Speech to the Tennessee Bankers Association Meeting
October 24, 2012
The Economic Outlook
I do not need to tell you that the economy stinks. How bad is it? Absent the government sector, negative real economic growth of -0.3 percent. That means that this is the first president other than Hoover with negative growth during his first four years. Yes, the president has a point when he says that he inherited a bad economy. With George Bush the economy grew 6.6 percent. But the president’s policies made it worse. His antibusiness agenda, refusal to compromise by adopting Simpson-Bowles and the Keystone pipeline along with his desire for tax increases and health care are only the tip of the iceberg. Federal spending is now 24% of GDP and growing. Traditionally it is 20 percent. Middle class incomes have fallen by $4,520. Health care premiums increased by $3,000. Only a blind party loyalist would want four more years of this.
Regardless of who gets elected, there is the so-called "fiscal cliff” looming where we have tax hikes and spending cuts of nearly $600 billion of tax hikes and spending cuts set to take effect at the end of the year.
• Payroll tax cut benefiting 160 million workers is scheduled to expire at the end of the year (taking away $1,000 for the average family)
• increase in the taxes of $1.7 trillion under Obamacare
• A typical middle-income family making $40,000 to $64,000 a year could see its taxes go up by $2,000 next year if lawmakers fail to renew a lengthy roster of tax cuts set to expire at the end of the year, according to a new report.
• Taxpayers across the income spectrum would be hit with large tax hikes, the Tax Policy Center said in its study Monday, with households in the top 1 percent income range seeing an average tax increase of more than $120,000, while a family making between $110,000 to $140,000 could see a tax hike in the $6,000 range.
• The increases would total more than $500 billion -- a more than 20 percent increase -- with nine out of 10 households being affected by the expiration of tax cuts.
• Taxes would rise by more than $500 billion in 2013 -- an average of almost $3,500 per household.
• $109 billion in automatic spending cuts scheduled to take effect in January
Cumulatively, the country would see a 5 percentage point jump in its average tax rate, which works out to taxes on the top 1 percent jumping by more than 7 percentage points and about 4 percentage points for most people earning below $100,000 a year.
Put another way, people in the $40,000-$64,000 income range would see their average federal tax rate jump from 14 percent to 17.8 percent -- or an increase in their overall federal bill of 27 percent.
All told, almost 90 percent of all households would face a tax increase, though the top 20 percent of earners would bear 60 percent of the overall cost. Across all households the tax increases would average almost $3,500.
The new top rate of 39.6 percent would kick in for income over $397,000. The current top rate is 35 percent rate.
What will this portend for the economy? The Congressional Budget Office said in August that this would cause a 0.5 percent contraction in gross domestic product next year, triggering a recession.
If postponed the consensus of business economists is that the U.S. economy will likely expand 2.4 percent next year, up from projected growth of 1.9 percent in 2012.
The Federal Reserve analysts projected that the unemployment rate would stay near 8 percent through 2014 having downgraded its forecast.
Federal Reserve Chairman Ben Bernanke said "I suspect that the fiscal issues may be part of that."
I suspect that he may be right in the short run. But in the longer run, the irresponsible disregard of the Fed for the value of the dollar may be more significant.
Regardless, if Romney is elected - sell your gold.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com