ACRU

Wasteful Politicians, And The Fed’s Coming Recession

This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published August 11, 2011 on Forbes.com.

The Tea Party-dominated Republican House majority already acted in the spring to solve America’s sovereign debt crisis by passing the budget proposed by House Budget Committee Chairman Paul Ryan (R-Wis.). With $6.2 trillion in cuts in the first 10 years alone, Ryan’s proposal would not only lead to a balanced budget, but would ultimately actually pay off the national debt if continued, as scored by the Congressional Budget Office.

Despite President Barack Obama’s unreasoned rhetoric, that budget was carefully crafted so no one would actually suffer as a result of those cuts. Sure some people would lose government windfalls and those who were able would have to pay for more themselves, slowly and carefully phased in over time. But that is exactly what we need right now.

If Senate Democrats and the Obama Administration had acted to implement that Ryan budget, or anything anywhere near it, there would have been no downgrade of America’s AAA credit rating that has prevailed since President Washington. But instead they responded with unreasoned derision, running an ad that showed Ryan throwing an elderly woman over a cliff, even though his reforms would not apply to anyone over 55 today. That ad itself contributed to last Friday’s credit rating downgrade, showing Washington unreasoned and unwilling to address the problem.

During the debt limit debate in July, the Tea Party-dominated Republican House acted to solve the sovereign debt crisis once again, passing the Cut, Cap and Balance Act of 2011. That Act cut government spending for fiscal year 2012, which starts on Oct. 1, 2011, by $111 billion, a modest, reasonable step out of Obama’s proposed spending for that year of $3,729 billion ($3.7 trillion). It also adopted a cap on total federal spending that would reduce it to the long run, postwar, historical average of 20% of GDP by 2017, another careful, reasonable plan.

The Act provided as well for President Obama’s requested increase in the debt limit, if Congress first passes a specified Balanced Budget Amendment to the Constitution and sends it to the states for ratification. The proposed Balanced Budget Amendment would also include a supermajority requirement to raise taxes. That means no tax increase could be enacted without a vote of 67% in favor in each house. The proposed Amendment also specifies a cap on federal spending equal to 19.9% of GDP, limiting federal spending again to the long term average for the past 70 years.

But once again the Democrat-controlled Senate failed to even take the measure up, and President Obama laughed it off. Standard and Poors (S&P), however, wasn’t laughing. S&P said publicly that Cut, Cap and Balance would have avoided the downgrade.

The credit rating downgrade and the reaction of the markets since then shows that the Tea Party Republicans were right all along in calling for the above measures, and passing them through the House. Trying to blame the Tea Party for the credit rating downgrade, like the wildly unreasoned President Obama and other Democrats are now trying to do, is like blaming Jenny Craig for obesity in America. The fault lies entirely with President Obama and the Democrat controlled Senate, who failed to take any action on the measures to solve the problem that the House already passed. S&P and the markets have thoroughly vindicated the Tea Party position.

In response to the ensuing market chaos, along with the continued weak economy, the Fed announced this week that it will keep interest rates near zero at least until mid-2013. This is actually quite bearish for the long term, if not sooner, without a return to compensating free market economic policies.

The Fed’s plan means almost five years of extremely loose Fed monetary policy, with record low interest rates. That loose policy cannot simply be ended after years without an economic downturn. Investors are misled by the money expansion and artificially low interest rates to make investments that are dependent on those policies. When those policies end, so does the economic foundation of their investments. The result is higher unemployment, and a recession. That was the pattern of the 1970s, which was the last time we followed the same Keynesian economic policies of the Obama Administration. But the loose monetary policy has to end at some point, or the result will be ruinous inflation.

The contractionary effect of the end of 5 years of loose Fed monetary policies will hit the economy at the same time as the already enacted tax rate increases due to Obamacare and the expiration of the Bush tax cuts. The top tax rates of virtually every major federal tax would then soar, except for the corporate income tax rate, which is already virtually the highest in the industrialized world. Obama’s soaring regulatory costs will also be soaring to a crescendo by then as well.

This is why I predicted in my new book, America’s Ticking Bankruptcy Bomb, the coming crash of 2013, unless these policies are reversed. The first step in that can occur in round 2 of the debt limit increase negotiations involving the new Congressional Super Committee.

What is important to recognize is that in these negotiations the above discussed Tea Party solutions can still be in play. The Congressional Super Committee considering further deficit reductions totaling $1.5 trillion over 10 years could still adopt some or all of the proposals in the Ryan budget, or in Cut, Cap and Balance, or some combination of them.

Indeed, both the Ryan budget and Cut, Cap and Balance included more than enough spending cuts to provide for sweeping, pro-growth tax reform, and still meet the Super Committee’s deficit targets. The Ryan budget, in fact, already provided for corporate tax reform reducing the federal rate to 25%, and for individual tax reform reducing the individual rates to 25% for those making over $100,000 per year, and to 15% for those making less. Yet, again it still ultimately achieved a balanced budget, and eventually even an historic national debt payoff, as scored by CBO. The reduced rates from such reform would liberate the economy for the long overdue recovery to take off.

Republicans must demand no less than such pro-growth tax reform as the price for their agreement in the next debt limit round. If President Obama and the Democrats refuse, let the automatic spending cuts trigger, and take the case to the people in 2012. The cuts can be adjusted as necessary and replaced with much bigger ones after that election. That would make defense an issue in the 2012 elections as well, which will be even more salient if Obama suffers a foreign policy/military crisis before then. His policies of historic financial weakness are only inviting that.