Special Report

Who Will Bail Out America?

By Peter Ferrara on 5.12.10 @ 6:09AM

Social Security, Medicare and the retirement of the baby boom generation wasn't enough of a burden for the American taxpayer. We will now be paying as well for the generous pensions of Greek bureaucrats retiring in the warm Mediterranean sun at age 55, thanks to the foresighted leadership of our very own international statesman, Barack Obama.

Just last year President Obama proposed, and his overwhelmingly Democrat Congress approved, an additional $100 billion line of credit from the USA to the International Monetary Fund (IMF). On Sunday, the IMF approved a contribution of $40 billion to the Greek bailout, with America voting yes for yet another raid on its own taxpayers.

But this is only the beginning. What the trillion dollar Euro bailout fund has done is to create the perverse incentives of Too Big to Fail for fiscally irresponsible Eurostates. Do those literally murderous Greek rioters look ready to accede to austerity budgets with massive tax increases and massive benefit cuts? Political leaders in the Mediterranean states in particular, faced with short-term financial and political pressures, will be too tempted to put off the pain a little longer, hoping that EU bailouts will save them in the end. Indeed, voters in Spain, Italy, Portugal, and elsewhere may well think they should get their share of those bailout funds too, voting out leaders who try to be responsible, and voting in the worst demagogues trying to take advantage of the situation to gain political power.

Imagine if each of the American states could run deficits with a federal bailout fund to back them up. Could we count on the voters of California, New York, New Jersey, Michigan, and Illinois to support candidates promising crippling austerity budgets, with draconian benefit cuts and skyrocketing taxes, so they can do the responsible thing? This is the system the EU has just adopted. What that means is get ready for still more IMF bailouts financed by American taxpayers.

Unemployment Still Rising

Yet, America is still plagued with its own problems, poised soon enough for yet another ride down the roller coaster. The unemployment report just last Friday showed unemployment rising again in April, from 9.7% to 9.9%, almost two and a half years now after the recession began in December, 2007. Since World War II, the average recession has lasted 10 months, and the longest has been 16 months. Yet, 28 months after the last recession began, unemployment is still 10% and rising.

And that is only scratching the surface. Besides the 15.3 million officially unemployed, the army of the underemployed included 9.2 million described by the Bureau of Labor Statistics as "working part time because their hours had been cut back or because they were unable to find a full time job." Another 2.4 million were marginally attached to the labor force, meaning they were not in the labor force, but "wanted and were available for work, and had looked for a job sometime in the prior 12 months."

That leaves a total of nearly 27 million Americans still unemployed or underemployed. With a labor force of 154.7 million, that translates into a total underemployment rate of 17.4%. Moreover, of the officially unemployed, close to 50%, or 6.7 million, were long-term unemployed, meaning they had been unemployed for 27 weeks or more, the highest total since the recession began over 2 years ago, and still rising.

While President Obama and his party-controlled media ballyhooed the 290,000 new jobs created in April, 66,000 were temporary census workers. Moreover, that is still not enough new jobs created to reduce unemployment. Given the natural rate of new entrants to the work force, close to twice that many must be created each month to reduce the unemployed.

The Recovery: Hopelessly Too Little, Shamelessly Too Late

Yes, with the U.S. economy growing again, economic recovery is technically underway. But that is an inevitable, natural, cyclical recovery, as I predicted in this column over a year ago. The notion that the economy was going to tumble ever downward without some magic from Obama the Magnificent was always a fairy tale bedtime story for small children and their mental equivalents. As mentioned above, the average recession since World War II has been 10 months, and those recoveries were not due to magical Big Government rescues.

The way to evaluate the current recovery is by comparison to other recoveries after downturns of similar magnitude. Historically, the deeper the recession the stronger the snapback recovery. The Bureau of Economic Analysis reports that economic growth in the first 3 quarters after the 1981-1982 recession was 5.1%, 9.3% and 8.5%. Yet, economic growth in the first 3 quarters after this last recession was 2.2%, 5.6% and 3.2%, not even half as much.

Moreover, in 1984, real economic growth boomed by nearly 7%, the highest in 50 years. That recovery then lasted 92 months without a recession until July, 1990, when the tax increases of the 1990 budget deal killed it. This set a new record for the longest peacetime expansion ever, the previous high being 58 months. During that recovery, the economy grew by almost one-third, the equivalent of adding the entire economy of West Germany, the third largest in the world at the time, to the U.S. economy.

Real per capita disposable income grew by nearly 20% during that boom, meaning the American standard of living increased by that magnitude. Real median family income had declined by almost 10% from 1978 to 1982, with income falling by 14% for the bottom 20%. But in a stunning reversal, real median family income grew by 11% during the recovery, with incomes increasing by 12% for the bottom 20%. The poverty rate, which had started rising despite trillions spent on the war on poverty, reversed and declined every year during the recovery as well.

Note also that the 1981-1982 recession resulted because Reagan had to slay a historic inflation. Inflation roared over 1979 and 1980 by 25% (11.6% in 1979 and 13.5% in 1980), after accelerating throughout the 1970s. But Reagan backed strict monetary policies at the Fed reining in the money supply, and inflation was slashed in half by 1983 as a result to 6.2%, and by half again in 1984 to 3.2%. Every school of economic thought, from Keynesian textbooks to the most free market "Austrian" economics of Friedrich Hayek and Ludwig von Mises, preaches that ending inflation inevitably produces a period of unemployment and recession.

In diametrically opposing contrast, instead of ending a historic, raging inflation, like Reagan, President Obama is creating one.

Indeed, everything critical to the American economy of today is the reverse of what it was during the economic boom starting in 1983-1984, reflecting that President Obama's policies are the opposite of Reagan's. Interest rates were heading sharply lower back then from historic highs, with the prime rate peaking at 21% in 1980. Today, as the Wall Street Journal commented on May 1, "[T]he Fed has held short-term interest rates at close to zero for 16 months. The only question is how soon and how high rates will rise."

Moreover, the 1983-1984 recovery was launched just as the Reagan marginal tax rate cuts became fully effective. But today we are set for historic tax rate increases to kick in next year. While the Tax Foundation reports that the top 1% of income earners already pay more in federal income taxes than the bottom 95%, President Obama says their taxes should be raised even more so they can pay their "fair share." So next year, capital gains tax rates will soar by close to 60%, tax rates on dividends by roughly 200%, and the top income tax rate by close to 30%.

In addition, as the 1983-1984 recovery launched, "an era of deregulation was lowering costs across most industries," as the Journal also commented, whereas today, "Washington is raising costs for business by expanding its regulatory reach via tougher antitrust enforcement, mandates on health care and energy, more political limits on telecom investment, restrictions on bank lending, and much more."

What this means is that instead of sustained recovery, what we are heading for is Art Laffer's Coming Crash of 2011. President Obama's economy is at its peak performance right now, however stunted that is.

President Obama's Grecian Formula

For 2009, Greece's budget deficit came in at 13.6% of GDP, and its national debt grew to 115% of GDP. President Obama has America on this exact same track. Our budget deficit for this year is nearly 11% of GDP. By 2020, according to the CBO, America's net national debt held by the public would be 90% of GDP. Total gross federal debt, which includes such items as the debt held in the Social Security trust funds (real debt that will have to be paid in the future), would be 122% of GDP.

But it's even worse than that. For the top 1% will get their revenge for President Obama's tax piracy. Instead of raising revenues through his top income tax rate increases, he will be lucky if revenues do not decline. For capital gains alone, every tax rate increase over the last 40 years has produced less revenue rather than more. President Obama's class warriors also do not understand that dividend payments will collapse next year as a result of their tax increases, and so will revenues from taxes on those dividends.

Lower than expected revenues, even if they do not absolutely decline, will mean still higher deficits and debt. Even more so as net interest spending increases as a result. If interest rates rise more than the modest increases President Obama's budget projects, even more likely with the growing world debt burden, then the vicious death spiral takes another tumble downward.

If the economy turns downward in 2011 rather than upward, then all of this will explode out of control right there. America will also be effectively defenseless at that point, for we will not be able to borrow the still greater funds that would be necessary for any protracted conflict. (Is that what the ultraliberal President Obama and George Soros planned all along to get America "under control," so to speak?). That condition of vulnerability, of course, again just the opposite of President Reagan's peace through strength, invites war.

If the totally irresponsible new Obamacare entitlements end up costing more than planned when they start in 2014, as is likely, the phrase "adding fuel to the fire" seems inadequate. How about firebombing the fire?

And we haven't even factored in renewed inflation yet. The EU bailout only encourages weak monetary policies from the European Central Bank, and further extended lax policies by the Fed. If this finally leads to inflation, as it did in the 1970s, the Fed would be faced with either raising interest rates, contributing to extended economic weakness and downturn, or letting inflation roar, until it returns to 1970s levels, or worse.

Maybe that is why the price of gold is already higher than the S&P 500. The truth is we are on the path to a worldwide flight from increasingly irresponsible fiat currencies. This is well beyond the issue of a declining or even collapsing dollar.

Even the shortsighted stock market, which usually looks only about 6 months ahead, is signaling trouble. For all the talk of a booming stock market recovery over the last year, it has never returned near to its peak over 14,000. It is stuck hovering about 25% below that peak. With the above economic prospects, there is no longer enough upside in trying to game the stock market to milk any remaining short-term gains.

Rest assured that when the credit markets tell America "No Mas" to record-shattering borrowing, there will be no one to bail out the USA. No one is big enough to even try it. Rather, the vultures will circle.

The only possible bailout will come on Election Day, 2010. Unless the American people send a message that rocks Washington like never before, 2012 may well be too late.

http://spectator.org/archives/2010/05/1 ... ut-america