Without another election looming, I believe President Obama will continue remolding the USA in his image, probably more aggressively.
Shortly before his election in 2008, he asked that we join him in “...fundamentally transforming the United States of America.” As usual, he didn’t specify what that meant. Now we have some idea. It includes: Obamacare; increasing taxes and regulations on the more successful among us; spreading an entitlement mentality; waging war on the middle class and on the fossil fuels upon which they depend; inflicting Chicago-style politics on us; not being supportive of Israel, our one true friend in the most volatile and most crucial part of the Middle East; and ignoring a basic tenant of our military that they always respond to fellow Americans in distress.
This column focuses on the economic outlook (the first four points mentioned). For background, I expect the economy to continue being the worst since the 12-plus years that are generally referred to as The Great Depression, or “Depression era.” By the economy, I mean the Gross Domestic Product (GDP, or overall economic activity) or our standard of living.(1)
Yes, there will be relatively brief periods of prosperity. Some times may even pass for looking like the worst is behind us and be spun as such. In inflation-adjusted terms, the economy will remain fairly flat with upturns and downturns, but certainly a declining standard of living overall. That is why the above graph has a slight downward trend to it. Those on welfare and in the lowest income classes may not feel that way (see below). The primary dampers to real (inflation-adjusted) economic growth will be the new taxes starting in 2013 and then get a big boost in 2014 when Obamacare fully kicks in.
Businesses are human. That’s not surprising since businesses are owned and operated by humans. If businesses are made to feel unwelcome and the ultimate government authority is not business-friendly, the normal response is to minimize the risk to what you’re building. If there’s one thing investors—-and here I mean not just financial investors but those owning or wanting to start businesses-—can’t stand, it’s uncertainty. Most investors think if they have a reasonably certain environment, they can devise a strategy to get through it OK, or they can get out. One way of coping is through cost-reduction and that starts with layoffs. If sales and profits are down or expected to decline, costs will be reduced and that includes all resources, human and not human.
All this is against a background that has become known as the “fiscal cliff.” The fiscal cliff is a government artifact-—not a law of economics.(2)
In health care, first there are all the taxes now hidden from most people, but which will be felt next year and much more so in 2014. There are also other uncertainties. One is the possibly major affect on medical supplies. Providers of health care may revert back to reusable supplies from the current disposables.(3)
Obamacare will drive virtually all domestic policy. Spending and taxes are based on this, the single largest part of Obama’s program. Most of the coming tax increases will be Obamacare taxes. Each tax will be a drain on disposable income. Each drain on disposable income will mean less spending, which will reduce overall demand and hence the need for employees. Each dollar taxed will be another step towards a “letting the government take care of me” attitude. Ultimately this means consolidation among insurance companies and among practitioners of health care. That implies fewer choices for consumers.
Taxing the wealthier actually encourages them to hide their incomes and wealth. Or, they simply work less and get paid in leisure, which is not currently taxable.
The primary beneficiaries of new business regulations are lawyers. They will either find ways around the regulations or, if that becomes too expensive, businesses will just be dissolved or deliberately stay small enough to duck under the regulations. For an example, see how a small poultry business dismantled much of FDR’s New Deal in the case of the sick chicken, http://http://en.wikipedia.org/wiki/Schechter_Poultry_Corp._v._United_States.
Either way, ordinary people -- including Obama constituents -- will be hurt. That won’t be universally true, but it will occur enough, over time, to reduce economic growth.
Obama’s policies of gutting the work/training requirements for the unemployed to receive benefits, freebies like the Obamaphones for indigent voters, general pandering to groups with gripes, and eliminating long-standing criteria for benefits, increase the fiscal strains on our economy. The notion of fewer working people paying more taxes to help support regularly non-working people brings to mind Margaret Thatcher’s statement, “The problem with socialism is that eventually you run out of other people’s money.” The other people here are the diminishing middle and higher income classes. See “Obama’s war on the middle class,” as discussed in my interview with Prof. Rich Hart, October, 25. 2012. http://www.allvoices.com/contributed-news/13265817-obamas-war-on-the-middle-class-an-interview-with-economics-professor-rich-hart
Add to all those taxes for Obamacare, the increasing fiscal burdens the middle class faces, and Obama’s war on fossil fuels (at least coal and petroleum) upon which the middle class depends for energy.(4)
History shows Republicans can rebound. In 1964, the Republicans nominated Barry Goldwater and got creamed by LBJ. Yet four later, the Republicans united under Richard Nixon and pulled out a squeaker over Hubert Humphrey. So if today’s Republicans and conservatives will listen to the people and embrace those with commonalities, the party could pull itself together in four years. Maybe even in two years.
In summary, when voters start to feel the effects of all the Obamacare costs (monetary and nonmonetary) piled on top of rising energy costs and other new Obama taxes, there will be an electoral revolt. It may be in the 2014 midterm elections that Republicans could garner solid majorities in both houses of Congress. The remaining Democrats will come under increasing pressure from the electorate for relief.
Forthcoming articles will look at some of these concerns in more depth.
1) Most people think the The Great Depression started with the Great Crash, in October, 1929. Actually, the economy peaked in August, 1929, and stock prices peaked around Labor Day, 1929. The decline in the economy was fairly subtle until the Great Crash on October, 29, 1929. Then each fed off the other as they both dropped until March, 1933...43 straight months of declining economic activity, 25 percent unemployed, no social saftey net, every city had soup kitchens and apple stands. There was no sustained economic recovery until after Pearl Harbor. However, after March, 1933, there was initially co-operation and government action and the country had 50 months of on again, off again economic recovery. That’s what I see for us. All those New Deal programs helped a little. Did we get our money’s worth? Unemployment fell from 25 percent when FDR took office to just under 15 percent (roughly twice ours today), so maybe yes. But by the time the next depression hit, in 1937, six months after FDR’s overwhelming victory over Landon (who only carried Maine & Vermont), most benefits of the New Deal programs were fading. The exceptions were what we call the social safety net types of programs and some power projects such as the TVA (Tennessee Valley Authority). Linchpin New Deal programs, such the National Industrial Recover Act (NIRA or just NRA), were declared unconstitutional. The second downturn, while only 13 months long, was very sharp. Unemployment jumped from under 15 percent to 19 percent in one year. A meaningful recovery didn’t really start for almost three more years...when we signed Lend Lease with England. (Lend Lease was FDR’s response to Churchill’s eloquent plea “Give us the tools and we will finish the job.”) Then came Pearl Harbor and we were in the war full force. 15,000,000 Americans served in the war and unemployment fell to near zero. Normally, what we now call stay-at-home moms, personified by Rosie the Riveter, went to work.
2) Remember a year or so ago, when the so-called “supercommittee” of Congress agreed that they could only agree to disagree and therefore, without a resolution, drastic spending cuts would go into effect around the beginning of 2013. That deadline was imposed by Congress and the President—-not by any law of economics. Therefore it can be changed by Congress and the President. The strategy was supposed to be vaguely similar to D-Day, when after the invasion force was “dropped-off,” the ships returned to England. The invaders (our side) had no choice but to successfully fight or be killed. The outlook here is dubious. No decision-maker’s skin is at stake, though perhaps it should be.
3) Earlier in my consulting career I wrote several in-depth (e.g. 200-page) market studies on disposable medical supplies. I haven’t looked at that industry much for over 10 years. However, I believe health care providers still prefer disposables to reusables because disposables are much more cost-effective. The question is will the Obamacare tax on medical supplies tip the cost-effectiveness back in favor of reusable medical supplies and against disposable medical supplies. This sounds simple. Let me show why it may not be: As a brief example, take the cost-effective of disposable versus reusable syringes:
Disposables are less labor intensive. They come in sterile wraps and stay that way until used. Practitioners simply get the syringe from a drawer, unwrap the syringe, uncap the needle, load the medicine, administer the injection, recap the needle, and drop the used syringe into a sharps holder (a device for temporarily storing sharp, bio-contaminated objects). Unlike with reusables, staff doesn’t have to collect used syringes, disassemble them, (they typically have 4-5 separate parts), sterilize each part, reassemble the syringes, repackage them into sterile containers, and then restock the supply cabinets. All those steps are usually not performed by the most skilled and costly labor.
As when several people are involved in one series of tasks, a lot can happen during those steps. All the potential liability is on the provider. With disposables, any error other than that caused by the provider is shared between manufacturer and provider and the provider’s labor costs are greatly reduced. Will the Obamacare tax, or maybe several taxes, and regulations change the balance?
4) Writing this brought to mind an interesting and possible historic analogy: Starting shortly after the Civil War ended in 1865, the U.S.’s westward expansion began picking-up momentum. That brought conflict with the Indians. General Philip Sheridan led the Army’s efforts. He realized the Army could never defeat the Indians in direct combat, at least not without too high a cost. He devised the strategy of eliminating something vital to Indian life---the buffalo. Uncounted millions of buffalo were slaughtered for the sole purpose of a “scorched earth” policy against the Indians. Much of that was done by well-paid civilian contractors (to use today’s term). The strategy worked. Tribe by tribe, the Indians retreated to reservations and learned new ways of life.
Is there a parallel here with Obama’s war on fossil fuel forms of energy essential to American middle-class life? All those green energy companies are not going to have much commercial success with today’s energy price structure. They could become commercially successful if the cost of fossil fuels became so high that it exceeded the cost of green energy. Then, the high demand for energy would switch to green. That would stimulate large scale production of green energy products, and green energy would prevail. Be warned, if prices rise that high, this could certainly induce a major recession, on top of any that may already be occurring, since the impact would be about the same as a new energy tax. I know fellow economists, liberal ones to be sure, who would love to see a few dollar a gallon tax on gasoline in order to help green energy. Obama’s Secretary of Energy, Steven Chu, a Nobel Prize winning physicist, said he wanted to see prices at the pump here the same as they are in Europe, now averaging around US$10 per gallon. When asked whether he owns a car, Chu said no. So it may not bother the Obama team if fossil fuels become the latter day buffalo.
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