A few weeks ago, I wrote that I did not yet see a Depression coming. However, as the election becomes less and less in doubt, everything is pointing to a painful contraction. The horrid mistakes I thought might not come to pass are looking more and more certain.
The real damage will be caused by the destruction of capital. Financial capital, being the net savings held by individuals, is the lifeblood of economic growth. Without a growth in capital, there cannot be economic growth. If capital is contracting then growth will contract.
1. Second Stimulus – As I wrote before, the stimulus destroys capital. It borrows from the capital market and gives to lower income individuals who have a lower personal savings rate. Capital will disappear as it is used to consume and not invest. Odds of passing? Certain.
2. Health Care Plan – While Obama’s economists claim that this will only cost $60 Billion per year, it is likely to cost more than twice that amount. Furthermore, once it goes in front of a Democratic Congress the largess will balloon the price further north. This will require massive borrowing or higher taxes (which will certainly be on the “wealthy” holders of capital) capital will decrease as it is used to consume and not invest. Odds of passing? Certain.
3. Higher marginal taxes – The supply-siders are correct that this will reduce the incentive to work. Those at the top have a much higher savings rate and thus accumulate far more capital. Higher taxes means lower work incentive and lower savings rates. Capital will be taken out of the market and given to the government. The tax “cuts” are unlikely to offset this hike because lower income people will consume almost all the savings. Odds of passing? Certain.
4. Capital gains tax hikes – At the very least, higher capital gains taxes explicitly take away capital growth which reduces economic growth. However, they also have the effect of driving investment out of the United States. Ironically, history has shown higher capital gains taxes will produce little to no additional revenues for the government. Odds of passing? Very high.
5. No new free trade and renegotiated trade agreements – No new free trade reduces the potential growth of capital. As Al Gore is fond of saying, "there is a scientific consensus" that free trade improves the economy. Fair trade is a euphemism for less free trade. Any renegotiated trade agreements with fair trade ideas in mind will mean a contraction in the economy. Odds of passing? No new free trade agreements – Certain. Mostly worthless fair trade agreements – Certain. Renegotiations - Thankfully, unlikely.
6. Government spending – I don’t see how anybody in their right mind thinks that the party who wantonly spent ever increasing amounts of money whenever in power over the last 80 years is suddenly going to reform themselves. Until I see Pat Toomey baptizing Sen. Robert Byrd on the shore of the Potomac, I’ll remain skeptical. More government spending, more borrowing. Borrowing capital to use for consumption reduces growth. Odds of passing? More than certain.
7. Wall Street Bailout – Even though I believe this to be temporary, it is still a misallocation of capital. Government misallocations of capital happen all the time, but not of this size. This is $700 Billion dollars. Much of this will lie stagnant in banks to provide unneeded capital to restore confidence in the banking system for the next two years.
8. Lengthening unemployment benefits – I have talked about this one as well. Studies, and logic, show that lengthening unemployment benefits increases unemployment. A good guess is that the rate will increase by an additional 1%. Fewer workers means less output. Not only does the surplus labor pool slow growth, but becomes a net negative because the government allows them to continue to consume. Odds of passing? Certain.
9. Other job interferences – Expanding food stamps, free/subsidized housing, increased minimum wage, etc… None alone will create significant damage, but the accumulation of all the feel good bills will give enough incentive to stay unemployed so the rate will be higher than it needs to be. Odds of passing? Certain.
10. Another moronic Keynesian spending package that has yet to be announced – After the economy continues to stagnate next year another misguided Keynesian style “Stimulus” plan will be revealed. We’ll call it Stimulus 3. Paul Krugman, of the New York Times and patron saint of the Democratic economic thinkers, is already pushing for increased “infrastructure spending”, by which he means haphazard government consumption of resources. This will require more borrowing of capital. This will reduce capital, and reduce growth. Odds of passing? Likely.
The coming Pyrrhic victory for the Leftist ideology almost amuses me, if not for the carnage they leave behind.