By LAWRENCE KUDLOW, Special to the NY Sun
Is it possible that we are already in a global recession but just don’t know it yet? And is the U.S. itself — still the epicenter of the world economy — standing on the front edge of another recession?
I sincerely hope I’m wrong. But warning signs are everywhere.
The eurozone economy is flat on its back. Greece may be headed for a political crackup and an exit from the euro and European Union. Deposit runs in Greece and elsewhere are beginning, and a credit freeze throughout the continent is not out of the question. Meanwhile, emerging economies like China, India, and Brazil are slumping.
Here at home, ex-Clinton strategists James Carville and Stan Greenberg sent a memo to President Obama telling him that his campaign message of slow and steady recovery progress is out of touch with Main Street America. They’re right. Of course, Obama’s “private sector is doing just fine” statement is part and parcel of his disconnect from economic reality.
The reality isn’t good. Whether you’re a Democrat or Republican, take a look at the numbers:
Job growth has been slipping badly for three months. Retail sales and factory orders are down two straight months. Real incomes are flat. Household wealth is way underwater from the housing collapse, dropping nearly 40% in the last three measured years. And GDP was an anemic 1.9% in the first quarter. Nearly all leading Wall Street economists are marking down their second-quarter estimates to 2% or less.
But here’s the key point: 2% growth is not a recovery. Many economists would call it a growth recession. When you get that low there’s little margin for error. A shock from Europe, an inventory selloff in the U.S., or almost any unexpected event could push us back into negative territory for an official double-dip recession.
The last saving grace for the U.S.? Business sales and profits are still trending higher, although GDP-measured profits did fall in the first quarter. That needs to be watched carefully.
That said, a recent IBD poll shows that the number of households with at least one person looking for employment is 23%. That translates to 30 million people looking for work. That’s not a recovery.
I can think of two major reasons for the latest economic stall — even inside an overall recovery rate that’s only half the normal pace of post-WWII recoveries. First is the deflationary impact of a sharp, nearly 10% rise in the exchange value of the dollar relative to the euro. That’s imparting a deflationary influence on the economy, where both import and producer prices have recently turned negative. The good side of commodity deflation is that oil and retail gas prices have fallen considerably; the bad side is that manufacturers may hold back production and that debtors have to climb out of deeper holes.
As someone who always touts the merits of a strong King Dollar, why am I complaining now that we have one? That’s my second reason for the latest economic stall: King Dollar is not being accompanied by lower tax rates.
The original supply-side growth model argued for a strong dollar and lower taxes, where the former keeps prices stable and the latter provides fresh growth incentives. But instead of easier taxes, a huge tax-hike cliff looms. Big problem. Wrong model. Anti-growth.
As the Bush era tax cuts expire at year end, so do the temporary payroll tax cut and the alternative minimum tax patch. By some estimates, over $400 billion in cash will be pulled out of the economy in 2013, along with a rollback of growth-oriented, marginal-tax-rate incentives. It’s hard to quantify, but it’s quite possible that business hiring plans and consumer-spending expectations have been put on hold until folks can figure out future tax policy.
All this is why the tax-cliff problem needs to be solved immediately. If the tax cuts are extended sooner rather than later, the economy might straighten out faster than most folks think. But House Speaker John Boehner told me that while he’s ready to talk to President Obama, the phone isn’t ringing. While House Republicans are expected to pass a tax-cut extension in July, it won’t go anywhere without White House support.
Unfortunately, the president is still talking about tax hikes on the rich. He should listen to Bill Clinton who argues for a full tax-cut extension to stop recession. If we wait until after the election to address the tax cliff, we will face uncertainty and chaos, bringing us closer to recession.
Isn’t there some way to nip this worst-case outcome in the bud?
@ the phoenix:
I am not an economist. Walter Williams recently posted an article on Jewish World Review saying: If we tax those who earn more than $250,000.00 per year at 100%, it won’t cover government expenses for more than 141 days. USA has also more than $106 triilion in unfunded liabilities. I donot think USA wouldbe able to meet all of its obligations wihtout default. I wish I would be wrong in my prediction; I am afraid that I could be right.
“Unfortunately, the president is still talking about tax hikes on the rich….” “The original supply-side growth model argued for a strong dollar and lower taxes, where the former keeps prices stable and the latter provides fresh growth incentives. But instead of easier taxes, a huge tax-hike cliff looms. Big problem. Wrong model. Anti-growth.” Sorry, I am not an ideologu to either side and I do not buy this argument. Where is this “growth” to come from? things have changed since Reagan before all the jobs, capital and profit were exported to Asia. Where does a strong dollar come from, isnt that part of what fueled Asia to the detriment of the US? China, the economic growth model is trying to keep a weak currency. The private secto has carried the ball for an entire generation and the “model” that is left is a distributive economy for other nations products and profits gone overseas with jobs and capital. I see no other model of production other than free enterprise however the god of capitalism is not exactly the same thing when applied. If the private sector has failed in providing the economy why should starving people wait for them to decide to invest based on having to pay lesss tax? Given more money in their pocket they are likely to send it overseas and only leave the costs of distribution to the fol consumers in the US. If they have failed the population will naturally call on the govt to step in in ways other than saving the CEO’s bonuses and shareholder capital. Ideologies can only thrive when they prove success. When I experience the way private corporations operate I conclude that the only way the public can be protected from thievery is by shackling their operations. the dilemma is that the people also need protection from the same type of minds that also occupy government. the private sector appears to be bankrupt of solutions to todays problems , much of which have grown out of the unfettered operation of that system and its propensity to corruption, except by conjuring up anachronistic ideologies. Ethics is not a highly valuable field of study in bringing up children and its operation for the most part seems to be relegated to one day a week of praying in substitution of real application. A relevant private sector solves problems, I have not seen that for a while.
@ the phoenix:
Thank you for the figures, Phoenix. You’ve done the readers a service.
…gimme a break!
i don’t think you need to be the sharpest crayon in the box to know that pretty soon the sh..stuff is gonna hit the fan:
U.S. Tax revenue: $2,170,000,000,000
Federal budget: $3,820,000,000,000
New debt: $ 1,650,000,000,000
National debt: $14,271,000,000,000
Recent [April] budget cut: $ 38,500,000,000
Let’s remove 8 zeros and pretend it’s a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Budget cuts: $385
we’re REALLY gonna get somewhere, right?
The USA has been in a depression for years beginning under G.W. Bush–Barack H. Obama has made the depression far worse–and deliberately so!
The so called “Bush” tax cuts did not go far enough–this together with his other Marxist economic policies and an unnecessary war in Iraq–caused much ruination for Americans.
Its pathetic that so many–even so called big name “conservatives” keep lauding the so called “Bush” tax cuts and claim they made for a booming economy–as they did not!
Sure the economy was much better under G.W. Bush–but not factually good.