2011 Economic Forecast: A Second Scoop of a Double Dip
Double Dip: ummm, ummm, ummm
Put away all of your charts: here’s the new symbol for the economic downturn that’s set to begin. After the weakness of the economy and the coming TaxAgeddon on January 1, 2011, is it much of a surprise?
DOUBLE DIP, ANYONE ONE?
A few signs of the imminent economic times–regardless of what all the president’s men are saying.
From Michael Pento Says Double-Dip Recession Is Now Guaranteed:
As usual, Pento’s TV appearance are about as contained and demure as Alan Greenspan on Ambien: “[Bernanke's statement that the economic recovery is intact] guarantees that we are going to have a double dip recession, because his track record is 100% accurate, but it is 100% accurate in the wrong direction. I look at markets and I look at economics, and since this whole rebound was derived by artifical means, why would I ever believe that we are not going into double dip recession. Should I listen to Ben Bernanke or should I listen to the price of oil which contracted from $85 to $72 a barrell in few weeks, should I listen to the 10 Year that went from 4% to 3.2% in a few weeks, should I listen to Doctor Copper that went from $3.50 a pound to $2.77 a pound: where would I want to put my allegiance with, markets or Ben Bernanke. We need to sell assets, and we need to allow the deleveraging process to consummate. We are going in a wrong direction and that’s the double dip recession is virtually assured.
And then there’s the coming Tax-tsunami.
This article by former Reagan advisor, Art Laffer–the developer of the Laffer Curve–rightfully points out that policies, not good intentions, have consequences. From Tax Hikes and the 2011 Economic Collapse:
On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush’s tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.
Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there’s always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.
Now, if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be.
That’s two-for-two on the coming second dip of the double dip recession. For an alternate, bit brighter view–at least on Laffer’s take–let’s go to Why the Laffer Curve Might Be Wrong Here:
Right now, the surge in corporate profits we are seeing has not been created by tax cuts but by the enormous “tax cut†of high unemployment. Companies are making more goods than ever with less people. In other words, productivity is skyrocketing. This has the same effect as an enormous tax cut because corporations get to keep more of every dollar made. Interestingly, another curve develops: At 0% unemployment, corporations will make nothing because the labor market will be so tight that labor costs will reach to infinity, and at 100% unemployment, corporations will make nothing because nobody will be there. There’s a point of equilibrium where the labor market begins to tighten but corporations still have sufficient profits. We aren’t at that point, but still at a point where companies are making enormous profits without having to pay the full labor costs (maybe call this “The Altucher Curveâ€)
Eventually companies have to hire more with their profits. The people they hire then become spending consumers, buying houses, cars, etc. This creates a cycle until equilibrium is reached at about 5% unemployment, where history has generally shown the employment levels to be at a point where there is neither inflation or deflation of wages.
Assuming that taxes go up as planned (and let’s not forget there’s an election in between), we are still only going to the level, give or take, where we were in the 90s. There was a nice boom then.
Of course, productivity gains are great: it’s what helped fuel the U.S. economy in the 1980s and 1990s. But productivity gains made because a lot of people are unemployed doesn’t seem so hopeful.
Especially, with the service industries.
Also, taking money out of the pockets of the remaining people who are employed is not a winning formula–contrary to the policies of this administration.
While we’re no financial guru, the following 2011 prediction doesn’t require one: a scoop of Barry Berry to go with a scoop of 2009′s Stimulus Strawberry.
MORE: Bernanke calls federal budget ‘unsustainable’–in case readers needed any more.
We do like to err on the side of giving more info than you may want.
by Mondo Frazier
image: deep ivy
h/t (on double dip): Monty, AoSHQ
Excellent piece. For anyone seeking further information on the Laffer curve, they can check out their video series on the concept that further backs this up.
Laffer Curve I – Understanding the Theory (http://www.youtube.com/watch?v=fIqyCpCPrvU)
Laffer Curve II – Reviewing the Evidence (http://www.youtube.com/watch?v=YsB_rnzBA08&feature=channel)
Laffer Curve III – Dynamic Scoring (http://www.youtube.com/watch?v=Mw7LtVwDCbs&feature=channel)
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In full agreement with you. Taxaggeddon is coming, and unfortunately it won’t be Laffer on the wrong side of policy on this one.
These people never seem to learn.
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I think the double dip theory paints a picture that is too rosy. The US could very well go down into the dust bin of history, like the old Soviet union did.
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