In the days when it was still necessary to explain to one's parents just what an economist does, my first job was to crank out a forecast of economic activity in the coming quarter. Get it wrong often enough, and you were gone. More senior employees assigned themselves the longer-term outlooks: their forecasts would be long forgotten by the time actual data became available.
That was then and this is now. So I will exercise the prerogative of seniority and shorten my comments on the current economic outlook to make room for a longer-range look at the post-Obama world in which we Americans will be living.
Green shoots continue to sprout. The supply of homes for sale dropped; banks have survived the stress tests in better shape than many feared and are going about the process of raising any needed capital; even traditionally cautious European Central Banker Jean-Claude Trichet thinks the global economy is starting to recover; the Organization for Economic Co-operation and Development (OECD) says several of the world's leading economies are turning up; Paul Otellini, CEO of recently fined Intel, says demand for computer chips has bottomed out; spending on technology has stabilized; Honda is ramping up its auto production a bit.
But, as usual, there are counter-signals: continued falls in house prices, weakness in the labor market, an impending wave of defaults on commercial property loans, and heaven-only-knows what Congress might concoct.
Longer-term, there is little doubt that we will be paying more for energy. On Wednesday Democrats in the House agreed on a cap-and-trade system that will put a price on CO2 emissions, a cost that will be passed on to consumers in the prices of electricity and other energy sources. Agreement was reached when the bill's enthusiasts bribed recalcitrant congressmen with free pollution permits for important constituents in the utility, oil and other industries. Which is too bad: cap-and-trade is a woefully inefficient way of imposing emissions costs on polluters. Experience in Europe shows that the price of permits fluctuates so wildly that potential producers of renewable energy aren't given a target against which to compete. A solar or wind installation that might make economic sense when users of coal have to pay $40 per ton for a permit, is uncompetitive when the price drops to $10, as it has done.
Energy costs will also be driven up indirectly, in a way concealed from consumers. We will pay higher taxes to cover the costs of the subsidies being lavished on solar, wind, ethanol and other parts of the energy economy by environmentalists. Or, in the case of ethanol, by politicians who equate ethanol with corn, corn with Iowa, and Iowa with the first presidential primary in 2012. Throw in the costs of a "smart grid" and all of us, especially those who have been stockpiling incandescent electric bulbs so as not to be dependent on the dangerous, malfunctioning and costly energy-saving fluorescents when the US outlaws incandescent bulbs in 2014, will pay more.
We will also end up paying more to borrow than we would have paid before the government decided that contracts are made to be broken. The Obama administration demonstrated in the Chrysler bankruptcy that it has no regard for the contracts that have in the past protected lenders who made their money available on the assumption that they would have a preferential claim on the borrowers' assets. Nor does it believe that contractual compensation arrangements should withstand a raised eyebrow in the White House or a raised voiced in congress. This weakening of the sanctity of contracts increases lenders' risk, and higher risk means a demand for an offsetting higher interest rate. George Will, writing in the Washington Post, notes, "The Obama administration is careless regarding constitutional values and is acquiring a tincture of lawlessness . [It] thinks contracts are written on water."
There will also be a major change in the structure of the financial services sector. New regulations will have a greater effect on institutions that create systemic risk than on smaller, below-the-radar enterprises. So the best and brightest will leave the job of second-vice-presidential-assistant-to-the deputy-risk-manager to the more bureaucratically inclined, and set up shop on their own. Or seek other outlets for their entrepreneurial urgings. One of the few pleasant unintended consequences of new regulations.
We are also certain to see the portion of our pay that we actually get to take home decline significantly. The debt that Obama is running up will have to be repaid. Already, there are grumblings in the market about the future of the dollar, with the Chinese not the only one of our creditors worrying that we will inflate our way out of our obligations. Run the presses, make dollars cheaper, and use the debased currency to repay debts. Former Comptroller General David Walker believes that we are in danger of losing our triple-A bond rating:
How can one justify bestowing a triple A rating on an entity with an accumulated negative net worth of more than $11,000bn [$11 trillion] and additional off-balance sheet obligations of $45,000bn? An entity that is set to run a $1,800bn-plus deficit for the current year and trillion dollar-plus deficits for years to come?
But inflation is not the only possibility. Instead, politicians, remembering the fate of Jimmy Carter when he allowed inflation to climb towards 20 percent, will try to restore fiscal sanity by raising taxes. Harvard economist Martin Feldstein, who supported the president's stimulus package, puts the needed tax increase at $1.1 trillion over the next decade; the International Monetary Fund puts the figure at $1.9 trillion, a sum the magnitude of which is better understood when written as $1,900,000,000,000.
After all, Congress won't be able to cut spending. Obama's drive towards a trillion dollar health-care tax-funded system seems to be irresistible. Drug companies will go along so they will be relieved of the cost of subsidizing lower-income folks' prescription drug needs. Insurers will go along because the law will require everyone to take some sort of coverage. Employers will go along so they can shift the cost of employee-benefit plans to taxpayers.
So higher taxes are in our future, as is the inevitable queuing with which patients in Canada and Britain are familiar, examples being cited by Obama's critics in television ads aimed at rousing voter opposition to his program. Polls show that most Americans are satisfied with the quality of their health care; they will be shocked at what happens to that quality. But like so much of what Obama is pushing through Congress, this "reform" will prove irreversible.
Finally, there are the cars we will be driving. It is difficult to predict whether the government will be able to prevent auto makers from producing the big, comfortable, safe cars consumers prefer, and shoe-horn them into smaller, European-style vehicles. But the greens and the peak-oil crowd will give it a good try.
Where is the outrage? Certainly among hedge fund operators vilified by Obama, the wound all the deeper because these same folks poured tens of millions into the Obama presidential campaigns. (One can forgive Hillary Clinton and John McCain their I-told-you-so smiles.) Perhaps among hard-working risk-takers who are upset by the president's distinction between "workers" and "families earning more than $250,000 per year". Perhaps, and if polls are to be believed, only perhaps, among the mass of voters worried about the rising debt burden faced by their children. We won't know until next year's congressional elections.
Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD and the editor of First Things.
By Irwin M. Stelzer
Reprinted with permission from The Weekly Standard