Tuesday, August 31, 2010

Economy languishes in the face of
failed big government solutions

Commentary by James H. Shott

Last Friday’s GDP report was a splash of cold water in the face of those who keep hoping against hope that, as the President and Vice President keep telling us, the nation really, really is seeing economic recovery. Really.

The report adjusted downward last month’s preliminary 2nd quarter GDP estimate of plus 2.4 percent. Even that rate, however, was not great news, because it fits into the prophecy of those economists who believe the country is moving toward a double-dip recession, and the adjusted rate, 1.6 percent, is dramatically lower than the original projection.

GDP numbers have been moving downward since December’s robust 5.0 percent, which was only the second positive number in quite a while. But the last two quarters (3.7 percent and 1.6 percent respectively) show the country is economically unstable.

From 4Q 2009 to 1Q 2010, the GDP rate dropped by 26 percent, and from there to 2Q 2010 it dropped 66 percent. The only good news from this is that we are still in positive territory. But if the next quarter’s loss in GDP is even half the size of this one, we’ll be in negative territory once again, and on the edge of another technical recession.

Even staunch Obama supporters and others who subscribe to Keynesian big government solutions ought to be ready to acknowledge that the humongous stimulus has not worked. The economic policies in place since Mr. Obama took office 19 months ago have been successful in only one area: creating tremendous uncertainty among the nation’s businesses, crushing essential job creation.

A dizzying array of new taxes and increases in old taxes now face the American people, from provisions in the health care reform bill to energy taxes in cap and trade legislation and other measures. However, increasing taxes right now – particularly on the energy industry – is foolish, because doing so will have a broad negative effect on economic activity.

Responding to questions about how proposed energy taxes will affect economic activity, Andrew Moylan, Director of Government Affairs at the nonprofit National Taxpayers Union, provided the following answers.

Q: To what degree will tax hikes on the energy industry effect gasoline/natural gas prices and the price of energy produced by oil and gas?

A: “It's difficult to determine exactly how much the impact will be in dollars and cents, but with potential tax hikes of $20-30 billion, it certainly will not be zero. At the end of the day it is consumers that bear the burden of tax hikes, so heaping tens of billions worth in higher taxes on American energy companies just means tens of billions worth in higher energy prices for American consumers. That's never a good mix, but it's particularly worrisome given our extremely fragile economy.”

Q: What are the likely secondary effects on prices of other goods?

A: “Oil and gas are crucial inputs in the broader American economy, which is why price shocks tend to have a cascading effect into other areas of the economy. As an example, let's say we were to raise taxes by $30 billion on American cheese manufacturers. That would be a terrible idea, as it would harm farmers, grocers, and cheese consumers alike. But if you don't much care for cheese, this tax hike isn't likely to affect you too terribly much (with the exception of some minor changes in the prices of other goods).

“That's because cheese is not the lifeblood of much of our economy the way oil and gas are. Walk into any Wal-Mart store in America and virtually everything on the shelves was made or transported with oil. The semi-trucks that fill our highways to deliver those goods are dependent on affordable transportation fuels.”

Q: How will the tax increases affect the way oil and natural gas companies operate?

A: “There's an axiom of economics that says, ‘If you tax something, you get less of it.’ Stated simply: if you raise taxes on American energy production, you'll get less American energy production. If companies do not find it profitable to continue to search for much-needed oil and gas in the United States, it will have a number of effects. These tax hikes will likely lead to oil and gas companies employing fewer Americans to harness our domestic resources. That will harm growth and recovery across a wide swath of the economy. It will also likely lead to more importation of oil from foreign sources, such as Canada, Mexico, or Saudi Arabia, to meet America's ever-growing energy needs.”

Today, one of every 10 Americans wanting to work can’t find a job, and millions more are under-employed, or have simply given up looking for a job. This is nearly 25 percent worse than Mr. Obama said it would be if Congress passed the stimulus bill.

What is needed is to provide stability for the private sector so that it can move the economy forward. But Congress and the administration have instead created havoc in the private sector through big government economic policies that punish business. They don’t have much time left to transform their failed policies into a sensible plan to stabilize the economy and allow a true recovery to develop.

Cross-posted from Observations

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