Sunday, May 3, 2009

Unintended Economic Consequences of Political Posturing

My turn to stir the pot - This is a long one, so put on your hip boots and follow along…

I’ll start by pointing out that – a very short year ago – April 2008 produced an all-time record for federal tax collections; over $400 Billion. That number is not particularly spectacular if you consider the April number is typically pumped up every year by receipt of tax payments on the previous year and first quarter estimate pre-payments. Anyway, April 2008 collections was a 6.1% increase over April 2007 revenues. (Hmmm… in spite of all those ‘tax breaks for the rich’, we collected More Money?) Same-month tax collections in 2008 slowly dropped through May, June and July (4.6%, 4.1%, 2.2%), but these were still increases over same-month collections recorded in 2007. Then the value of federal tax collections started going south, decreasing for the rest of the year. Starting in August, drops were -5.1%, -4.4% -6.9%, -3.4%, and a whopping -14.1% reduction in December, 2008. The reduction continued into 2009 with losses of -11.4% and -17.4% in January and February.


The instinctive reaction (by some) is that this represents some kind of manipulation by ‘those greedy, fascist, corporate fat-cats on Wall Street’… Big Business is behind it… I’ll toss the BS flag on that.

Instead, I think this loss in tax revenue is the (natural) result of otherwise subtle actions taken by Small Business America. Sure, Big Business is Big and can certainly have a huge impact on the economy. But the inherent and hidden power which rests in the hands of the entrepreneur class is much more far-reaching. So what caused this sudden and relatively radical shift in federal tax revenues?

I’m going to label it the PRO Economy (Pelosi-Reid-Obama), which got seriously cranked-up in June of 2008 and ran all the way to Election Day in November. What has happened is a should-have-been-expected result of their proposed policies and public statements. You reap what you sow.

The PRO’s began by repeatedly telling the country they were taking direct aim at the conventional sources of energy which drive our economic engine. They stated this unilateral action was critically necessary to ‘save the planet’ from environmental destruction. As inherently stupid as that may be, they didn’t stop there. They also declared their intention to aggressively tax the 5% of the Producers (i.e., people who actually pay taxes) with the express goal of redistributing that confiscated wealth to others (e.g., the people that vote for them).

By September, the long-time-coming real estate bubble finally burst, with plenty of blame to go around on both sides of the aisle. Those in charge at D.C. pushed for and passed a series of bailouts, not only for the troubled financial sector but they manufactured an almost endless list of folks who wanted their access to government largess, too. Yes, this stupidity started in one party’s administration, but it was continued even more aggressively by the next party’s henchmen. "Who started it" is not the point.

In a classic case of “unintended consequences”, I think those small-and-middle sized taxpayers – especially the ones hovering around that so-called $250K threshold - started heading for the lifeboats. If the summer political diatribes and obvious signal flags didn’t do it, the Sept-Oct bailout fiasco certainly opened their eyes. They didn’t take action because of current economic conditions (which were mediocre at that time). No - They just started thinking about what the economic conditions would be like in the not-too-distant future, based on the publicly stated agenda of the PRO’s and their ilk… And once everything fell into place, they started looking for their own ‘exit strategy’.

I’m talking about entrepreneurs and small investors, here: the Real Lifeblood of our economy. Everyone with a small business who struggles day-to-day with providing products and services, keeping track of payables and receivables, making payroll and generally trying to earn a buck. Reluctantly, I think, they took the steps smart businesspeople *always* take they see a serious recession is taking hold… They stopped hiring, stopped expanding, they let people go and didn’t replace them, they tried to make worn-out equipment last a few months longer, etc., etc., etc.

In other words, they started deliberately downsizing their personal business in response to what appeared to be on the horizon for them. They saw nothing but penalties and punishment coming their way – which would be wielded by the PRO’s and directed predominately at THEM. If you are familiar with Ayn Rand’s Atlas Shrugged, the Highly Effective People (e.g., the Producers) “Went Galt.” They effectively announced, “If you clowns really think *I* am the problem, then you can fix this mess without me.”

The end-result of this logical and understandable reaction of the Productive Class is driving the recession much deeper than many think. (Don’t be surprised if the DOW drops below 6000 before its over, and maybe around 5000.) This is pushing federal tax receipts into free-fall. I’ll jump out on a limb and predict April 2009’s tax receipts will show a staggering drop from the $400 billion collected in 2008: down to say $225 billion give or take a bit. Ouch.

There was a similar downturn in tax collections in 2001 and 2002, related to terrorism and other factors. But this time, it will be far worse. And when you combine the collection shortfall with the unbridled spending spree by the PRO’s in D.C., I think the CBO’s estimate of “only” a $1.85 Trillion shortfall will be *way* off the mark. How does a $2+ TRILLION dollar deficit sound? And that’s just for ONE YEAR. Ouch, indeed.

If – repeat *IF* - the PRO’s and what passes for an opposition party - would CHANGE COURSE and reach the conclusion that Real Economic growth and the ultimate survival of the country is *far* more important than pursuing environmental boondoggles, engaging in class warfare, and justifying government takeovers of large corporations and demonizing anyone that gets in their way… then maybe, just MAYBE, enough of those Productive Few who have “Gone Galt” might come back in from the wilderness and re-join the fray. If they don’t – all bets are off.

But does anyone think the PRO’s are even *remotely* likely to pass up their best chance in a generation for a *huge* power grab and Do The Right Thing? Hint: it’s not about the Money - it’s about the POWER.

I’m sorry. IMHO, while the Republicans have insanely abandoned their core conservative principles (they’ve turned into Democrat-Lite), the PRO’s are the worst kind of far-left ideologues. To these bozos, it’s not about doing the Right Thing – it’s about how what you’re doing LOOKS. (And always with an eye towards increasing their power over others.) They will not be deterred by the Failure of their policies and actions: after all, they had Good Intentions, didn’t they? Isn’t that all that matters? Besides, it would all work if only everyone would give it a chance and stop sabotaging what I’m trying to do…

To the clowns-in-charge, Failure doesn’t require changing course or finding alternatives: all one needs to do is assign and vilify suitable scapegoats. And then they can keep doing whatever they want, even when it clearly doesn’t work… And, like it or not, the PRO’s are in charge – they have the control in their hands, so the ball is in their court. Don’t try to blame the previous administrations, either. The PRO’s have enough time to FIX this mess, *if* they can rise above personal ambition and place the welfare of the Country ahead of staying in control. This is a time for statesmen; not politicians and bureaucrats.

Now… before you jump on me with both feet… this isn’t a Democrat-vs.-Republican thing. I can just as easily argue that a substantial portion of the reasons why we got in this mess can be laid at the feet of Republican buffoons. So What? It’s not about assigning ‘blame’. It’s about REALLY working together and solving problems. And sometimes that requires you set aside YOUR interests in favor of Doing Whatever It Takes To Get The Job Done.

As far as what the PRO’s are proposing and actually doing… Well, IMHO and as we say in the South… That Dog Won’t Hunt.

- Steve

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