Unhappy New Year

By Jeffrey Folks

Most economists predict that, under current policies, the nation's unemployment rate will be close to 9% through the end of 2012, with the broader measure of unemployment (U-6) running above 16%. GDP growth is predicted to be sluggish, in the range of 2%. Government will continue to lay off workers as growth stagnates and tax receipts remain flat. In short, the economy will remain lousy.

It doesn't have to be this way.

The President, whose fiscal restraint was on display this week during his $4 million taxpayer-funded Hawaiian vacation, has no idea about how to manage the nation's finances and promote economic growth. Faced with the longest slump since the Great Depression, his solution is to raise taxes and increase spending. The only thing he's managed to get done lately is extending the payroll tax cut for two months and continuing to fund 99-week unemployment benefits.

Tax cuts are always a good idea, but not if they are funded by a $37 billion stealth tax on mortgages. A permanent cut in tax rates funded by real spending cuts is the best prescription for growth. As Stanford economist John B. Taylor put it, it is adherence to "the principles of economic freedom" that spurs growth, not short-term intervention by the Federal Reserve or other parties. What Taylor means by "economic freedom" is simply freedom from excessive taxation and regulation, and strict adherence to the rule of law.

Unfortunately, Taylor finds a lack of "economic leadership" in Washington today. Everything that Obama has done, from passing costly healthcare reform to threatening new taxes on the rich, reflects an absence of leadership. Instead of focusing "like a laser" on job creation, as he has repeatedly promised to do, the President is focused solely on his reelection chances. The economy seems to be the least of his concerns.  

A 2% cut in withholding is not going to reignite economic growth in 2012. It has not done so in 2011, during which GDP growth has averaged 1.17% when it should be running five times that number. Over the past 64 years, real GDP growth has averaged 3.28%, with numbers running above 5% in post-recession periods. There's something seriously amiss when the economy fails to recover following a severe recession. The problem is Washington, and more specifically, liberal Democrats in Washington.

Liberals like Nancy Pelosi think that the way to increase employment is an indefinite extension of unemployment benefits. That's like addressing a lifeboat shortage on the Titanic by handing out free drinks. An unemployed worker who has failed to obtain employment over the course of 99 weeks is unlikely to find a job of any kind in the 100^th week.  In fact, a study released Dec. 15 showed that workers who collect unemployment benefits for over a year are likely to file for permanent disability benefits and never return to the work force. The 99-week extension of unemployment benefits is not the path to prosperity -- it is the entry way to a lifetime of poverty and total dependence on government.

Unfortunately, that seems to be just what liberals want. By means of a broad array of welfare and entitlement programs, liberals are transforming what was once a free and independent citizenry into a wretched mass of government beneficiaries. Large numbers of these will be voting for President Obama in November because he promises to defend their perceived right to government support.

It's no accident that welfare benefits have been increasing just as economic growth has stalled. As capital is shifted, either through higher taxes or increased borrowing, out of the private sector to pay for benefits, business investment slows and the economy grinds to a halt. During a normal recovery following a recession, economic growth accelerates to over 5% and remains high for many quarters. That was the case following the recessions ending in 1975, 1982, 1992, and 2001.  But this time it's different. 

The President says it's because his predecessor, George W. Bush, ran the economy into a "ditch." He has been repeating that line for more than 1,000 days, and will undoubtedly employ it right up to the November election. But the economy was in the same ditch back in 1975, 1982, 1992, and 2001, and in every case it recovered within 12 months. This time it has not recovered, and it shows no signs of recovering in 2012. The Outlook Survey issued by the National Association for Business Economics predicts an unemployment rate of 8.9% for 2012. That is not a normal recovery.

This time it's different because the Democratic Party no longer cares about economic growth. It believes that the American people are just as well off collecting $330 a week in unemployment benefits as they are working. Far more important than economic growth is their obligation to the special interests who oppose growth: labor unions who block the opening of a Boeing plant in South Carolina, environmentalists who oppose the Keystone XL pipeline, trial lawyers mounting class action suits on the basis of disparate impact and the alien tort statute -- all of them aided and abetted by the Obama Justice Department, National Labor Relations Board, EPA, and other agencies.

It's a wonder, in fact, that the economy is growing at all, and doubtful that it can continue to do so in 2012.  Overseas, Europe is slipping into recession, and growth in the emerging markets is slowing.  At home, 77% of small businesses report that they do not intend to hire new workers in 2012.  State governments continue to let workers go, and the U.S. Postal Service is scheduled to lay off 120,000 workers and close 3,700 post offices beginning in 2012.  Meanwhile, Americans have once again maxed out their credit cards in an effort to maintain their standard of living. Once credit has been exhausted, there is nothing left to fund consumption.

As bad as things are, they'll probably get worse in 2012. And they are likely to continue going badly for years to come after that, because it will not be easy to reverse the damage of the current administration.

I'd love to be able to wish you a Happy New Year. Really. But as long as we have Obama and his legacy of Big Government to deal with, it's going to be one Unhappy New Year after another. Get used to it.