The Coming Economic Debacle

The CBO recently acknowledge what others have stated, the coming economic debacle facing whoever is elected in 2013. The massive tax increase along with austerity program with no real growth component added to the mixture will lead to a sharp downturn. While the CBO sugar coats it with a one of those “oh yeah, growth will return in the second half of 2013”, that is whistling beyond the grave yard. The reality is that combined with the coming disaster of the collapse of the Euro and European Union, Obamanomics is putting a knife in the chest of the economy and this time, there is no blaming George Bush. Obama's economic plan has already weakened the economy and set in place the worst recovery in the post- World War II era; and you can easily make the case that this is the worst recovery over the past century as well. Obama is leaving his successor an economy with massive debt, massive federal regulation, along with new entitlement programs that will add to future deficit while failing to reform the major entitlement programs of Medicare and Social Security. He has left no room for error and no room for any future administration to maneuver.

Economist Don Luskins noted, “So just by the numbers, the fiscal cliff matters. Investors are wrong to blithely assume that the boys in Washington will somehow do the right thing, and it will all work out in the end. All these tax issues will have to get negotiated in the lame duck session of Congress after what is likely to be an unusually bitter election season. And it's highly likely that an increase in the statutory debt ceiling will have to be negotiated at the same time, in order to avoid a Treasury default—investors would be wise to remember what a near-death experience that was last August. If there's a bargaining failure and the scheduled tax hikes on dividends aren't stopped, we'll be sorry we're spending so much political energy now debating about the "'1%' and their supposed privileges. It's the 30% down in the stock market we ought be worrying about."

Luskins’ point is that the cliff is just around the corner and disaster is within reach simply because there will be little time after the election to deal with the issue. Luskins and others have added that it is not just the expiration of the Bush Tax cuts that matter but the other tax increases written into law as result of Obama’s own economic plan. The expiration of the Bush tax cuts and the additional Obamacare surcharge will raise capital gain tax from 15% to 23.8% at a time that the market needs more capital. This move by itself will squeeze the capital market and devastate the stock market, plus send spiraling downward the retirement nest egg of the millions of Americans who are part of the investor class. He added, “The same logic also applies here to bonds, because at year-end the top tax rate on interest income will rise to 43.4% from 35%. According to our simple arithmetic, if the yield on a 10-year Treasury is 2% today, it would rise to 2.3% with next year's tax rates. That's a whole new version of the Laffer Curve, one in which higher taxes drive higher government debt service costs.” Higher tax rates could actually lead to higher treasury cost and result in higher interest rates!

Bill Clinton made it clear that a second Obama administration will increase taxes across the board (even though he couched it very carefully to make it seem that he is speaking for himself but his points are logical based on Obama’s own future spending plans and the Middle Class will get soaked). Clinton stated, “This is just me now, I’m not speaking for the White House — I think you could tax me at a 100 percent and you wouldn’t balance the budget…We are all going to have to contribute to this, and if middle class people’s wages were going up again, and we had some growth to the economy, I don’t think they would object to going back to tax rates [from] when I was president - before the Bush tax cuts.”

The key question in 2013, how quickly will Congress react to reform the tax code and entitlement reforms while reducing our debt both presently and in the future? Romney will inherit an economic disaster and there is no doubt where the blame will lie. Hint: It won’t be Bush’s fault this time.

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