THE BEAR'S
LAIR More
Obama, deeper chasm By Martin
Hutchinson
The Iowa caucuses appear to
have done their usual job - dooming the Republican
ticket in next November's election. So I thought
it worth looking at what another four years of
President Barack Obama might bring, and how deep
might be the hole the US will have to dig out of
in 2017. "Be assured, my young friend, that there
is a great deal of ruin in a nation," wrote Adam
Smith in 1782, so on balance one can remain
optimistic.
To diverge into political
analysis for a moment, the Iowa Republican
caucuses have a long history of promoting social
conservatives with modest national appeal and
questionable track records, while suppressing
economic conservatives (the Democratic caucuses
have an equivalently eccentric track record).
It's not really surprising - Iowa is
nearly 1,000 miles from the
nearest international
border and its economy is highly dependent on
agricultural and ethanol subsidies, with not much
of the free market about it. This time it promoted
the social conservative and foreign policy
neo-conservative Rick Santorum, the libertarian
pacifist Ron Paul and the moderate-liberal Mitt
Romney, while suppressing more mainstream
candidates with better track records, such as
Texas Governor Rick Perry and to an extent former
Speaker Newt Gingrich.
Assuming Perry and
Gingrich don't enjoy a miraculous revival in New
Hampshire (where Romney secured victory on
Tuesday), South Carolina or Florida, it's thus
likely that Romney will be the nominee, easy for
the Obama administration to attack on class
warfare grounds, or, if Romney fails, Paul or
Santorum, either of whom would be objectionable to
a substantial element of the Republican coalition.
Given Iowa's efforts, therefore, the
chance of a united and enthusiastic Republican
campaign in 2012 is minimal, and Obama's
probability of re-election in November soared in
the wake of the Iowa result from around 50% to
maybe 80%.
Given the assumption that Obama
wins re-election, we can then map the economic
policy trajectory of the following four years with
some certainty. Obama would not have won
re-election on a wave of new enthusiasm, or on the
basis of a suddenly robust economic recovery,
which appears unlikely before November, but simply
because of the ineptitude and political
vulnerability of his opposition.
Hence he
is unlikely to have significant coat-tails to pull
Democratic senators and congressmen into office
with him. Thus, with a large number of vulnerable
Democrat senate seats, the Republicans will
probably gain the four seats necessary for bare
control of the senate, without losing control of
the house.
The 2014 election, producing
the congress of Obama's last two years, is more
difficult to forecast at this time, but in the
senate the Democrats will be defending their
outsize gains of 2008, so it's likely the
Republicans will pick up a further senate seat or
two, while possibly ceding back control of the
House. In other words "gridlock" between congress
and the president is likely for the whole of
Obama's second term.
The result would not,
however, be four years of stasis. Since a
re-elected Obama's political strength would be
much greater in 2013 than it was in 2011, his
ability to peel off a few Republicans to pass
"consensus" legislation would be correspondingly
greater.
Moreover, much of his 2009-10
legislation, notably the healthcare law and the
Dodd-Frank financial regulation law, has staged or
delayed implementation provisions that might be
blocked by a Republican president but would be
implemented in full by a re-elected Obama.
The Obama healthcare legislation, which
greatly increased state control over the
healthcare sector, would thus enter on schedule in
2014 (in the unlikely event that the Supreme Court
eliminates the individual mandate, the rest of the
legislation will still stand, and the runaway cost
of the legislation without the individual mandate
would compel congress to introduce something
equivalent that would pass Supreme Court
scrutiny).
Since the cost of Obama's
healthcare bill was only balanced by accounting
tricks (such as assuming large cuts in Medicaid)
that will not pan out in practice, the Federal
budget would thus after 2014 incur a major
additional burden, potentially pushing deficits
even beyond the frightening levels assumed by
present legislation. Since the cost-cutting
attempts of the newly elected Republican majority
in 2011 ended with 2012 Federal spending higher
than in 2011, we can assume that even the most
determined attempt by Republicans in congress to
cut spending won't work while Obama is president
(and would probably be short-lived and only
marginally effective even with a Republican
president).
Unless the economy is
exceptionally strong, which is very unlikely -
we'll do that last! - the pressure for a major tax
increase will thus become irresistible. Even if
the budget deficit could be kept to
crisis-avoiding levels through rigid spending
control, Obama would reject that approach, because
it would prevent him from introducing new spending
programs, apparently his favorite political
activity.
Hence there will probably be
three major tax increases. One will restore most
of the pre-2001 tax levels, which will be
impossible to stop should Obama win in November,
if only because they are due to be restored
automatically in January, giving a re-elected
Obama a very strong negotiating position. A second
tax increase will eliminate most of the current
tax deductions for high earners, in particular the
mortgage, charitable and state and local income
tax deductions. Provided the charitable tax
deduction was included, I would be in favor of
this elimination, as would many Republicans, so it
seems likely that in 2013 a bipartisan coalition
will agree to some such measure.
The third
major tax increase, by far the most significant,
will be the introduction of a value added tax
(VAT). With united Republican opposition, that
could probably be avoided, since it would require
contentious legislation. However Romney, the
likely Republican presidential nominee, has
refused to rule it out, so united Republican
opposition is likely to be impossible, provided
Obama plays his cards intelligently and offers a
sop to "bipartisanship" such as a corporate tax
cut and perhaps a deeply reluctant abandonment of
further tax rate increases on the rich. (The rich
would already be suffering tax increases from the
Medicare tax surcharge to be introduced in 2013,
the reversal of the 2001/2003 tax cuts and state
tax increases imposed by governments mired in
deficit by sluggish economic growth).
The
introduction of a VAT, perhaps at a low initial
rate of say 5%, will solve Obama's problems. It is
likely to be unpopular, but if it is passed under
a cover of bipartisanship Obama and the Democrats
should avoid most of the electoral blowback. Most
important, once a VAT is in place, Obama's
healthcare plan will be funded and further Obama
spending schemes will be possible without
inflating budget deficits.
Outlays,
currently 23.8% of gross domestic product (GDP)
and projected (unrealistically) by the
Congressional Budget Office to decline to a low of
22% of GDP by 2015 before increasing thereafter,
will with a VAT be able to increase further, to
perhaps 27% of GDP by the end of Obama's second
term.
Revenues will trail outlays, but
instead of 20% of GDP in 2015 (including repeal of
the 2001/2003 tax cuts) will rise to perhaps 24%
of GDP, leaving the deficit at 3% of GDP, or about
$500 billion in today's money.
Of course,
were a further spending-prone president elected in
2016, outlays would rise further, as entitlement
spending spiraled upwards, but that problem could
be solved, at least in the short term, by
increasing the VAT rate towards European levels.
Implementation of this policy mix would
result in the US economic growth rate slowing
significantly, with the "speed limit" being
perhaps 2% instead of the 3% we were used to
before 2008. Aggressive regulation by enthusiastic
Obama appointees in the energy and financial
sectors might knock another half point off growth,
without pushing the economy into outright
recession - regulation would be a further drag,
not a "shock".
As in the more sclerotic
economies of Europe, unemployment would remain
high, perhaps around present levels or even rising
a little as tax increases kicked in. However, with
the budget deficit reduced by the tax increases,
there would be only a modest chance of a further
financial crisis or government debt default.
Indeed the VAT introduction, providing a further
bottomless pit of government revenue, might well
persuade the rating agencies to restore the US
credit rating to AAA.
Monetary policy
would remain loose, so inflation would continue
creeping upwards, but the lags involved in the
transmission between money growth and inflation,
the continuing price-suppressing effect of global
outsourcing, and aggressive manipulation of the
statistics by the Obama-controlled Bureau of Labor
Statistics, might well prevent the reported
inflation level exceeding 15-20% before November
2016.
In any case, inflation at moderate
levels would be very popular with much of the
populace, who would see the housing market recover
nicely and their real value of the mortgages
decline, with Obama naturally taking credit for
the recovery. Losers would be holders of US
Treasuries and non-defaulted mortgages, most of
whom are foreigners anyway.
By 2016, the
disadvantages of Obama's policies would be clearly
apparent. However, as in Britain in 1979, a
partial reversal of them, with consequent
long-term economic improvement, would still be
possible. That would, however, require the
Republicans to nominate a presidential candidate
who was economically principled, electable and
capable, a tall order indeed. For this to be
achieved, the good citizens of Iowa would have to
be prevented from knocking this paragon out of the
running in favor of a grossly inferior alternative
- from current and past experience, perhaps the
highest hurdle of all!
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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