The Fiscal Cliff and America's Coming Recession

Obama and the Crash of 2013

By Peter Ferrara

Since the end of World War II two thirds of a century ago, federal spending has been stable at around 20% of GDP. America prospered to become the mightiest economic power in the history of the world with the federal government limited to that level of spending.

But President Obama is certain he has a better idea. He wants higher taxes and higher federal spending. Only with that can he “spread the wealth around.” He believes that would make the economy grow faster “from the middle class out,” as the middle class and the poor spend the money “the rich” were wasting in savings and investment.

That is fallacious economics, based on the idea that we can spend ourselves rich. Economic growth and prosperity for working people and the middle class does not stem from increased spending and consumption. It stems from increased production and productivity. And that stems precisely from savings and investment.

You can’t consume what you don’t produce. Increased savings means increased investment, which is what creates new jobs and provides workers with the tools to be more productive. That increased productivity enables workers to earn higher wages, as wages in a competitive market equal the marginal productivity of labor (what the worker adds to production). The increased demand for labor created by the investment drives wages up to this level of productivity.

Spare me the miseducated thinking about the essential role of consumer demand to drive economic growth and prosperity. In a market economy, consumer demand can never be inadequate for the economy to grow and prosper. If demand is insufficient to clear the market for any good or service, then the price of the good or service will fall until demand equals supply.

President Obama’s neo-Marxist concept of raiding the savings and investment of “the rich” to spread the wealth around and thereby increase spending and consumption is precisely inverted economics that will only bring down economic growth, jobs, wages, and incomes of the middle class and the poor. These are precisely the results we have seen in Obama’s first term, with negligible new jobs created over his entire term on net, declining real wages and incomes for the middle class and the poor, and more Americans in poverty than ever before in the more than 50 years that the Census has been keeping track of poverty.

If those who make the sacrifice to save and take the risk of investing find that the government is only going to seize their savings and investment when they are successful, they will soon sharply reduce their savings and investment, at least here in America. That will only hurt the middle class and the poor the most, as they lose the jobs and rising wages and incomes essential to their own personal prosperity.

But that is all only going to get much worse in Obama’s second term, as his policies produce renewed recession, double digit unemployment, collapsing real wages and incomes, and new poverty records.

Last year I wrote a short book for Encounter called “Obama and the Crash of 2013.” I predicted then that Obama’s policies of increased top tax rates for nearly all major federal taxes, soaring new regulatory burdens, and loose, cheap dollar monetary policies, would produce renewed recession in 2013. Since then I have been joined in this view by the Washington establishment as reflected most authoritatively by the Congressional Budget Office.

Already enacted into current law to go into effect on January 1 are increases in the top tax rates of nearly every major federal tax. That is because the tax increases of Obamacare go into effect on that date, and the Bush tax cuts expire, which the President refuses to renew for the nation’s job creators, investors and successsful small businesses.

As a result, the top two income tax rates will jump nearly 20%, the capital gains tax rate will soar by nearly 60%, the tax on dividends will nearly triple, the Medicare payroll tax rate will skyrocket by 62% for these disfavored taxpayers, and the death tax will rise from the grave with a 57% rate increase.

This is all on top of the U.S. corporate tax rate, which under President Obama is now the highest in the world, except for the socialist one party state of Cameroon, at nearly 40% on average, counting state corporate taxes. Even China has a 25% corporate rate. The average in the social welfare states of the European Union is even less than that. Canada, which has been booming since Obama became President here, now sports a 15% federal corporate rate.

But under President Obama there is no relief in sight. Instead he continually barnstorms the country for still more tax increases. His latest is to ruminate about a carbon tax. So much for his campaign pledges not to raise income taxes on the middle class “in any form.” Any such carbon tax would be another enormous drag on the economy, which is sensitive to high energy prices.

What President Obama is proposing is to maintain the failed policies of his first term, which produced the worst recovery from a recession since the Great Depression, except to add this panoply of tax rate increases on the very job creators, investors and successful small businesses the economy most needs to create jobs and the long overdue real recovery. Higher tax rates slash the incentives for increased production by reducing what producers can keep out of what they produce. The result will be less savings, investment, business creation, business expansion, job creation, and economic growth.

These tax increases will result in less revenue rather than more. In the past 45 years, every time capital gains tax rates have been increased, capital gains revenues have declined rather than increased. When Bush slashed the tax rate on dividends in 2003, dividends paid soared as a result, and so did the taxes paid on those dividends. If the combination of all these rate increases results in renewed recession, as I and many others believe will happen, the result will be lower rather than higher federal revenues overall. Any carbon tax will just add to the recession downdraft, as the economy is sensitive to energy costs.

Adding to this is the raft of new regulatory costs and burdens the Obama Administration delayed until after the election. That includes new global warming regulations adding trillions in new costs to the economy, even though the emerging economies from China to India to Brazil have indicated they will not participate in decimating their economies with this Western delusion. Also online is the regulatory shutdown of the coal industry, adding further to energy costs.

Then there are hundreds of new Dodd-Frank regulatory burdens to come online, threatening the business and consumer credit essential to economic recovery. Still more regulatory excess is slated to come from Obamacare, including the costly employer mandate, which will require employers of 50 or more workers to buy the most expensive, politically correct health insurance for their employees. This is already walloping hiring and jobs.

Finally, the Fed is laying the groundwork for the next financial crisis, with out of control monetary policies creating a ticking inflation time bomb, and the resulting contractionary monetary tightening when the Fed decides the inflation is getting out of hand. This was the primary cause of the four consecutive, worsening recessions of the 1970s, from 1969 to 1982. This will only add still further to the coming crash starting next year.

The Washington establishment thinks the “fiscal cliff” next year includes the spending cuts of the 2011 debt limit deal. But precisely because we can’t just spend our way to prosperity, such reductions in government spending would just reduce the federal drain on the private sector, and so promote recovery rather than recession.

Nevertheless, the otherwise inevitable renewed recession next year from Obama’s policies will mean double digit unemployment, deficits rocketing to new all time, world records over $2 trillion, and still further exploding federal debt. Enjoy it, because you, and/or your friends and neighbors voted for it.