James Pethokoukis

Politics and policy from inside Washington

Back to recession in 2011? (Even kind of rhymes)

Jun 7, 2010 14:43 UTC

Tax-cut guru Arthur Laffer worries about next year. He attributes the economic rebound this year to workers and business pulling forward economic activity into 2010 to avoid more taxes and regulation in 2011. As he puts it in the WSJ today:

In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe “double dip” recession.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

Me: That is the supply-side version of things. But even Keynesians should worry. Goldman Sachs ran a study awhile back looking at what would happen if all the 2001 and 2003 tax cuts were repealed. As I have written:

Using the respected Washington University Macro Model, Goldman reset the tax code to its pre-Bush status, assumed all tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm see? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. “Absent a tailwind to growth from some other source,” the analysis concludes, “this would almost surely mark the onset of a recession.”

COMMENT

Sub:Appeal to all world citizens.To me world is one country.
Hello Sir/Madam,
Pls do not think its a general recession.Its a tremendous failure of the global administrators(not leaders).They shd not cont. anymore.In global administration only sefless and honest people are required……….and I don’t see any other option.The development and all good things are created by only selfless and honest people,not by those people who are enjoying luxury in unacceptable level.If you pls try to understand what I meant.
thanking you,with kind rgds….Chinmoy Chatterjee from India.

Posted by chinmoy | Report as abusive

Kudlow: Enjoy the recovery while it lasts

Oct 15, 2009 17:41 UTC

The Great One opines thusly:

But storm clouds are gathering. And a big one is the sinking dollar. No one in the Obama administration or at the Fed seems to care about it. In fact, they are probably applauding the lower dollar as a sort of 1970s way of boosting exports and the manufacturing heartland in the Midwest. But the falling dollar is bad for consumers. And it ultimately will cause higher inflation, as signaled by the rising gold price. There also are future tax hikes and the explosion of spending and debt. All of this is why it’s hard for me to be a long-term bull.

The great market boom of 1982 to 2000 was basically characterized by low marginal tax rates and King Dollar. Unfortunately, the 21st century has seen a weak dollar and more recently rising tax rates that are coming due in 2011 (if not sooner). In other words, the prosperity-inducing Mundell-Laffer supply-side model is being reversed.

As Art Laffer put it to me, we are stealing demand and production from the future. So even as we get a V-shaped recovery now and into next year, 2011 may pay the piper for both low growth and higher inflation.

Me:  That is the whole plan here, steal growth from the future. It is the ultimate in wealth redistribution.

COMMENT

Jimmy keep harping on the fact that the govt and FED caused the crisis so how can they possibly be expected to solve anything…it all comes down to TOO BIG TO FAIL really, we need to break up the banks into smaller entities like the 1990s which both DEMs and REPUBs do not want because it it more work fundraising and less easy money for both party campaigns…K street and DC are sick and caused this together with the banks…

Posted by paul | Report as abusive
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