September 2012

The Most Avoidable Recession

By John R. Hendrickson

Economics has a reputation for being the “dismal science” and this is certainly true when both the United States’ and the world’s economy are taken into consideration — it is comparable to swimming in the pool of despondency. This fall as President Barack Obama and Republican presidential nominee Governor Mitt Romney debate their polar opposite economic ideas and philosophies the nation will continue to drift closer to the January 2013 fiscal cliff. In January 2013 the fiscal cliff will be triggered by massive tax increases, which include the expiration of the Bush Tax Cuts, which will sink the American economy and may even result in another recession. This has become known as Taxmageddon.

The Congressional Budget Office (CBO) recently warned that policymakers cannot afford to delay fiscal policy decisions any longer.[1] Specifically this is directed at the January 2013 tax hike and the spending sequestration that Congress agreed to last year. J.D. Foster, a Senior Fellow in fiscal policy at the Heritage Foundation described the situation:

Taxmageddon is the $500 billion tax hike slated to take effect on January 1, while the fiscal cliff consists of Taxmageddon plus various spending reductions — among them the sequestration left over from the disastrous negotiations that led to the Budget Control Act in 2011.[2]

This is in addition to our already fragile economy with slow economic growth, high unemployment (8.3 percent), and the heavy albatross of uncertainty hanging on all aspects of the economy. The federal government continues to spend massive amounts of money, about 25 percent of gross domestic product (GDP), which is bankrupting the nation.

The national debt which is over $16 trillion and the out-of-control spending symbolized by annual trillion dollar deficits is leading the nation to fiscal Armageddon. “For the fourth year in a row, the federal government in 2012 will run a budget deficit exceeding $1 trillion.”[3] Patrick Louis Knudsen, who serves as a Senior Fellow in Federal Budgetary Affairs at the Heritage Foundation, wrote that federal “spending this year will reach $3.6 trillion, almost 23 percent of the economy and well above the historic average of about 20.2 percent.”[4] This does not include the massive unfunded obligations (at least $70 trillion) of entitlement programs such as Social Security, Medicare, and Medicaid, which will place enormous pressure on the budget.

This bleak fiscal outlook, which is also confronting Europe, demands more serious attention by policymakers. J.D. Foster explains some of the economic consequences that confront policymakers:

According to CBO’s analysis, if Congress defuses Taxmageddon and the fiscal cliff, then the economy will grow at a tepid 1.7 percent in 2013 and the unemployment rate will remain stuck around 8 percent. But if President Obama and Congress play chicken with Taxmageddon and fail to act, then the economy will contract by about 0.5 percent and the unemployment rate will shoot up to 9.1 percent, about half-way back to the peak from the last recession.[5]

In addition Foster argues that failure to prevent Taxmageddon may result in further significant job losses: “roughly 1.6 million more Americans will be out of work — on top of the 12.8 million who already want to work but can’t find jobs.”[6]

Taxmageddon, along with the budget sequestration that is geared for $100 billion in spending cuts, can be resolved if policymakers start taking the economic situation seriously.[7] The problem is that the philosophical differences between Republicans and Democrats is so wide that avoiding a recession in January 2013 will depend on the outcome of this year’s presidential and congressional elections. Policymakers could come together before January 2013 and work to find a compromise in renewing the tax cuts and preventing Taxmageddon, including resolving the question for sequestration.

Policymakers have an opportunity to avoid another recession by implementing sound economic policies that will lead to economic growth rather than decline. The solution will be difficult and it will take considerable political leadership and principle in order to solve our economic and fiscal crisis. This will include cutting spending, reforming entitlements, lowering tax rates, reducing excessive regulation, and repealing the Patient Protection and Affordable Care Act. These are all policies that will put an end to the economic uncertainty and lead the nation back on the road of economic growth.

The “new normal” of slow economic growth, high unemployment, and record numbers of people depending on government aid cannot be allowed to continue. John O’Sullivan, who serves as Editor-at-large for National Review, recently wrote that “[President Ronald] Reagan expressed great faith in the future of the American people, but he also warned that their grandchildren might lose that future if the present generation did not defend the U.S. Constitution and traditional liberties.”[8] As a nation we have drifted dangerously away from constitutional principles and it is time to repent and return to constitutional limited-government. Only then will we be able to reverse this current era of national decline.

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] Stephen Dinan, “Deferring on budget no longer an option, CBO says,” The Washington Times, August 22, 2012, <http://www.washingtontimes.com/news/2012/aug/22/cbo-feds-flirting-double-dip-recession/> accessed on August 23, 2012.

[2] J.D. Foster, “CBO Warns: President Obama and Congress risk triggering another recession,” The Foundry, The Heritage Foundation, August 22, 2012, <http://blog.heritage.org/2012/08/22/cbo-warns-president-obama-and-congress-risk-triggering-another-recession/> accessed on August 22, 2012.

[3] Patrick Louis Knudsen, CBO Budget Update: Historic Deficits Continue, Recession Threatens in 2013, Issue Brief No. 3706, The Heritage Foundation, August 22, 2012, <http://www.heritage.org/research/reports/2012/08/cbo-budget-update-historic-deficits-continue-recession-threatens-in-2013> accessed on August 22, 2012.

[4] Ibid.

[5] Foster.

[6] Ibid.

[7] Knudsen.

[8] John O’Sullivan, “The case against Optimism,” National Review Online, August 22, 2012, <http://www.nationalreview.com/articles/314631/case-against-optimism-john-o-sullivan> accessed on August 22, 2012.