Sunday, May 23, 2010

So Much for the V Shaped Recovery

Obama's policies have effectively killed off any chance of a normal "v-shaped" recovery for the US. There are several Obama engineered headwinds for the US economy:

1) The problem of credit: several Obama initiatives have created severe problems for lower income and middle income Americans who seek credit, both retail credit (credit cards, debit card, etc.) and mortgage credit. This lack of credit will show up in retail sales. Small businesses have been especially hard hit by the Obama credit restriction programs. In no recovery period in US history has there been such a concerted effort by a political party to close down credit facilities crucial to small businesses, vital for economic recovery. The policies behind these restrictions are "reforms" of credit card lending, debit card regulations, and the new financial regulation bill soon to become law. As if these credit-destroying initiatives were not enough, the Obama Administration is quietly pushing bank regulators to crack down on business lending, especially lending to small businesses.

2) The problem of "toxifying employees": by sponsoring legislation that makes employees more expensive, the Obama Administration and the Congress have made employees toxic. Who wants to spend $ 50,000 to hire a $ 30,000 employee? The answer: hardly anyone. By adding significant employer financed mandates (including the health care monstrosity) and increasing employer liability (for things that employers cannot control), the Congress has created a huge cost per employee even if that employee worked for free. This means a significant drag on hiring and a permanently higher level of unemployment. The impact on low income workers and minorities will be the most severe. Watch unemployment rates for the most disadvantaged among us to be sky high and permanently so.

3) The destruction of the financial service industry: some of this is being accomplished by the demonizing rhetoric of the White House and especially the partisan and extreme rhetoric of the President himself. He will become known as the "great divider"). Obama cannot resist slamming the business community and the financial service industry in particular. But the FinReg bill (expected to become law within a few days) is the real killer. This bill permanently enshrines "too big to fail" as the cornerstone of US regulatory policy. This moves us in the direction of the old state-run banking regime that characterized China during the it's pre-capitalism years. The White House and the Treasury are authorized by FinReg to pick winners and losers among commercial and investment banks and to direct the flow of capital as they see fit with no checks on Treasury and White House powers to intervene in the financial service industry. Obama seems to truly despise capital creation activities and private enterprise. This means the financial service sector will retrench and the international center of finance will, within the next generation, shift to Asia, where the political climate is significantly milder and friendlier to the financial service industry. All of this will further inhibit the economy's chances of an economic recovery.

4) Finally the prospect of huge tax rate increases across the board (middle class Americans will face much, much higher tax bills, even the poorest among us) will act as a brake on capital formation and entrepreneurial activity. Rich folks will simply shift their assets around so that they can avoid paying the new, higher tax rates (that's why Buffett and Gates don't mind higher tax rates -- they won't have to pay them). This means no real momentum for an economic recovery.

Normally, had the government simply done nothing, we would probably be looking at six to eight percent GDP growth rates and an unemployment rate around 8 percent and declining. Instead, we face a serious chance of a "double dip" economy where the growth in GDP could slip back into negative territory in either the third or fourth quarter of the year. Unemployment rates will probably head into double digits and stay there through much of the latter half of 2010 and much, if not all, of 2011. This will will be the direct result of the Obama agenda.