Obama tax rises threaten US recovery

Martin Feldstein

March 19, 2012

The recent payroll gains and the declining unemployment rate in the US have raised hopes that the economy will now start growing faster than the tepid 1.7 per cent rate last year. Optimists are expecting growth rates as high as three per cent for this year and next.

I hope they are correct. The recession that began in December 2007 was deep and painful and the recovery that began in June 2009 has been slow and grinding in spite of unprecedented fiscal outlays and even larger monetary stimulus. House prices have continued to fall and housing construction remains dormant because of Barack Obama’s government’s failure to reduce the large number of homeowners whose mortgage debt exceeds the value of their homes. Business investment has been depressed by the anti-business rhetoric and policies of Mr Obama’s administration.

While payroll employment has recently been rising by more than enough to absorb the growth of the labour force, the expansion in gross domestic product has been weak and most of that increased production has gone into inventories rather than into final sales to households, businesses and foreign buyers. The latest official estimate indicated GDP grew at three per cent in the fourth quarter of last year but final sales constituted only 1.1 per cent of that, with the rest going into inventories. Estimates by Macroeconomic Advisers for January indicate an annualised GDP growth rate of 2.5 per cent, but also suggest that final sales actually declined.

The jump in the consumer price index for February resulted in real average hourly earnings falling in that month. Higher prices and falling real incomes caused the Michigan consumer sentiment survey to decline this month.

Looking to the future, there are strong headwinds that will make it difficult to achieve a robust recovery. Higher petrol prices will reduce real incomes and cut spending on domestic goods and services. The weaknesses in many European economies will cut US exports to those countries.

But the most important cloud on the horizon is the large tax increase that will occur next year unless there is legislation to block it. The Congressional Budget Office predicts that, under current law, the revenue of the federal government will rise from $2,456bn in the current fiscal year, which ends in September, to $2,968bn in the following fiscal year. That increase of $512bn is equivalent to 2.9 per cent of GDP, bringing federal revenue as a share of GDP from 15.8 per cent this year to 18.7 per cent next year.

The higher revenue would reflect an increase in personal tax rates, higher payroll taxes, as well as increased taxes on dividends, capital gains and corporate incomes. Revenue would continue to rise in future years – as a share of GDP it would increase to 19.8 per cent in 2014 and would stay above 20 per cent for the remainder of the decade.

A sustained tax increase of that magnitude would push the US into a new and deep recession next year. So, it is important to recognise that legislation is required to prevent such a tax rise.

Getting that legislation passed will be difficult. Mr Obama has said he wants to keep the high taxes for upper income taxpayers and to raise total taxes on corporations and other businesses.

The Republicans in Congress and the Republican presidential candidates have indicated they want to avoid all of the tax increases that are specified in current law and to start a process of tax reform. So the 2013 tax rates will depend on the outcome of the presidential elections in November.

Many political analysts are predicting that Republicans will maintain control of the House of Representatives and become the majority in the Senate but that Mr Obama will be re-elected. While this “most likelyoutcome may not occur, the potential tax consequences pose a serious risk to the economy not only in 2013 but this year as well.

A Republican Congress could vote to eliminate the tax increases but a re-elected President Obama could veto the legislation. While neither side would want to see the economic downturn that would result from failure to achieve a compromise, political accidents happen.

The risk of dramatic tax increases and an economic downturn next year affects the behaviour of businesses and households today. Companies that expect large tax increases in 2013 and potentially another downturn in the near future will be reluctant to invest or hire this year. And individuals who think their personal taxes may rise next year will also cut back on current spending on “big-ticket” and other discretionary items.

America needs to reform its tax rules and entitlement programmes. But we can do that in a way that strengthens confidence and raises the rate of economic growth. The dramatic rise in federal revenue starting next year that is built into current law would undermine the economy and threaten this year’s rate of expansion. The political choice has never been more important for our economic outlook.

The writer is professor of economics at Harvard University and President Ronald Reagan’s chief economic adviser


March 18, 2012, 6:25 p.m. ET

The U.S. Cruises Toward a 2013 Fiscal Cliff

As tax cuts expire and spending falls, the economy will be hit with a 3.5% decline in gross domestic demand.


                               Getty Images

At some point, the spectacle America is now calling a presidential campaign will turn away from comedy and start focusing on things that really matter—such as the "fiscal cliff" our federal government is rapidly approaching.

The what? A cliff is something from which you don't want to fall. But as I'll explain shortly, a number of decisions to kick the budgetary can down the road have conspired to place a remarkably large fiscal contraction on the calendar for January 2013—unless Congress takes action to avoid it.

Well, that gives Congress plenty of time, right? Yes. But if you're like me, the phrase "unless Congress takes action" sends a chill down your spine—especially since the cliff came about because of Congress's past inability to agree.

Remember the political donnybrook we had last month over extending the Bush tax cuts, the two-point reduction in the payroll tax, and long-term unemployment benefits? That debate was an echo of the even bigger donnybrook our elected representatives had just two months earlier—and which they "solved" at the last moment by kicking the can two months down the road. And that one, you may recall, came about because they were unable to reach agreement on these matters in December 2010. At that time, President Obama and the Republicans kicked one can down the road 12 months (the payroll tax) and another 24 months (the Bush tax cuts).

The result of all this can kicking is that Congress must make all those decisions by January 2013—or defer them yet again. If the House and Senate don't act in time, a list of things will happen that are anathema either to Republicans or Democrats or both. The Bush tax cuts will expire. The temporary payroll tax cut will end. Unemployment benefits will be severely curtailed. And all on Jan. 1, 2013. Happy New Year!

There's more. As part of the deal ending the acrimonious debate over raising the national debt ceiling last August, the president and Congress created the bipartisan Joint Select Committee on Deficit Reduction, commonly known as the "super committee." It was charged with finding ways to trim at least $1.5 trillion from projected deficits over 10 years. Mindful that the committee might not prove to be that super, Congress stipulated that formulaic spending cuts of $1.2 trillion would kick in automatically if the committee failed.

Sure enough, it failed. So those automatic cuts are headed our way starting Jan. 15, 2013. To make this would-be sword of Damocles more frightening, the formula Congress adopted aimed half the cuts straight at the Pentagon.

Now, you don't really believe the defense budget will be cut that much, do you? Probably the rest won't happen, either. But if it all did, the resulting fiscal contractionconsisting of both tax increases and spending cuts—would be in the neighborhood of 3.5% of gross domestic product, depending on exactly how you count certain items, all at once. That's a big fiscal hit, roughly as big as what a number of European countries are trying to do right now, though with limited success and with notable collateral damage to their economies. An abrupt fiscal contraction of 3.5% of GDP would be a disaster for the United States, highly likely to stifle the recovery.

.At this point, you are probably thinking: Well, of course Congress will find ways to wriggle out of its self-imposed budgetary corset. I agree. But the invisible hand won't do it; someone needs to figure out how.

It is next to certain that nothing will be done about the fiscal cliff during the election season. In fact, some Republicans are now threatening to renege on the spending cap for fiscal year 2013 that they agreed to last summer. In the absence of progress between now and Election Day, Congress will have about eight weeks left—including Sundays, Thanksgiving, Christmas and New Year's Eve—to either (a) find a solution to the long-running fiscal battle or (b) kick the can down the road again.

Bet on (b). Also bet that the agreement will come just before the bubbly flows on New Year's Eve. An outcome like that is far more likely than falling off the fiscal cliff. But my point is that finding a clever way to kick the can down the road again is becoming a bigger and bigger challenge. And Congress has barely coped with previous such challenges.


Fast forward to December 2012. The lame duck Congress will have on its plate all the issues it had to deal with in the December 2010, August 2011, December 2011, and February 2012 budget battles, plus the automatic cuts mandated by the failure of the super committee, plus the legacy of whatever claims and promises are made during the campaign. We may also be bumping up against the national debt ceiling again. And who will have to sort it all out? A Congress whose days are numbered and whose complexion may have been altered dramatically by the election.

The current betting odds say that President Obama will be re-elected in November, with Republicans controlling both the House and the Senate. Does anyone think a mix like that will be less contentious than the one we have now? And does anyone think that Republicans, seeing control of both houses of Congress on the horizon, will be more compromising in the lame duck than they have been in the recent past?

.In sum, while we probably will not fall off the fiscal cliff in January 2013, there are ample opportunities for stumbles and slips between now and then. So wouldn't it be nice if the two parties engaged on this issue prior to Election Day?

Mr. Blinder, a professor of economics and public affairs at Princeton University, is a former vice chairman of the Federal Reserve.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

March 18, 2012 7:52 pm

America’s three takes on the crisis

Matt Kenyon comment illustration

Is capitalism in crisis? The question, posed earlier this year in a series of articles in the Financial Times, is suddenly commonplace. In the last week alone, this journalist has attended two august conferences entitled “capitalism in crisis”, one in New York, one in Washington. There is little consensus. But most agree that if capitalism is in crisis, it is localised: western capitalism is in trouble while communist China and its neighbours are free of philosophic angst.

For the time being, continental Europeans are filtering their woes through the prism of Europe, rather than the grander abstractions of capitalism. Only in the US, which for now is probably the least crisis-ridden portion of the western world (a scant consolation), is the question being addressed directly. Since the 2008 meltdown, America’s response has been divided into three schools, of which two are ascendant.


The first, which virtually monopolises the Republican party and which we might labelpurgative”, says Americans are being punished for Washington’s gluttony. Only when government stops taxing and over-regulating the wealth creators will animal spirits return. At its extreme end comes Ron Paul, the libertarian candidate for the Republican presidential nomination, who refuses to lie down, no matter how many times he comes last. His fortunes have tracked the price of gold, which is now 14 per cent below its peak in 2011.

Its most effective exemplar is Grover Norquist, founder of Americans for Tax Reform, who has cajoled virtually every elected Republican to sign a pledge never to raise taxes. Under Mr Norquist’sstarve the beastapproach, even the abolition of tax breaks counts as a tax increase and must be matched by spending cuts. It is the philosophy of lemmings. It is now the controlling spirit of the Republicans.

The second, encompassing the Obama administration and the mainstream economics profession, we might label “restorative”. Their goal is to rekindle demand by means fiscal and monetary until the economy has reached the point where it needs no further help. They concede that there was much wrong with the model before the 2008 meltdown, including poor regulation and an unfair distribution of wealth. But they stop short of querying the foundations of US capitalism. They remain in the intellectual – if not always the electoralascendant.

In spite of signs that US unemployment is finally dropping, the restorationist war is by no means won. Grounded in the Keynesian lessons of the Great Depression, their greatest fear is that the US is approaching another 1937 – when Franklin Roosevelt plunged the US back into depression by switching to fiscal austerity. Their fears are well-founded. They are also right to say that US politics poses the greatest threat to America’s economic sanity. But they are too complacent about the underlying health of US capitalism.

That, at least, is the opinion of the third school, which we might describe as diffuse but which prefers to call itselfnew foundation”. Its proponents include economists, such as Kenneth Rogoff and Nouriel Roubini, but also some business leaders and think tanks. Their view is that the US – and other developed economiesneeds to renovate the building. American capitalism was already failing to cater to the majority before the 2008 crisis, they argue.

They have a lot of evidence on their side. Before the meltdown, median incomes had already dropped in the 2002-2007 business cycle, which was unique for a developed capitalist economy in the last three generations. Since then, things have got worse. According to the Bureau of Labor Statistics, US weekly median incomes have fallen by two per cent since the US recession officially ended in mid-2009. Incomes are supposed to rise in a recovery.

This time that holds true only for the crème de la crème. Earlier this month, Emanuel Saez and Thomas Piketty, the Berkeley economists, showed that the top one per cent of Americans captured 93 per cent of the growth in 2010. That was up from 65 per cent in 2001, the first year of the previous recovery. Meanwhile, real incomes did not budge for the remaining 99 per cent.

But evidence amounts to little in a democracy if the remedies look too radical. The new foundationists are right in pointing to structural flaws in the US economy. But their concerns have been gradually sidelined by the tussle between the first two schools, whose next showdown is rapidly looming.

Regardless of who wins the election, today’s incumbents face an ominous convergence of decisions in the Novemberlame ducksession of Congress. These include the expiry of the Bush-era tax cuts, the next approval to lift America’s sovereign borrowing ceiling, and the imposition of a $1,200bn automaticsequester” on the budget if they fail to agree a fiscal plan. The outcome remains impossible to forecast. No one should put all their money on a benign scenario.

In the same way that the urgent drives out the merely important, the Keynesian restorationists are thus blotting out the foundationists. The fear of an ill-timed fiscal purge later this year cannot be dismissed.

All of which will one day come to be seen as a missed opportunity by America. The restorationists often remind us that Keynes once said, “in the long run we are all dead”. That is right. Except that the economic long run has long since been upon us.

Copyright The Financial Times Limited 2012.

Markets Insight

March 19, 2012 11:45 am

Central banks must address rising oil prices

In 2008-9, chaos in global financial markets led to a large recession across the world economy. The recovery from that recession has been hampered by a different markets problem: rising and volatile energy and commodity prices.

In 2010, the world economy bounced back more strongly from recession than most forecasters were expecting. But, with stronger growth came higher energy and commodity prices. The oil price fell from nearly $150 a barrel in mid-2008 to about $40-45 in early 2009. But it did not stay there for more than a few months. By early 2010, it was back up to $75-80, on the way back to above $100 again.


Last year saw a broader-based rise in commodity and energy prices, pushing up inflation rates around the world. The squeeze on consumers generated by this price surge was the main factor responsible for the slowdown in global growth last year. Inflation rates peaked in most countries last autumn. However, as the world economy has started to show more signs of life in the early months of this year, the oil price is picking up again, with Brent Crude back up to around $125.

Looking back over the past decade, an ominous pattern is emerging. The era of relatively stable energy and commodity prices which prevailed from the mid-1980s until the early 2000s has given way to a prolonged period of rising and volatile prices. This reflects the fundamental balance of supply and demand. New sources of energy supply and natural resources are costly and slow to come on stream.

But demand is being driven up by the activities of the 6.8bn people now living on the planet, with the vast majority of them participating in the global economic system and aspiring to a higher standard of living. We have never been in this situation before.

Since the early 2000s, whenever we have seen a combination of strong growth in Asia and emerging markets and reasonably healthy growth in western economies, we have also experienced a burst of energy and commodity price inflation. The first occurred in 2003-5, the second in 2006-8, and the third in 2009-11. If, as many forecasts suggest, the world economy starts to gather momentum again as we move through this year, we are set for another phase of rising energy/commodity prices, carrying through into 2013 and possibly 2014. This is likely to push up inflation worldwide and may eventually be a threat to growth as living standards are squeezed.

We cannot guarantee, either, that the next jump in energy and commodity prices will be the last. The world economy suffered a prolonged period of such price rises and volatility from the late 1960s until the early 1980s. And that was in an environment when the “global economy” was a small club of western economies, accounting for a minority of the world’s population. We now have a truly global economic system, with a world population that has doubled since the mid-1960s. In this environment, it is hard to predict when this phase of global price volatility might end.

A consensus is emerging that countries need to do everything to stabilise oil prices following the market volatility of 2008.

How should policymakers react? Central banks in western economies have generally turned a blind eye to the surges in inflation created by successive waves of energy and commodity price inflation.

Initially, this was because we started from a disinflationary position in the wake of the late 1990s Asian crisis. Then it was because of the imperative to deal with the global financial crisis. More recently, monetary policymakers have tended to treat bursts of globally driven inflation as temporary and not warranting a policy response.

The key to the ability of central banks to respond in this way is the stability of inflation expectations and underlying confidence in their ability to sustain stable prices in the medium term. But continuing to tolerate phases of relatively high inflation will raise questions about their commitment to price stability. In my view, a policy of “leaning against the wind” of high energy and commodity prices – by seeking to influence the exchange rate and expectations of price increases – is more likely to be successful in anchoring inflation expectations and sustaining central bank credibility.

In the 1970s, the western central bank that took the inflationary threat from energy and commodity prices most seriously – the Bundesbank emerged from that period of volatility with its reputation greatly enhanced. Others, including the UK, faced a long battle against high inflation and fared less well. Currently, the focus of the western central banks is on combating the aftermath of the financial crisis rather than the threat from energy and commodity prices. That judgment may have been right in 2008-9. But a renewed burst of commodity and energy price inflation could require a different policy approach

Andrew Sentance is senior economic adviser at PwC and a former member of the Bank of England Monetary Policy Committee, from 2006 until 2011

Copyright The Financial Times Limited 2012.

Executive Doomsday Order: Obama Authorizes Gov to Seize Farms, Food, Processing Plants, Energy Resources, Transportation, Skilled Laborers During National Emergency

Posted By Mac Slavo
On March 18, 2012 @ 1:26 pm

“In a nutshell, it’s the blueprint for Peacetime Martial Law and it gives the president the power to take just about anything deemed necessary for “National Defense”, whatever they decide that is.” (The Intel Hub [1])

While millions of people have been preparing [2] for the possibility of a catastrophic event by relocating to rural homesteads or farms, as well as stockpiling food, water, personal defense armaments and other essential supplies with the intention of utilizing these preparations if the worst happens, the latest executive order signed by President Obama on March 16, 2012 makes clear that in the event of a nationally deemed emergency all of these resources will fall under the authority of the United States government.

The signing of the National Defense Resources Preparedness executive order [3] grants the Department of Homeland Security, the Department of Agriculture, the Department of Labor, the Department of Defense and other agencies complete control of all US resources, including the ability to seize, confiscate or re-delegate resources, materials, services, and facilities as deemed necessary or appropriate to promote the national defense as delegated by the following agencies:

Sec. 201. Priorities and Allocations Authorities. (a)

(1) the Secretary of Agriculture with respect to food resources, food resource facilities, livestock resources, veterinary resources, plant health resources, and the domestic distribution of farm equipment and commercial fertilizer;

(2) the Secretary of Energy with respect to all forms of energy;

(3) the Secretary of Health and Human Services with respect to health resources;

(4) the Secretary of Transportation with respect to all forms of civil transportation;

(5) the Secretary of Defense with respect to water resources; and

(6) the Secretary of Commerce with respect to all other materials, services, and facilities, including construction materials.

(b) The Secretary of each agency delegated authority under subsection (a) of this section (resource departments) shall plan for and issue regulations to prioritize and allocate resources and establish standards and procedures by which the authority shall be used to promote the national defense, under both emergency and non-emergency conditions.
The new order provides specific definitions for each of these essential infrastructure elements, indicating that all resources, not just those owned by large farms and businesses, are to be directly controlled by the government.

Thus, if you think the investments you made in digging a water well, building a solar array, or stockpiling food were for your own personal use, think again:

Sec. 801. Definitions. In addition to the definitions in section 702 of the Act, 50 U.S.C. App. 2152, the following definitions apply throughout this order:

(b) Energy means all forms of energy including petroleum, gas (both natural and manufactured), electricity, solid fuels (including all forms of coal, coke, coal chemicals, coal liquification, and coal gasification), solar, wind, other types of renewable energy, atomic energy, and the production, conservation, use, control, and distribution (including pipelines) of all of these forms of energy.

(c) Farm equipment” means equipment, machinery, and repair parts manufactured for use on farms in connection with the production or preparation for market use of food resources.

(e) Food resources” means all commodities and products, (simple, mixed, or compound), or complements to such commodities or products, that are capable of being ingested by either human beings or animals, irrespective of other uses to which such commodities or products may be put, at all stages of processing from the raw commodity to the products thereof in vendible form for human or animal consumption. Food resources” also means potable water packaged in commercially marketable containers, all starches, sugars, vegetable and animal or marine fats and oils, seed, cotton, hemp, and flax fiber, but does not mean any such material after it loses its identity as an agricultural commodity or agricultural product.

(f) Food resource facilities” means plants, machinery, vehicles (including on farm), and other facilities required for the production, processing, distribution, and storage (including cold storage) of food resources, and for the domestic distribution of farm equipment and fertilizer (excluding transportation thereof).

(i) Health resources” means drugs, biological products, medical devices, materials, facilities, health supplies, services and equipment required to diagnose, mitigate or prevent the impairment of, improve, treat, cure, or restore the physical or mental health conditions of the population.

(j) National defense” means programs for military and energy production or construction, military or critical infrastructure assistance to any foreign nation, homeland security, stockpiling, space, and any directly related activity. Such term includes emergency preparedness activities conducted pursuant to title VI of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5195 et seq., and critical infrastructure protection and restoration.

(n) Water resources” means all usable water, from all sources, within the jurisdiction of the United States, that can be managed, controlled, and allocated to meet emergency requirements, except “water resources” does not include usable water that qualifies as “food resources.”
Additionally, like the Selective Service established to draft Americans into the military in the event of war, all Americans are automatically registered for the National Defense Executive Reserve, an agency responsible for identifying experts and skilled laborers for jobs that may need to be performed during a national security. That means your entire work history is now stored, aggregated and flagged in a national database and you can be called on at any time and forced into service for national security reasons at a government-run institution or labor camp:
Sec. 501. National Defense Executive Reserve. (a) In accordance with section 710(e) of the Act, 50 U.S.C. App. 2160(e), there is established in the executive branch a National Defense Executive Reserve (NDER) composed of persons of recognized expertise from various segments of the private sector and from Government (except full time Federal employees) for training for employment in executive positions in the Federal Government in the event of a national defense emergency.

(d) The head of each agency with an NDER unit may exercise the authority under section 703 of the Act, 50 U.S.C. App. 2153, to employ civilian personnel when activating all or a part of its NDER unit. The exercise of this authority shall be subject to the provisions of sections 501(e) and (f) of this order and shall not be redelegated.

Sec. 601. Secretary of Labor. (a) The Secretary of Labor, in coordination with the Secretary of Defense and the heads of other agencies, as deemed appropriate by the Secretary of Labor, shall:

(1) collect and maintain data necessary to make a continuing appraisal of the Nation’s workforce needs for purposes of national defense;

(2) upon request by the Director of Selective Service, and in coordination with the Secretary of Defense, assist the Director of Selective Service in development of policies regulating the induction and deferment of persons for duty in the armed services;

(3) upon request from the head of an agency with authority under this order, consult with that agency with respect to: (i) the effect of contemplated actions on labor demand and utilization; (ii) the relation of labor demand to materials and facilities requirements; and (iii) such other matters as will assist in making the exercise of priority and allocations functions consistent with effective utilization and distribution of labor;
The EO also outlines compensation for resources and labor that may be seized by the government. Payments would be made debt receipts and overseen by the Treasury Department in conjunction with the Federal Reserve. Similar to compulsory eminent domain provisions, a government official would determine what your land, resources or labor are worth, and you would have no choice but to agree to that value:

Sec. 301. Loan Guarantees. (a) To reduce current or projected shortfalls of resources, critical technology items, or materials essential for the national defense, the head of each agency engaged in procurement for the national defense, as defined in section 801(h) of this order, is authorized pursuant to section 301 of the Act, 50 U.S.C. App. 2091, to guarantee loans by private institutions.

(b) Each guaranteeing agency is designated and authorized to: (1) act as fiscal agent in the making of its own guarantee contracts and in otherwise carrying out the purposes of section 301 of the Act; and (2) contract with any Federal Reserve Bank to assist the agency in serving as fiscal agent.
As of March 16, 2012, your land, your food, your water and your abilities as a laborer are now a wholly owned subsidiary of the United States government at any time they choose to initiate the provisions of this order, which according to the order itself, can be during an emergency or a non-emergency.

While some reports indicate that the general impact of this new executive order is negligible [4], when considered with the broader implications including the introduction and passage of laws allowing for the indefinite detention of American citizens without charge or trial, restricting the general assembly of individuals to protest [5], the establishment of an internet kill switch [6] contingency plan and jamming of all non-government communications [7], the existence of FEMA refugee and detainment camps [8], coupled with confirmations that the U.S. government is training members of the armed forces for domestic policing [9] duties and preparing for economic collapse and civil unrest [10], this latest legislation may very well be the final nail in the coffin for American liberty as we have known it under the US Constitution.

When implemented simultaneously with existing laws and Presidential orders, the National Defense Resources Preparedness executive order [3] establishes a clear chain of command and control over all aspects of American life in what can only be described as a police state under martial law.