Peter Ferrara is worried about the future, specifically the immediate future. After the 2012 elections, he fears that America, which has never really recovered from our last recession, will experience another, even sharper, economic decline. Ferrara offers three reasons to expect an economic collapse in 2013. First, taxes are going up, especially on the highest earners. Most people assume that the "rich" can afford more taxes and indeed, many can. But the uber wealthy are not the people who will be paying. The reality is that those making over $250,000 a year are often small business owners, the historic leaders in job creation for the country. The truly wealthy (multi millionaires) do not have "income" as such, and their assets are held in forms that produce little in the way of income or taxes. So it will be small business owners who bear the brunt of the tax increases, and they truly cannot afford it, at least not if they plan to expand their hiring. But taxes are only one part of the equation. 2013 will also see a dramatic increase in regulatory costs. Already the typical American taxpayer loses over $8000 a year in value just to regulation, but with Obamacare and new EPA regulations designed to stop global warming, these costs will skyrocket. Finally, the Federal Reserve is currently keeping interest rates artificially low to mask the deleterious effects of our current Keynesian policies on the economy. But in 2013, Ferrara predicts, the Fed will be forced to raise interest rates to prevent massive inflation. Already, actual inflation on consumer prices is over 8% and could easily go higher.
Ferrara paints a very bleak picture indeed, but one has to ask how accurate his predictions are. In some instances, this reviewer thinks Ferrara is overstating the case. Consider for example the effects of Obamacare. This legislation is indeed a drastic overhaul of the American health system, and will definitely be costly. But no one knows whether Obamacare will be implemented fully, and it is possible that the Supreme Court will strike down either the whole law or significant parts of it. Similarly, we do not know if income tax rates will in fact go up. The Bush tax cuts will expire at the end of 2012, but it is entirely possible that Congress will sign yet another extension of those cuts if the economy does not improve. 2012 is an election year, and allowing a de facto tax increase by voting against an extension is not going to win Congressional representatives a lot of votes. Whether Obama would sign such a bill remains to be seen, but he is also facing an election year, and the incentive to compromise with a Republican House would be strong. Finally, it is not clear that the EPA will be successful in imposing a series of regulations that are worse than the Cap and Trade bill Congress failed to pass. If they are, then Ferrara has a strong case. Already, energy costs are increasing and jobs are being lost due to the Obama administration's myopic energy policies. But the EPA's regulations face significant court challenges and no one knows whether they will be successful in imposing their radical agenda.
But if Ferrara is overstating the likelihood of recession, he is understating a more significant danger. Much of Ferrara's case is built on what he thinks the Federal Reserve will do in 2013. He believe Bernacke, chairman of the Fed, will try to contract the money supply by raising interest rates. I think that is unlikely. Currently the US government is borrowing over 43 cents of every dollar it spends. Consumer spending has already returned to pre recession highs, and if there was any validity to Keynesian thought at all, we would be in the midst of the greatest economic boom in modern history. Of course, we are not experiencing any such economic success. But we are building up an unsustainable level of debt. Coupled with our obligations going forward for social security and medicare, the government simply cannot pay its bills. No amount of tax increase, on either the highest earners or even on everyone, will pay it off. And Washington simply does not have the political will to eliminate even its most unsuccessful programs; Head Start and Amtrack come to mind here. And all the truly big ticket items are off the table. The simple fact is that a raise in interest rates would bankrupt the country right now, and the only way to get out of debt is to inflate our way out. This will be devasting, and hit the poor and working middle class the hardest, but it is the most likely scenario. One should expect double digit inflation by 2013, and like the 1970s, no job growth will accompany it.
On the whole, I enjoyed Ferrara's book, as I have enjoyed many others in the Encounter Broadsides series. I like the 18th century look and feel of these political tracts, and I find the arguments presented to be stimulating even when I disagree with some of the content. But like other titles in the series, I think the biggest flaw in this book is that it places the blame squarely on the shoulders of President Obama. I am no fan of the President, but the problems this country faces run a lot deeper than a single individual. These problems are at root based on a philosophy of government that suggests every problem has a political solution. It is a philosophy that was shared by the previous President (Republican George Bush) as well, and it was responsible for getting us into this long running recession (the "new normal") in the first place. Doubling down on that failed approach, as this administration has done, of course made things worse. But it will require a radical rethinking of the role of government to actually make things better. This book suggests some good policies, but placing the blame on our current president is too simplistic. It suggests that replacing Obama will somehow solve our problems. It won't. Unless the person who replaces him is willing to actually reduce the size of government, and given most of the current Republican contenders for the office, that is unlikely. So hope for the best, but prepare for the worst. It may be another significant recession, if we are lucky. Or it may be dramatic, perhaps hyper inflation, if we are not.
