On October 23, 2009, I wrote that if the Bush tax cuts were allowed to expire at the end of 2010, the US would experience another recession. That ultimatum is now squarely facing the US economy, and I have a few assorted thoughts on some major areas that are being under-discussed.
a) I find it revealing that leftists are quick to parrot some memorized garbage about why taxes should rise back to what they were during the Clinton era, yet the same leftists have no interest in returning to the spending levels of the Clinton era. I am perfectly fine with returning to Clinton-era tax brackets if we also return to Clinton-era spending. Any takers? Come on, any takers?
(crickets chirping as leftists flee to avoid having to address the contradiction between wanting Clinton-era tax levels but not Clinton-era spending levels).
If cornered, a leftist will change the subject and say that the Iraq War is the reason spending is high (note that this does not address the point of why they do not wish to return to Clinton-era spending levels). However, contrary to leftist propaganda, the Iraq War actually cost less than the Obama stimulus, as per the chart below from the Washington Examiner. In fact, exclude the Iraq War, and the budget deficit was all but erased by 2007. At least the Iraq War was ultimately successful. But from 2011 onwards, the deficit is set to widen further if the tax rates rise. GDP will shrink below the current projections, causing tax revenue to shrink despite the higher rate of taxation. Republicans winning a few seats in the 2010 Congressional election may halt the tax increase, but will not reduce spending, as Republicans are far too politically uncreative to overturn this increased spending.
b) How a person feels about the capital gains tax is an intoxicating test of how true to free market principles a person is. The fact that capital gains are far more concentrated among the wealthy than wage income is drives socialists into a crazed frenzy that will have them vehemently demanding that capital gains be taxed at 80% or more. However, raising the tax rate of capital gains is the way to inflict the greatest economic damage for the least increase (in fact, often a decrease) in tax revenue. This is simply because of the fact that capital is highly mobile. Russia, China, and India all have long-term capital gains tax rates of 0%, and short term rates no higher than 15%. By contrast, the US long term rate in states like New York and California currently approaches 25%, will rise to 30% with the expiry of the Bush tax cuts, and rise further to 34% under an Obamacare supplemental tax. Capital, thus, finds a better climate in Russia, China, and India than in the US, and trillions of dollars have already departed from the US. Who won the Cold War again? Or rather, is that the wrong question, with the right question being "Where has the traveling disease of socialism migrated towards?".
There should be no capital gains tax at all. This is for the simple reason that if a person sells an appreciated asset, and then pays a capital gains tax, they no longer can buy back the same asset that they had just sold. For those who screech about the 'rich' making too much, remember that taxing capital gains makes them invest less, which means they will employ fewer people. Everyone is either employed by a rich person, or sells to people employed by a rich person, so punitive capital gains taxes always trickle down to people who are not rich.
c) This brings us to the original question of a new recession in 2011. Since the technical definition of a recession is quite limited, it is easy to concoct a 'stimulus' that pulls demand forward, causes a technical 'end' to the recession (in Q309 in the most recent case), and then is concluded by a lengthy hangover that comes perilously close to a new recession in its own right, discussed under the term of a 'double dip'. All of this is a greatly distracted discussion.
The most important measure of economic health, jobs, has not only not seen any recovery since the end of the prior recession in Q309, but is destined to languish through the end of 2011 and possibly much later. This chart from Calculated Risk (click to enlarge) shows that only has the current recession been deeper than all others in the last 60 years, but it has kept jobs at a very low level for over a year. Not only has this recession extended the vertical axis in this chart, but it is certainly destined to extend the horizontal axis as well (unless you believe that 8 million jobs will be created in the next 18 months). So aside from mention of a 'double dip', this recession is already at least 3 times worse than the average post-war recession. There is no chance of a full recovery to breakeven in the remaining 18 months of the existing horizontal axis of this chart, and it is improbable even by 2013, extending the employment recession to a full 6 years at least. The Techno-sponge keeps liquidity lower than policy-makers realize it is, and a rise in tax rates could dry up what little trickle of job growth is currently being seen.
d) Socialism is much more rigged in favor of the ultrawealthy than capitalism is. This is because in capitalism, there is continuous churn in the ranks of the wealthy, and anyone can be displaced by a new technology or new business model. Everyone has a chance to rise, and everyone at the top needs to continue to compete to stay in place.
In socialism, however, only the ultrawealthy can afford to bypass the oppressive rules placed on everyone else (by hiring lawyers, bribing judges and government officials, etc.). The ultrawealthy thus can erect a wall between them and the rest, and make it nearly impossible for an upper-middle-class person to become wealthy on the merit of innovation or business savvy. Hence, any attempt to create a socialist utopia ends up making it easy for the ultrawealthy to build large moats around their incumbent positions.
e) Let me also add a dash of gender psychology here, and explain why many men are capitalistic, while many women are socialistic. As explained before, female hypergamy dictates that women are biologically driven to share their genes with only the best possible man, and women would rather share a top man with other women than have a lesser man all to themselves. If it is clear that the men at the top will remain there (socialism), there is much less risk in the decision-making process for women. In a capitalistic environment, the men at the top today may not be there in a decade, and there is a far riskier 'stockpicking' aspect to choosing which man's genes are going to have long-term value. Thus is further complicated by the fact that a 'valuable' man in the past usually was so due to fighting skill and capacity for violence, while a 'valuable' man today is one with analytical/entrepreneurial skill, which was not easily monetized in the past. But the human brain does not evolve as fast as it needs to, and if you wonder why a serial killer immediately gets love letters from a large number of women (including educated, married women), but the founders of Google and Facebook do not, this is why. The serial killer has proven himself to be a 'valuable' man as per metrics women are evolved to respond to, that were determinants of male power, before modern society existed. By appearing in the media for having been a serial killer, has received a resounding stamp of validation on his credentials, and is certified as an apex male.
Along the same vein, women are also driven to extract resources from lesser men while cutting them off from the better things that society has to offer. Thus, I find it necessary to mention that of all the socialist policies that are obstructing market forces and preventing job creation, organized misandry is a greatly overlooked one. 'Feminist' groups like NOW have lobbied for stimulus dollars to be diverted towards themselves, and away from areas where fewer women work (such as infrastructure and manufacturing). Passage of the 2009 'stimulus' immediately led to an unprecedented chasm between male and female unemployment rates. This sort of shameless vote-purchasing and disenfranchisement of men, zealously enacted by Democrats and almost as zealously condoned by whiteknighting Republicans, will prove to be very corrosive to the long-term economic health of the US economy. This is where Republicans are fatally flawed - they completely fail to see how they themselves undermine their own goals. I will have much more to say on this before election day.
These five thoughts, though not quite related to each other, have been overlooked among the oceans of ink expended in commentary about the current malaise. Perhaps we are on the brink of a breaking point, where government wastage will soon cause visible declines in quality of life, where overburdening productive workers (men in particular) causes a long overdue backlash, and where the little-understood technological deflation quickens in the absence of much-needed liquidity injections. Let us see how far this unique blend of government incompetence and corruption can go.