The Coming Crash of 2011

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The Coming Crash of 2011

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By Peter Ferrara on 2.10.10 @ 6:09AM

Americans no longer remember the concept of the "business cycle." For centuries, market economies have periodically turned down, and then turned back up. The recovery from such downturns is natural for a market economy. Every morning, at least some of the unemployed get up and look for work. Businessmen wake up and spend the day trying to restore their businesses to prosperity. As a result, market economies naturally come back to recovery. This is why the average recession in the U.S. since World War II has been only 10 months, with the longest, until now, being 16 months.

Bad economic policies can throw economies into downturns, and delay recoveries. Keynesian economics and rising effective tax rates produced four worsening inflation/recession cycles in and around the 1970s: 1969-1970, 1973-1974, 1979-1980, and 1982.

But Reaganomics was so successful that it all but abolished the business cycle for a generation. The economy took off at the end of 1982 on a 25-year economic boom interrupted by only two, short, shallow recessions in 1990-1991 and 2001. That is why today we no longer recognize the natural workings of the business cycle.

The current recession was officially scored by the National Bureau of Economic Research (NBER) as starting in December, 2007. It was caused by excessively loose Federal Reserve monetary policy from 2001 to 2006, and the liberal policies creating the subprime mortgage market, resulting in the catastrophic housing bubble.

As previously explained in this column, from the beginning the government tried to address the downturn with long ago failed, counterproductive, Keynesian economics, rather than Reagan's shockingly successful supply-side economics. First there was the Bush/Pelosi stimulus bill of February, 2008, since forgotten because it had no positive effects.

A year later, President Obama and Congressional Democrats came back with the almost $1 trillion stimulus bill, promising that it would stop unemployment from climbing above 8%. These bills both involved Keynesian economics because they tried to stimulate the economy through higher government deficits and spending. Even the "tax cuts" in those stimulus bills involved tax credits and rebates that effectively are the same as just more government spending, sending out government checks, rather than the tax rate reductions that were the focus of Reaganomics and supply-side theory, which fundamentally change economic incentives. The slow and weak recovery from the recession, which has lasted almost two years (a postwar record), shows yet again the failure of Keynesian economics, continuing a long, unbroken record of failure stretching back to the 1930s.

But the Obama Administration came into office knowing that the economy would ultimately recover as the business cycle turned up naturally, and planned to reap the political credit, enabling still greater leaps of neo-socialism. Internally, they are surprised and miffed that it has taken so long, not understanding that their own, blindly anti-market policies only delayed recovery.

The Plague of Left-Wing Propaganda

A plague of left-wing propagandists from such pustules as the George Soros-funded Center for American Progress are already feverishly at work attempting to obscure these economic realities. On a recent broadcast of the Larry Kudlow Show on CNBC, Art Laffer politely sat through an infantile lecture from Michael Linden, Associate Director for Tax and Budget Policy for the Center, claiming that Laffer had been "long discredited" in his argument that cuts in capital gains tax rates produce higher revenues.

But the truth is that over the past 40 years, every time capital gains tax rates have been cut, revenues have increased, and every time capital gains tax rates have been increased, revenues have declined.
In 1968, a 25% capital gains tax rate generated real capital gains tax revenues of $40.6 billion calculated in 2000 dollars. The capital gains tax rate was then raised 4 times in the next 7 years to 35%. By 1975, at the higher rate, capital gains revenues totaled $19.6 billion in constant 2000 dollars, less than half as much.

In 1978, the capital gains tax rate of 35% yielded $29.9 billion in 2000 dollars. The rate was then cut 3 times to 20% over the next 4 years. By 1986, the new rate, 43% lower than the 1978 rate, raised $92.9 billion in 2000 dollars, about three times as much.

The capital gains rate was raised by 40% the next year, to 28%. Capital gains revenues fell to $56.2 billion that year, and declined all the way to $34.6 billion by 1991.
In 1997, Congress cut the capital gains tax rate from 28% back down to 20%. Despite this almost 30% cut in the rate, capital gains revenues rose from $62 billion in 1996 to $109 billion in 1999. Revenues over the period 1997 to 2000 increased by 84% over the projections before the tax cut.

Finally, Congress cut the capital gains rate from 20% to 15% in 2003. Capital gains revenues doubled from 2003 to 2005, despite this 25% cut in the rate. Revenues increased by $133 billion during the years 2003 to 2006 as compared to pre-tax cut projections.

Other propagandists have compared the unemployment rate in President Reagan's second year in office to the rate under President Obama today. But they fail to account for the fact that Reagan slashed roaring inflation in half by 1982, and in half again by 1983. Prices had soared by 25% over the two years 1979 and 1980. But annual inflation fell to 6% by 1982, and to 3% by 1983. Find me the economics textbook that explains how that can be done without a temporary increase in unemployment. President Obama, by contrast, is today sowing the seeds for inflation, rather than conquering it.

Economic Growth in 2010

Just as President Obama's economic policies are the opposite of President Reagan's, his economic performance will be the opposite as well, as Art Laffer argues in his latest economic outlook report.
Economic growth will return throughout 2010, due to the natural economic recovery as discussed above, which this column predicted a year ago. President Obama often talks as if without his magic Keynesian fairy dust, the economy would continue to lose several hundred thousand jobs every month, until the total number of jobs fell to zero. Thinking people know nothing like that would ever happen. The reality is that the recovery has come too little, too late, as also discussed above.

For several reasons, this will be the best year economically of President Obama's reign. First, the deeper the downturn, the stronger the recovery, and this recession has been the worst since World War II. Given that, real economic growth this year could be expected to be 6% to 8%. The economy grew by almost 7% in Reagan's recovery in 1983 and 1984. But because of the counterproductive economic policies of President Obama and his neo-socialist Democrats, growth will only be half that. Moreover, as Laffer notes in his report, "this slingshot effect will long be a thing of the past by 2011."

Secondly, Federal Reserve policy has been enormously expansive, with the monetary base soaring by 150% over the past year. Interest rates have also been kept close to zero during this entire time. Basic textbook economics will tell you that this boosts the economy in the short term.

Thirdly, the broad tax rate increases scheduled for 2011 will cause producers to produce more in 2010 while they can still gain the relief of the lower rates. As Laffer writes, "Higher tax rates on January 1, 2011 will incentivize people to accelerate income out of 2011 and into 2010." As a result, "GDP growth in 2010 will be some 3% to 4% higher than it should otherwise be."
But I don't think unemployment will fall this year all the way to 7%, as Laffer suggests. I don't think it will fall below 9%.

Down the Roller Coaster in 2011

But, Laffer rightly continues, "when the U.S. economy comes to 2011, the train's going to come off the tracks."

Not only will the slingshot effect of recovery from the deep recession be over. The positive effect of the enormous Fed monetary expansion will be petering out. Monetary expansion does not create long-term economic growth. The Fed has to press the accelerator faster and faster to maintain the same stimulative effect. But if it does, then inflation starts to arise, accelerating faster and faster if the Fed continues. Indeed, the runaway expansion of the monetary base the Fed has already engineered will generate explosive inflation if the Fed does not pull it out in time.

But if the Fed pulls back, interest rates will start to rise sharply. The borrowing needs of Obama's record-shattering deficits will exacerbate this effect, as will the borrowing needs of a newly growing economy. Those higher interest rates will squelch the recovery. Or as Laffer says, "Any attempt to rein in excessive monetary expansion would lead to an immediate and precipitous economic collapse."

And we haven't even begun to talk about the tax rate increases of 2011. These purely ideological abuses of economic policy will end up punishing working people nationwide. The top income tax rate is scheduled to increase by close to 20%, the capital gains tax rate by at least 33%, and the top dividends tax rate by 164%. Further tax increases in the pending health care legislation would raise these tax rates still more. Laffer adds that starting at the end of 2010,
the U.S. will have a payroll tax rate increase, an estate tax increase, and income tax increases. There's also a tax increase coming in 2010 on carried interest [further discouraging investment]. This rate will rise from its current level of 15% to 35%, and then it will rise again in 2011. On state and local levels, there is also no government spending restraint and state tax rates are rising.
Also pending is an $800 billion cap and trade tax on energy, and high cost, unreliable energy is another prescription for economic failure.

"The rich" don't even have to pay these higher taxes for the higher rates to have a devastating effect on working people. Working people will suffer if investors just respond to the resulting incentives by pulling back their money, or sending it overseas for investment in friendlier economic climates, like India, Brazil, and China. That will result in fewer jobs, lower wages, higher unemployment, and slower economic growth or even decline in America.
Laffer explains just how devastating the resulting reversal from the artificially pumped up economy of 2010 can be, saying,
The tax boundary that will occur on January 1, 2011 tells me that GDP growth in 2010 will be some 6% to 8% higher than GDP growth in 2011. A year on year decline from trend of some 6% to 8% in GDP growth would represent a larger collapse than occurred in 2008 and early 2009.
Again, just the opposite of the long-term economic boom that followed the 1982 downturn when Reagan first slayed inflation, the flowering of growth in Obama's second year will be followed by long-term stagnation and economic decline for America, slaying the American Dream, until President Obama's neo-socialist economic policies are reversed.

The only hope for change the American people have now is to engineer a dramatic change in leadership in Washington in this year's elections. Only that can restore the prosperity policies necessary to avert the Coming Crash of 2011.

Letter to the Editor topics:
Recession, Economic Recovery, Business Cycles, Capital Gains Tax
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Peter Ferrara is Director of Policy for the Carleson Center for Public Policy and a Senior Fellow for the Heartland Institute. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of America's Ticking Bankruptcy Bomb: How the Looming Debt Crisis Threatens the American Dream, and How to Turn the Tide Before It Is Too Late, forthcoming from HarperCollins.
 
what's wrong P??

don't dare place this in the politics section huh??? scared that mame's gonna school ya??

lol..

for one thing, the market failed because of DE REGULATION. we allowed too much money to flow into too little hands and the system ground to a halt. liberal policies, HA!

second, reaganomics has been credited with widening the gap between the rich and the poor, while allowing economic indicators to say that the economy is growing in a healthy way.

we know that a period of economic growth in which the middle class looses wealth isn't really economic growth. well, I know that, you seem to be oblivious to that fact....
 
I actually read this from start to finish. makes sense to me. Obama is a puppet of wall st. There will be no SS for me. It's all spent.
I'm already planning my escape. Mb Belize. Mb Panama. Mb Ecqudore. Way better quality of life for less money...
 
what's wrong P??

don't dare place this in the politics section huh??? scared that mame's gonna school ya??

lol..

for one thing, the market failed because of DE REGULATION. we allowed too much money to flow into too little hands and the system ground to a halt. liberal policies, HA!

second, reaganomics has been credited with widening the gap between the rich and the poor, while allowing economic indicators to say that the economy is growing in a healthy way.

we know that a period of economic growth in which the middle class looses wealth isn't really economic growth. well, I know that, you seem to be oblivious to that fact....



well I must have made a mistake and posted it here :D


but it wasnt deregualtion, it was the way they regulated that people who cant afford home loans should be approved for them, IE the bleeding heart searching for more votes made the rules looser to allow people who could not afford a home get one,


many years later when the housing market began to decline all these, unfit loans began to default because they should have never been loaned that money in the first place cuase a horrendous domino effect,

1) housing prices go down
2) more people default
3) less people buying houses
4) more people lose their jobs
5) those people without jobs default and lose thier homes
6) housing prices go down
7) more people default
8] less people buying houses
9) more people lose thier jobs
10) those people without jobs default and lose thier homes
11) housing prices go down.......................................


this will keep going until only the people who can afford homes and still have jobs own homes.

then the market can start to recover.

but giving loans to people who do not qualify to pay them back to purchase votes and make the economy boom under false pretences. now that is called irresponsible.


the gap between poor and rich you talk about is a red herring, because everybody benefits from that as long as they work hard and succeed


the way our leaders did it from back in Clinton times was provide false un-pay-back-able loans to spur homes sales creating a false boom & false jobs that eventually all crashed into a house of cards that we are paying for now. while all the politicians who created this mess are mostly already out of office and already bought their votes.

How much did their votes cost? It cost our nation.

If we don’t have a smart president in 2012 America will be lost. And Obama is an idiot risk taker, and he is risking this counties future over his personal ideology, that he did not even reveal to the American people. He is the worst type of snake you can imagine.
 
let me tell ya somethin,

most, if not ALL laws regarding financial services companies and financial transactions passed since the 80s until barack obama was in office served to DE REGULATE the financial services industry.

those loans you talk about, were pushed on by ultra-conservative nut alan greenspan. he said banks don't need regulations regarding how many loans or risk to take on b/c banks are responsible enough to not take on too much risk....

hmmm... the mortage industry, a well-oiled, under-control machine that provided america with great prosperity for over 50 years, got de-regulated to the point it failed.

greed and profits squeezed a lot of money out of that machine then came to the tax payers for a bail out. just so they could do it again.

blame all the 'regulation', delude yourself all you want. i'll be here to set you straight. it was the DE REGULATION of the mortage, banking, and insurance industries that led to this mess.

that is all.
 
let me tell ya somethin,

most, if not ALL laws regarding financial services companies and financial transactions passed since the 80s until barack obama was in office served to DE REGULATE the financial services industry.

those loans you talk about, were pushed on by ultra-conservative nut alan greenspan. he said banks don't need regulations regarding how many loans or risk to take on b/c banks are responsible enough to not take on too much risk....

hmmm... the mortage industry, a well-oiled, under-control machine that provided america with great prosperity for over 50 years, got de-regulated to the point it failed.

greed and profits squeezed a lot of money out of that machine then came to the tax payers for a bail out. just so they could do it again.

blame all the 'regulation', delude yourself all you want. i'll be here to set you straight. it was the DE REGULATION of the mortage, banking, and insurance industries that led to this mess.

that is all.



I just dont get why you are trying to blame conservatives, when it is cleary both parties are to blame. you choose to blame conservatives when alan greenspan the suposed conservative guru you speak of that ruined everything was apointed by Billy Clinton presidency and it was clinton a liberal and the republican led congress that started this mess.


I would like to have a law that any politician found to be responsible for some fucked up shit to be doused with gasoline and burned alive. I bet they would be much more carful with our precious country then :D
 
so what if he was appointed by bill clinton??

he had the experience, education, and pedigree for the position. too bad his take on the way companies operate was completely off.

completely underestimated the power of GREED.

speaking of the devil, he did go on meet the press and supported the idea of letting the bush tax cuts expire and move on into the catacombs of our bad decisions file.....
 
@dannyboy602 -- yea man, Im with ya -- planning my escape to Brazil any day now!

I got about 1/3 the way down and realized this article is a Obama bashing in disguise. Im with you on this one redivider -- but need to watch my tone -- walking on thin ice with RIU as it is... and if there is one thing that can get me hot, is politics..
 
President Obama and Congressional Democrats came back with the almost $1 trillion stimulus bill, promising that it would stop unemployment from climbing above 8%.

that was never promised, that was a projection.

i double dog dare you to find me any place where this was promised.

this claim is direct evidence that whoever wrote this article is nothing more than a partisan hack.
 
Gees, no more politics guys- lets all share a fatty and do what we're good at... - p.s I Liked Reagan- he was the first president I could rememeber as a kid. My opinion is that his policies were good, and really brought about prosperity at a time when things were bad. His pro-big business policy was just what we needed at the time- and rekindled capitalism and the american dream- unfortunately it was left unchecked by his sucessors to the point where it became "too much of a good thing" and now we have this big ugly corporate profit driven monster-bitch-country-thingie. He and Nancy were anti drugs- but you couldn't hate them for it, because it was like hating your loving grandparents who were just trying to make you do your best... I don't think any president since, has cared about the country as much as they did- regardless if you think they ultimately did good or not.
 
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