Monday, June 7, 2010

The Looming Economic Collapse

H/T: Hot Air Headlines
Arthur Laffer predicts more "Hope and Change" on the horizon in today's Wall Street Journal.  After nearly ten years of demagoguing the Bush tax cuts as tax cuts for the rich, Democrats may see the law of unintended consequences in action as their "if you see it move tax it" strategy for economic doom meets the sunsetting of Bush tax cuts:
Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.
 There are already many signs we are headed for the dreaded "double dip."  Friday's dismal job report was all but a day of reckoning for Democratic policies that tax and regulate businesses to death.  It is one thing to campaign on pitchfork politics channeling outrage at big business and the rich, it is quite another thing to then expect the rich and big business to churn out jobs in response.

As bleak as the economy has been in 2010, Laffer may be right that what little growth we have seen represents a shift in demand from 2011 to 2010.  We saw this same shift in demand from the future to the present with the cash for clunkers program Democrats hoped would light a spark under the auto industry.  Obama's delayed tax increases may be shifting demand from the future even while the threat of increased regulation chokes off real growth. In contrast, the Reagan tax cuts saw relatively flat growth along with an increase in unemployment while business waited for the tax cuts to take effect before turning on the growth engine. As Laffer points out, the economy then took off "like a rocket:"
But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.
 Hope and change 2011 is shaping up to be a real dud.  I wonder how much pain must be inflicted on the public to guarantee  us real hope that the White House will be Obama free in January 2013?

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