters, the Obama recovery has produced less than half that at 2.8%, with the last quarter at a dismal 1.8%. While the Reagan recovery produced nearly 20 million new jobs, and civilian employment rose by almost 20%, today America still suffers 6.8 million fewer jobs than when the recession started over 3 years ago. The labor force participation rate has fallen to its lowest level almost since the Reagan recovery started over 25 years ago.

Why? He blames Obama's Keynesian deficit policies. He says what every economist should have said to Keynes from 1936 to now, and which only Austrian School economists say: the deficits cannot work, ever.

I have previously discussed why this happened. Obamanomics doggedly followed the opposite of Reaganomics in every detail. The centerpiece of Obamanomics was the old-fashioned Keynesianism that was a proven failure and left for dead 30 years ago. That was reflected most of all in Obama's February 2009 trillion dollar stimulus package. That didn't work because borrowing a trillion dollars out of the economy to spend a trillion dollars back into the economy does not add anything to the economy on net.

And borrowing two trillion for the stimulus instead still wouldn't have done it, for the same reason. Those calling for still more of the same Keynesian snake oil are just self-identifying themselves as hopelessly deluded fools who must not be taken seriously ever again. Worse than not working, Obama's trillion dollar stimulus already drove us to the brink of bankruptcy. Going for still more now as advocated by the mentally blinded would be walking off the cliff with our eyes closed.

You can see this. Yet the entire profession has denied it from 1936 until today. The Keynesian miracle of deficit-driven recovery is a myth.

I would go further. The transfer of lending to government weakens the recovery, for the output is not what paying customers wanted. The borrower is corrupt and inefficient: government.
He continues.

Already scheduled now under current law in 2013 is the expiration of those Bush tax cuts, which President Obama has refused to renew for single workers making over $200,000 a year, and couples making over $250,000. Also scheduled to go into effect in 2013 under current law are all the tax increases of Obamacare. Together, these job killing tax policies would result in a sharp increase in the tax rates on the nation's small businesses, job creators, and investors for virtually every major federal tax.

These taxpayers would see their income tax rates jump by nearly 20%, the capital gains tax rate increase by nearly 60%, the total tax rate on corporate dividends increase by nearly three times, their Medicare payroll tax rate increase by 62%, and the death tax rise from the grave with a 55% rate. This would go way beyond the outdated Obama talking point about returning to the Clinton tax rates, adding up to a top federal tax rate of 44.8% on wage income alone, besides all the tax increases on capital income, on the way up to a 62% top federal tax rate.

Obama is proposing more taxes. He will not get them, so I skip over that armument.

Meanwhile, American businesses continue to suffer from virtually the highest corporate tax rates in the industrialized world, leaving American companies uncompetitive in the global economy.

But wait! There's more!

Besides this tax tsunami, President Obama is implementing another trillion dollar plus cost burden on the economy through the EPA's cap and trade tax policy. That is one central feature of President Obama's war on production of traditional, low cost, energy, shutting down drilling, extraction and pipelines from the northern tip of Alaska, down through Canada, to the energy rich Western states, through Texas, to the Gulf of Mexico. Obama keeps issuing statements that he is opening drilling or permitting or exploration here and there, only to have it shut down by his bureaucracy soon thereafter. All of this will only raise energy prices higher and higher through to 2013, squelching the economy still further.

President Obama doggedly pursues this because he and his advisers believe ideologically that higher energy prices and less energy production and use are good for the environment. But this extremist view of what is good for the environment is a catastrophe for the economy, jobs, and working people.

This is just the beginning, however, of President Obama's reregulation burden on the economy, which is estimated to be rapidly rising towards $2 trillion, or over $8,000 per employee, in annual costs even before EPA's calamitous cap and trade really begins. That is close to 10 times the corporate tax burden, and double the individual income tax burden.

With another 4,225 federal regulations already in the pipeline, and the new regulatory burdens from Obama and the Dodd-Frank financial regulation bill still to come, how high will that burden be by 2013?

Then there is loose money from the FED. That will end this month. If it looks as though there will be a recession in 2012, the FED will pump, he thinks. So do I. That will end after the election. Here, I think it depends. If we are facing a massive recession in 2013, the FED will pump.

But once the Fed ends this monetary crack, the artificial pump up for the economy ends as well, and the underlying weakness of the economy is revealed. That appears to be what is happening now, as QE2 ends.

If the Fed stands pat, the downturn will feed on itself, fueled further by all of the above contractionary policies. If the Fed is spooked into resorting to QE3 and the return to easy money, that will cause the inflation started by QE2 to surge. Indeed, once the Fed goes down that road, it surely will not try to cut back again until the 2012 election is past, to avoid a nasty downturn in the middle of President Obama's planned reelection victory tour. Inflation would consequently surge all through next year, cutting the real wages of working people and their families further.

Right after the election, the Fed will stop the merry go round to finally pull the plug on burgeoning inflation. But that extended monetary malpractice will only make the downturn withdrawal from the monetary crack high all the more nasty.

Fererra, who is normally low key, is near apocalyptic.

From the comprehensive tax rate increases, to the soaring energy costs, to the costly regulatory burdens, to the monetary policy mindlessness, all of this adds up to one whopping double-dip downturn in 2013. The extended unemployment exploding into double digits will be effectively another depression. Once it starts feeding on itself, there is no telling just how far it will go.

But with the deficit already at $1.6 trillion or so this year, America cannot handle another recession, let alone effectively another depression that will cause the deficit to soar well beyond any possibly manageable levels. World financial markets cannot bear that load, and will not even try. Indeed, it is the Fed's monetary policy working the printing presses overtime for QE2 that has financed the purchase of the debt for the current all-time record deficit.

How bad can it get? Greek-like.

Because of the willfully mindless irresponsibility and ideological self-indulgence of Obamanomics, America is mortally vulnerable to another recession at any time soon. The result would be precisely the national bankruptcy of Greece, where we cannot raise in the world credit markets the further debt to finance what will be well over half of our budgeted federal spending. We are already borrowing and adding to the debt to finance 43% of our federal spending today.

He offers only this optimism: "The only way to get off this bullet train to oblivion is to radically reverse Obamanomics in dogged detail. The American people get one more chance to do that in 2012."
I see no major change. If he is defeated in 2012, and the Senate goes Republican, all this will still hit.
Maybe Obamacare can be repealed. The Bush tax cuts can be extended. But the regulations are untouchable, or close to it. FED policy will still be tight. The deficit will still be massive.

Then the crash will hit . . . with Republicans in power, with no one to blame. It will be two years of "It's Obama's fault." Then comes 2014.

If Fererra is close to the truth, we are in a lobster trap of Federal debt and high unemployment. The FED is about to turn off the spigot. I don't think it will stick to its guns. If it does, Great Depression II will arrive early.