April 2012

Is the United States in Economic Decline?

By John Hendrickson

“Our out-of-control federal debt is a lot like a bad disease: Just because you ignore it doesn’t mean it will go away. Even as pundits and economists tout a U.S. recovery, our fiscal picture just keeps getting worse,” argued an Investor’s Business Daily editorial on the current fiscal crisis in the United States.[1] Investor’s Business Daily’s editorial page is spot-on in writing about the alarming condition and decline of the fiscal health of the nation. The national debt is over $15 trillion and the federal government has been running repeated trillion dollar deficits, while not passing a budget in over a thousand days. This is on top of a slow economic recovery with high unemployment (8.3 percent), which is actually closer to 15 percent when those who are discouraged from looking for work or are underemployed are taken into consideration.

Economic storm clouds are also building in Europe as many countries try to deal with fiscal emergencies and the threat of a European economic collapse. Although some economic signs look good, such as the decrease in the unemployment rate, too many factors remain that could trigger another economic recession. President Barack Obama’s recent budget proposal calls for at least $3.8 trillion in spending, but fails to seriously address the national debt and the escalating costs of entitlement programs. President Obama and Democrats in Congress are also causing uncertainty over the increase in regulatory activity and the passage of the Patient Protection and Affordable Care Act. As economist Peter Ferrara noted in The American Spectator:

But even worse than his first term is what Obama is brewing up for 2013 on his current course. Most people do not know that already enacted in current law for 2013 are increases in top tax rates of virtually every major federal tax. That is because the tax increases of Obamacare become effective that year, and the Bush tax cuts expire, which Obama has refused to renew for singles reporting income over $200,000 per year, or couples reporting over $250,000 per year (in other words, the nation’s small businesses, job creators and investors, in plain English).[2]

Grover Norquist, President of Americans for Tax Reform, described the current tax increases coming down the pipeline when he wrote:

When it comes to taxes, Washington, D.C., is now experiencing the quiet before the storm of the century. But, starting in early 2013, American families and small employers will face a list of tax increases so large they cannot be ignored in this election season. Adding together data from the non-partisan Congressional Budget Office (CBO), it’s reasonable to say that these combined tax hikes will total $6 trillion to $7 trillion over the next decade.[3]

It is not only the tax rates that are causing concern for the economy, but also the increased cost and burden of regulations. “During its first three years in office, the Obama administration unleashed 106 new major regulations that increased regulatory burdens by more than $46 billion annually, five times the amount imposed by the George W. Bush Administration during its first three years.”[4] The increase in regulation serves as an obstruction to job creation and as columnist Charles Kadlec wrote in Forbes “the rapid growth in the regulatory burden under President Obama, and the Administration’s weak dollar/high oil price monetary policy are on-going impediments to full employment…”[5]

“The massive increase in federal spending under Obamanomics, for example, appears to have sucked the job-creating strength out of the rest of the economy,” argued Kadlec.[6] The problem is that the policies of the current Administration have failed to bring the economy back into recovery from the “Great Recession.” As Daniel Mitchell of the Cato Institute wrote:

The problem is that Obama has tried all the wrong policies. He tried a big-spending Keynesian package that was supposed to be a ‘stimulus,’ but that’s the same failed approach that Japan tried in the 1990s, and the same failed approach that Hoover and Roosevelt tried in the 1930s. Taking money out of the economy’s productive sector and letting politicians engage in a spending spree is the opposite of prudent policy.[7]

And as Ferrara argued:

Art Laffer predicted the Coming Crash of 2011 on the basis of the expiration of the Bush tax cuts on the upper income earners alone. Those tax rate increases were extended to 2013 in December 2010 out of the fear that that prediction was right. But now in 2013, in addition to those tax rate increases, we have all of the tax increases of Obamacare, the further exploding costs of Obama’s building regulatory blizzard, and the possible contractionary effect of the Fed’s monetary policies, all at the same time. Unless we reverse course, the result will be one big, bad crash in 2013. Adding that on top of Obama’s first term, the entire period will look like an historical reenactment of the 1930s.[8]

It is clear that claiming an economic victory is too early because of the seriousness of the fiscal crisis that is facing the nation along with all of the policy uncertainty that exists. It is quite clear that another approach must be taken to avoid further economic decline. The current economic crisis proves not just in the United States, but also in Europe, that the welfare state has reached its high watermark. Policymakers must follow an approach that will work to reduce spending, keep tax rates low, and eliminate unnecessary regulations. Policymakers need to replace the economic policies of President Obama with those of President Ronald Reagan. Charles Kadlec argues that policymakers should look to President Reagan as a guide in formulating policy solutions:

Channeling Reaganomics, that includes stabilizing the value of the dollar as the first step toward a 21st century gold standard, reforming the corporate and personal income-tax codes with lower tax rates and fewer deductions, cutting back the regulatory state, and stopping the growth in federal spending. By doing so, Republicans can offer the American people a modern narrative of constitutional, limited government…[9]

John R. Hendrickson is a Research Analyst at Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation. They are brought to you in the interest of a better-informed citizenry.

[1] Editorial, “Washington distracts us as fiscal disaster looms,” Investor’s Business Daily, March 14, 2012, <http://news.investors.com/articleprint/604403/201203141851/new-warning-about-fiscal-danger-ahead.aspx> accessed on March 15, 2012.

[2] Peter Ferrara, “The worst economic recovery since the Great Depression,” The American Spectator, March 14, 2012, <http://spectator.org/archives/2012/03/14/the-worst-economic-recovery-si> accessed on March 15, 2012.

[3] Grover Norquist, “The taxman cometh,” Human Events, March 12, 2012, <http://www.humanevents.com/article.php?id=50137> accessed on March 15, 2012.

[4] James L. Gattuso and Diane Katz, “Red Tape Rising: Obama-Era Regulation at the Three-Year Mark,” Backgrounder, No. 2663, March 13, 2012, The Heritage Foundation, Washington, D.C., <http://www.heritage.org/research/reports/2012/03/red-tape-rising-obama-era-regulation-at-the-three-year-mark> accessed on March 15, 2012.

[5] Charles Kadlec, “The House GOP authors a jobs recovery,” Forbes, March 12, 2012, <http://www.forbes.com/sites/charleskadlec/2012/03/12/the-house-gop-authors-a-jobs-recovery/> accessed on March 15, 2012.

[6] Ibid.

[7] Daniel J. Mitchell, “Obama has tried all the wrong policies,” Cato.org, March 13, 2012, Cato Institute, <http://www.cato.org/publications/commentary/obama-has-tried-all-wrong-policies> accessed on March 15, 2012.

[8] Ferrara.

[9] Kadlec.