Wednesday, November 05, 2008
The reasons are these:
1) Obama, Pelosi and Reid have substantially similar ideas about energy. Early next year they will raise the gas tax, and under the new administration most realistic energy projects will not be approved. Instead, the unrealistic stuff will get a heavy economic subsidy. I looked into three countries that have done this (Germany, Denmark, and the UK). In each country, the result was much higher energy costs to consumers and businesses, and that's without figuring in the subsidy. The strongest upside in the current economy is declining energy prices, which would have, within a year, helped many consumers to repair their household finances somewhat. The offset to the direct costs was the lag in utility price increases, and between that and such measures I expect energy costs to consumers and businesses to rise again by sometime next year. The Democratic Congress will substantially reinstitute the offshore drilling ban. Crude oil prices will begin to rise almost immediately on speculation over these policies. As a direct result of Obama's election, I am expecting crude prices to move from the $60s to the $80s by the end of the year.
2) Protectionism. (See CarTrade roundup, Balita's coverage of Powell's Hong Kong speech today.) China is already making noises about this. Carbon cap and trade are either domestic economic suicide or protectionism. I think the new administration will opt for protectionism. There appears to me to be an exceedingly sharp correction taking place in China right now. The effects of protectionist policies on world trade will be ugly.
3) There is no way that taxes can be cut significantly for most households. Capital gains taxes and taxes on dividends and interest will be raised next year. Since a lot of those proceeds are tied up in 401Ks, those taxes won't raise that much. Corporate tax increases are very possible, but corporate profits are dropping rapidly enough that total corporate tax revenue will continue to drop. Thus the pressure to raise revenue for other projects will be fierce. That's the reason for the Democratic proposal to basically raid the 401Ks. I don't think this is viable, but I do think that they will figure out some way to get a percentage off them. Probably the minimum would be something like the proposal to eliminate the tax break on contributions, but that would only bring in about 40 billion in new revenue a year. If Congress were to tax interest and dividends on those 401Ks, they'd make much more, and I expect an attempt to do this somehow.
4) The plight of older workers now losing their jobs is pretty dire. Many more of them will be taking early Social Security than would otherwise, because if you are a 63 year old who has lost your job, you have very little chance (perhaps 1 in 10) of getting another which carries health insurance in this climate. If you had health insurance you have to pay the full cost. This is going to be a terrible problem for older workers. This movement will bring forward the Social Security crunch. Thus the budgetary position will worsen more rapidly than expected, which is why I do expect some form of number 3 to pass. Medicare is already in the red; by 2012 Social Security will be in the red unless the income cap for taxation is removed, which would add 3.65% to taxes for higher income workers. They will probably do this in two years. The only other alternative is to somehow tax no AMT munis.
5) The result of energy proposals will be to sharply raise inflation in the US again.
6) The high inflation rate (much higher for lower-income individuals than the official rates) has eroded the standards of living of lower-income people very rapidly over the last three years. The food banks are running out of food, and utility cut-offs keep moving higher. Therefore we will need to spend ever-increasing amounts to subsidize lower-income retirees and workers. We're not going to get it from corporations, so we are going to have to get it from individuals.
7) FHA is going to go broke pretty quickly! What happens then?