US citizens pay their annual income taxes on April 15. About the only good news is that tax rates remain low — both the payroll tax that supports social security (pensions) and the federal income tax were extended at lower rates for 2011 and 2012. However, those taxes are both scheduled to snap back to higher levels in Januar 2013, just as cuts in federal spending are mandated to take effect. The combination of higher taxes and lower federal spending will give a 1-2 punch to the US economy in eight months (dubbest “taxageddon” by Congressional staffers).
This combination, which has the virtue of bringing the US government budget closer to balancing, would be a good thing and manageable if taxpayers had recovered from the Great Recession. But they have not. Earnings are flat, and if the tax cuts of 2010-2012 are withdrawn, average after-tax income will fall back to the level of 1998!
At the same time, growth elsewhere in the world remains scarce or absent. The Financial Times/Brookings Institution tracking index declared that the world economy was “still on life support” as of mid-April (see: http://www.ft.com/intl/cms/s/0/c2ce65a2-858f-11e1-90cd-00144feab49a.html#axzz1s9YYJft5). In China and India growth is falling to lower rates than in the past decade, Brazil and Turkey have to tame inflation, and Europe’s austerity policies are driving it back into recession (with borrowing costs rising again for Spain and Italy).
If it needed driving home, all of this underlines the point that Rogoff and Reinhart have been making ever since the great recession started — that this is a classic financial speculation crisis (not a normal business cycle recession), and recovery may take up to a decade.
There is a silver lining, however, and that is that in America such crises have given rise to a bout of progressive legislation that helped restore the balance between corporations and labor/consumers. After the excesses of the Gilded Age in the 1890s, the Panic of 1893 created a long slump, and after 7 years the Progressive Era arrived with trust-busting and financial regulation. After the Roaring 20s, the Great Depression began in 1929 and led to the New Deal in the latter half of the 1930s. As these examples show, the US doesn’t move immediately from economic crisis to progressive legislation — because the first response is for the business community to demand long and loud that they need to be unshackled to lift the economy out of its slump and restore jobs. However, in both the 1890s and then in 1929-34, tax and financial actions designed to help big business did nothing to restore jobs, and after years and years of slumping employment, people demanded government do more to help workers and consumers.
So far, over 90% of the gains from recovery measures since 2008 have gone to the top 1% of US earners. That too fits the pattern of the earlier crises. So I expect that by 2013 or 2014, in a second Obama administration if employment is still at 8 percent or so, that people will demand an end to Republican obstructionism and more progressive financial and social legislation. If I’m right, the key election will not be 2012, which Obama should win easily, but 2014, when Obama will be seeking a restructuring of Congress that will let him make the changes people will want.
Of course, progress will have to be made on reducing entitlements — I expect a grand deal to include something like much higher taxes on top earners, slightly lower taxes on corporations, and some increase in middle-class benefits/tax deductions now in exchange for reductions in social security and medicare payments in the more distant (after 2020) future. But that is looking rather far ahead; the count-down now is to taxageddon in 8 months. Let’s see how we handle that…