Another Perspective

Why Today Is 1979, Not 1995

It will be harder to pull the wool over American eyes this time around regarding Mr. Obama. The rotten state of the economy will see to it.

By 1.26.11

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In 1979, of course, Jimmy Carter was the incumbent President, and no sophisticated, intelligent person in Washington thought Ronald Reagan had a serious chance of beating him. The RNC was convinced Reagan would be another Goldwater, and its entire focus was to deny him the 1980 nomination. You know what happened.

In 1995, President Clinton had just suffered a shocking, historic defeat in the midterms, with the Republicans taking both houses of Congress for the first time in 40 years. At first, he seemed to be on the same trajectory as Carter. But he pivoted to embrace the policies of the new Republican Congress, while still managing to play off them to hold his Democrat party base. The Republicans nominated the clueless Bob Dole in 1996, and you know what happened.

Hence the question, is today 1979, or 1995? You can't answer that question by looking at where we are today. You have to look at the underlying trends to gauge where we are going to be in the fall of 2012.

Meet the New Boss

Obama partisans can be cheered by the uptick in Obama's polls. But the roots of that are the roots of his downfall. Dick Morris has called this one wrong. The uptick is not due to Obama's Tucson speech, which will have no significant lasting effect (unless the Republicans are stupid enough to be browbeaten into silence). The uptick is due to Obama's extension of the Bush tax cuts, which has allowed breathing room for a real economic recovery to begin this year, long overdue.

But note the fatal flaw in that hopeful policy turn, like in a Greek tragedy. The extension is only for two years, and all that it involves is extending the same tax rates that have been in effect for the last 10 years. There is no tax rate cut to provide additional incentives for economic growth. Worst of all, President Obama has vowed to come back and impose that tsunami of tax increases in the top tax rates of every federal tax in 2013.

What is already scheduled under current law is precisely that. The top two tax rates would increase by nearly 20%, counting Obama's phase-out of deductions and exemptions. The capital gains tax rate would soar by close to 60%, counting the Obamacare tax increase also going into effect in 2013. The tax rate on corporate dividends would triple, counting the Obamacare tax increase as well. Obamacare will also increase the Medicare payroll tax by 62% as well on upper income earners. All these tax increases will pile on the nation's employers and investors at once.

The economic effect of that, and the resulting further political implications, are discussed further below. But the immediate political implications are that this tsunami of tax increases, as currently framed, will be a top central issue in the 2012 elections.

A second top central issue of that election is being framed right now. Obama and the Democrats have already begun attacking the Republicans because they don't want to spend enough, in the Democrats' enlightened view. In the current political environment, this is an incalculable blunder, and the Republicans must recognize that and embrace the issue framed just this way.

The Democrats are married to the view that this will be 1995 all over again. But it is actually much worse for them than 1979, because Obama's leftward extremism has awakened the grassroots, as witnessed by the rise of the Tea Party. In this environment, the 1995 attack on the Republican budget because it doesn't spend enough will be as politically fatal as Obamacare was in the midterms. This year, there will be a widespread grassroots expression that even the Republican budget spends too much. Sen. Jim DeMint and his cohorts are already fanning those flames. That argument will resonate at the grassroots, and among independents in particular, throughout 2012.

In last night's State of the Union, President Obama actually just reiterated the fundamental guiding premise of Obamanomics over the past two years. That is that more government spending is the key to economic growth, both short term and long term. But the reality is that still more government spending will just subtract from rather than add to the economy. More on the State of the Union fallacies next week.

Meanwhile, the Obamunistas are back to their calculated deception, and so certain that us Homer Simpsons out here will fall for it again. Investor's Business Daily framed the issue exactly correctly in its lead editorial yesterday, entitled "The Grand Pivot -- Who's He Kidding?" The editorial began, "Will the man who conned the public into believing he was a moderate, but who has governed as the most immoderate leftist in the country's history, now try to pull the same con so he can be elected again?"

Yup. Even before last night, the Great Con was already underway. On January 18, the Wall Street Journal published a commentary by the President himself announcing a new Executive Order commanding an Administration-wide review of regulatory burdens "to remove outdated regulations that stifle job-creation and make our economy less competitive."

In the business world, this strategy is called "bait and switch." In politics, it's called "Boob Bait for Bubbas." On Monday, the explained what was in the actual Executive Order, saying, "When the agencies weigh costs and benefits, the order says, they should always consider 'values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts.'"

The Journal further explained what this means:

Talk about economic elasticities. Equity and fairness can be defined to include more or less anything as a benefit. Under this calculus, a rule might pass Mr. Obama's cost-benefit test if it imposes $999 billion in hard costs but supposedly results in a $1 trillion increase in human dignity, whatever that means in bureaucratic practice. Another rule could pass muster even if it reduces work and investment, as long as it lessens income inequality.

That is why, "No sooner had Mr. Obama told the bureaucracies to subject all regulations to a cost-benefit test than the bureaucrats began telling reporters that they are already a model of modern efficiency, thank you very much." While the EPA has already adopted rules providing for the implementation of cap and trade by regulation that will proceed to carpet bomb the economy starting this year, "the Environmental Protection Agency said in a statement that it was 'confident' it wouldn't need to alter a single current or pending rule." The Journal rightly concluded, "This sounds more like the end of cost-benefit analysis than the beginning."

This regulation Executive Order ploy will go down in the Calculated Deception Hall of Fame along with the "net spending cut" he promised us in the 2008 election campaign, which he followed up with a 25% increase in federal spending. Then there was the "PayGo" legislation adopted in 2009 with great fanfare at the White House signing ceremony, promising us that no legislation could be adopted again that was not fully paid for. That was followed by dozens of spending bills passed by the Democrat Congress exempting the legislation from "PayGo." And remember, "If you like your health insurance, you can keep it"?

Another overhyped ploy is the appointment of William Daley from Wall Street as the new White House Chief of Staff. For the significance of that, witness former Assistant to the President for Economic Policy Larry Summers, whose widely cited academic work included the demonstration that extended unemployment benefits increases unemployment. With Summers at his side, President Obama has given us 99 weeks of extended unemployment benefits, to go with stubbornly high unemployment. But the titans of Big Business, where the real Homer Simpsons live and work, have already fallen for the same ploy.

2011 + 2012 = 1979 + 1980

With the tax and spending issues so decisively framed against President Obama and the Democrats for 2012, as explained above, developing severely adverse economic trends raise the possibility that the Democrats will be cast deep into oblivion in 2012. Indeed, despite the political relief Obama has won by embracing the Bush tax cuts in toto for two years, the underlying economic trends are dangerous enough that 2012 can still be dialed all the way back to 1967, with Obama forced out of the race as President Johnson was that year.

Just as the fear that the Obama tax tsunami would force the economy into a disastrous double dip recession compelled the extension of the Bush tax cuts in 2010, that tax tsunami now scheduled for 2013 will raise the same fears in 2012. What has not been widely recognized, but soon will be, is how disastrously vulnerable America is to another recession right now.

With a deficit already well over $1 trillion almost two years after the recovery supposedly began, a double-dip downturn would further skyrocket that deficit well over $2 trillion. Would we really be able to borrow that much? Gross federal borrowing as a percent of GDP is already nearly 3 times as large as for Greece, or any of the PIGS, because so much of the U.S. national debt is so short term, and has to be rolled over every year.

What happens when the U.S. Treasury announces one day that it is going to borrow $XY billion dollars the following week, and when that week arrives the market responds, "No, you're not"? That was when Greece hit the wall. It was at least temporarily rescued by a trillion dollar bailout by the European Union. But who would bail out America? Who even could?

Not sufficiently appreciated are the implications of this for our national defense. America got the money to fight World War II by borrowing to send the national debt to 109% of GDP. But with the national debt already slated to soar over that on our current course, even before another recession, where would we get the money to fight another protracted conflict if such a recession further crippled our finances? Just the opposite of how Reagan's Peace Through Strength won the Cold War without firing a shot, would the double-dip scenario invite War through Weakness? Would our collapsing finances entice our enemies to go on the attack?

Worst of all, the problem is not just Obama's bull-headed devotion to massively redistributive tax increases. Further adding to the prospect of the double dip is the Fed's disastrous return to the policies of the 1970s. The Fed's quantitative easing on top of quantitative easing has already begun to reignite inflation. Indeed, Fed Chairman Ben Bernanke openly proclaimed last fall that he was explicitly adopting a policy of renewed inflation to revive the economy. His thinking was only such inflation could result in negative real interest rates, after two years of zero short term rates did not seem to be enough.

And that inflation is already appearing in commodity prices that have been soaring for several months now. And it has already appeared in developing countries around the periphery of the dollar-trading zone. This is where roaring inflation always first shows up.

Soon enough this year, that inflation will show up in the headline CPI. That in itself means big political problems for Obama and the Democrats. Much worse, however, is that the Fed, President Obama, and America, will then be trapped in a monetary policy conundrum.

If the Fed cuts back on its expansionary policies to shortcircuit the inflation, interest rates will soar, and along with the tightened monetary policy that itself will throw the economy into recession. Monetary policy does operate with long lag times, as Milton Friedman taught those of us paying attention. But that lag time places an inflationary resurgence into this year, from the beginning of quantitative easing two years ago. Will the Fed pursue a contractionary course this summer, threatening renewed recession in the summer or fall of 2012? Obama's only hope may be that those long lag times may push any such recession into 2013. But coinciding with Obama's now scheduled crushing tax increases, that recession would then be a historic doozy, crippling America and leaving Obama's reelection worthless. Note: lag times may be shorter now because the markets at least have learned from the 1970s.

But if the Fed doesn't contract to counter the rising inflation, then the inflation will feed and accelerate into 2012. That gives Obama and the Democrats the prospect of running that year with near double-digit unemployment, inflation, and interest rates, as in 1980. Staring into the dustbin of history is exactly where they will be then.

This is the policy conundrum that created the multiple recession, roaring inflation 1970s. It is what Obama and the Democrats so richly deserve. For as the prophet Santayana advised us, those who do not learn from history are condemned to repeat it.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.