From the May 17, 2009 Sunday Times (London)
May 17, 2009
by Irwin Stelzer
In the days when it was still necessary to explain just what an economist does, my first job was to crank out a forecast of economic activity in the coming quarter. Get it wrong often enough, and you were gone. Senior employees assigned themselves the longer-term outlooks: their forecasts would be long forgotten by the time the actual data became available.
That was then and this is now. So I will exercise the prerogative of seniority and shorten my comments on the economic outlook to make room for a longer-range look at the post-Obama world in which we Americans will live.
Green shoots continue to sprout. The supply of homes for sale has dropped; banks have survived the stress tests in better shape than many feared and are going about the process of raising capital; the cautious European Central Bank chief Jean-Claude Trichet thinks the global economy is starting to recover; the Organisation for Economic Cooperation and Development says several of the world’s leading economies are turning up; Paul Otellini, chief executive of Intel, said demand for computer chips has bottomed out; and spending on technology has stabilised.
However, as usual, there are counter-signals: continued falls in house prices, weakness in the labour market, an impending wave of defaults on commercial-property loans, and heaven only knows what Congress will concoct.
Longer term, there is little doubt that we will be paying more for energy, either directly or indirectly by paying higher taxes to cover the costs of reducing carbon-dioxide emissions and of the subsidies being lavished on solar, wind, ethanol and other parts of the green economy by environmentalists. Or, in the case of ethanol, by politicians who equate ethanol with corn, corn with Iowa, and Iowa with the first presidential primary in 2012. Throw in the costs of a “smart grid” and all of us will pay more, especially those who have been stockpiling incandescent electric bulbs so as not to be dependent on the dangerous, malfunctioning and costly energy-saving fluorescents when America follows your country and outlaws incandescents in 2014.
Last week Democrats in the House of Representatives reached an agreement on a cap-and-trade system for carbon-dioxide emission permits by bribing recalcitrant congressmen with free pollution permits for important constituents in the utility, oil and other industries. Which is too bad: cap-and-trade is a woefully inefficient way of imposing emissions costs on polluters. Experience in Europe shows that the price of permits fluctuates so wildly that potential producers of renewable energy don’t have a target against which to compete. Green power might make economic sense when users of coal have to pay $40 a tonne for a permit but is uncompetitive when the price drops to $10, as it has done.
We will also end up paying more to borrow than we would have paid before the government decided that contracts can be broken. The Obama administration demonstrated in the Chrysler bankruptcy that it has no regard for the contracts that have in the past protected lenders who made their money available on the assumption that they would have a preferential claim on the borrowers’ assets. Nor does it believe that contractual pay deals should withstand a raised voiced in Congress. This weakening of the sanctity of contracts increases lenders’ risk, which leads to a demand for an offsetting higher interest rate.
There will also be a big change in the structure of the financial-services sector. New regulations will have a greater effect on institutions that create systemic risk than on smaller, below-the-radar enterprises. So the best and brightest will leave the job of second-vice-presidential-assistant-to-the deputy-risk-manager to the more bureaucratically inclined, and set up shop on their own, or seek other outlets for their entrepreneurial urgings – one of the few pleasant unintended consequences of new regulations.
We are also certain to see take-home pay decline significantly. The debt that Obama is running up will have to be repaid. Already, there are grumblings in the market about the future of the dollar, with the Chinese not the only one of our creditors worrying that we will inflate our way out of our obligations. Run the presses, make dollars cheaper, and use the debased currency to repay debts. But that is not the only possibility. Instead, politicians, remembering the fate of Jimmy Carter when he allowed inflation to climb towards 20%, will try to restore fiscal sanity by raising taxes.
Harvard economist Martin Feldstein, who supported the president’s stimulus package, puts the needed tax increase at $1.1 trillion over the next decade; the International Monetary Fund puts the figure at $1.9 trillion, the magnitude of which can be better understood when written as $1,900,000,000,000.
After all, Congress won’t be able to cut spending. Obama’s drive towards a $1 trillion healthcare tax-funded system seems irresistible. Drug companies will go along so they will be relieved of the cost of subsidising lower-income patients’ drug needs. Insurers will go along because the law will require everyone to take some sort of coverage. Employers will go along so they can shift the cost of employee-benefit plans to taxpayers.
So higher taxes are in our future, as is the inevitable queuing with which patients in Canada and Britain are familiar, examples being cited by Obama’s critics in television ads aimed at rousing voter opposition to his programme. Polls show that most Americans are satisfied with the quality of their healthcare. But like so much of what Obama is pushing through, this “reform” will prove irreversible.
Finally, there are the cars we will be driving. It is difficult to predict whether the government can prevent carmakers from producing the big, comfortable, safe cars we prefer, and shoe-horn people into smaller European-style vehicles. But the greens will give it a good try.
Where is the outrage? Perhaps among the mass of voters worried about the rising debt burden faced by their children. We won’t know until next year’s congressional elections.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
Home | Learn About Hudson | Hudson Scholars | Find an Expert | Support Hudson | Contact Information | Site Map
Policy Centers | Research Areas | Publications & Op-Eds | Hudson Bookstore
Hudson Institute, Inc. 1015 15th Street, N.W. 6th Floor Washington, DC 20005
Phone: 202.974.2400 Fax: 202.974.2410 Email the Webmaster
© Copyright 2013 Hudson Institute, Inc.