Jeff Bone's nightmare is that a Democratic Congress with Obama as
will raise the marginal income tax rates to 40% or more, precipitating
an economic catastrophe.
To be clear, that's *not* my nightmare scenario. Raising the marginal
tax rates to 40% or even a bit higher is *by itself* unlikely to
precipitate an economic catastrophe. Here's the basic nightmare
Obama is elected and promptly collaborates with the Democratic
Congress, without any legislative checks, in implementing a VAST
amount of new spending that increases the governmental burden on the
GDP by an absolute minimum of 8% of GDP, but more likely greater than
10% and possibly approaching 20%. Among these promised "changes" we
implement a nationalized health care system that will ultimately
reduce profit incentives and accelerate the flight of drug companies
offshore and stifling innovation and new (domestic) medical market
creation dramatically, among other things reversing the gains in
survivability for e.g. cancer that we enjoy relative to the rest of
the world. In addition we'll see taxation used punitively in the form
of "windfall taxes" levied against oil companies and others, further
accelerating the flight of business offshore. All of this will
trickle down and, 12-18 months after the first crises hit larger
companies, we'll start seeing record amounts of small business failures.
Along with all of this new spending, which will by itself reduce
productivity (as those dollars will *not* be circulating through the
capital markets and small businesses) we will get a metric assload of
new regulation, which will be the nail in the coffin; SarbOx by
itself is to blame for the second quarter of '08, the first in over 30
years without a single venture-backed IPO. But that's going to be a
cakewalk compared to what the interventionist regulators want to do to
the financial markets. With an almost immediate doubling or more of
market regulation --- initially intended to "curb" oil and energy
speculation (as if that's a bad thing for prices!) --- this will
quickly get out of hand. The financial markets will react as expected
by anyone with any understanding and common sense: they will crash,
wiping out trillions of dollars of wealth in short order and
jeopardizing the private sector retirement holdings of tens of
millions of individuals.
The leftist Congress will claim this as proof that markets cannot be
relied upon to provide a social safety net, and further unsustainable
promises (and increases to existing entitlement promises) will be made
--- swallowing still more of the GDP.
Energy costs will skyrocket as the dollar plummets further against
foreign currencies, and the built-in transportation and other energy
costs will start to precipitate real problems for businesses driven by
logistics. Food shortages for non-local food goods will be
commonplace, and restaurant closures will mount. When energy costs
get high enough we'll start to see the failure of larger grocery
chains, but the local grocer and / or food co-op will benefit from
this. Net-net, though, within a couple of years the pro rata part of
every household budget devoted to food and energy costs will rise to
dwarf discretionary spending, causing failures among businesses that
cater to the latter. Finally the costs will rise far enough that it
will put significant pressure on the level of e.g. mortgage spending
that is sustainable, and we'll see a wave of mortgage failures and
foreclosures that makes the last 12 months pale in comparison. That
will then precipitate a secondary wave of failures among financial
institutions, which will create the final panic that drives us into
deep and prolonged economic crisis.
The Congress will respond to escalating price levels by mandating wage
increases and restricting the freedom to hire and fire - further
depressing the ability of business to get the job done --- and by then
we will be firmly embedded at the base of a hyper-inflationary curve
which itself will further impair our ability to compete in the global
market for needed resources. Outright price controls probably aren't
far behind; gas rationing for private citizens is inevitable at this
point. The further inevitable airline failures will likely force the
Congress to react by nationalizing the airlines, and domestic flights
will quickly fall to a fraction of the current level.
By this time job losses will have mounted to historic levels, massive
amounts of wealth will have been destroyed and / or moved offshore,
the GDP will be in the toilet (at a time when GDP elsewhere is
improving rapidly, further marginalizing our effective pro rata of
global wealth) --- and the term "Great Depression" will be getting
knocked around... and it will be too late.
Tax policy alone is not what precipitates this; it is a confluence
general ideas, attitudes and plans that infect the ascendant left wing
of today's Democrat party. Just as surely as the centrist and pro-
market attitudes of the Democratic Leadership Council moderated the
leftism of the party in the 90s and encouraged / allowed the historic
gains of the 90s, so the recycling of discredited, antique ideas
("change" -- yes, back to the policies that brought us the New Deal
and the Great Society) that are resurgent in today's party jeopardize
The danger is the intersection of increased spending; increased
meddling in markets and a generally positive attitude about central
planning and regulation; a general antipathy towards "speculation,"
investment, market solutions and capital; complete naivete about
economics and finance and the chaotic, interconnected "ecosystem"
nature of the market; and an unrealistic optimism about the
effectiveness (much less appropriateness) of governmental solutions.
These things in combination with an economy already weakened by
general American imprudence and the bad policies of the Bush
administration are, collectively, a recipe for economic disaster of a
scale that the world has never seen before.
I should note that this isn't, actually, the final nightmare
scenario. Financial crises precipitate dramatic social unrest; in
the ultimate nightmare scenario all the above is merely a backdrop
which acts to encourage vast social upheaval, including the not
unlikely possibility of a complete revolt of the radical right wing in
an attempt to free its adherents from a mindset they find not only
abhorrent but sinful. The Dominionists, claiming that Obama is the
Antichrist, might then seize the moment --- and we would then have a
*multiparty* civil war. Millions would perish and the American
republic might be lost forever.
There are limits to both nightmares. The American economy will
depression, and scientific and technical progress continues even while
You can't assume that. While it's likely, in a time when increased
global technology and competition is bringing 2.5 billion new and very
capable people into the mix, you can't assume that we will bounce back
to anything like the present level in terms of average quality of
life, as this is *deeply* predicated on energy budget per capita, and
our ability to continue to consume 25% of the energy resources (with
only 3% of the reserves and < 5% of the population) entirely depends
on our fundamental economic strength. If we fall off the curve
dramatically, there's absolutely no solid argument why we must or will
get back on it.
As I've said, I don't believe the above is a foregone conclusion; in
fact, it's less likely than not, though more likely with an unchecked
balance of power. The economy *is* an ecosystem and ecosystems are
often surprisingly resilient. I believe the likelihood of the proper
insults being delivered to the system, in the right degree and order
to precipitate the above, is about 1/3 with a Democratic trifecta.
But given the potential for even a diluted form of the above, that's
far higher than I'd like.
Given that a GOP-Dem-Dem configuration of Executive, House, and Senate
prevents the above while it does *not* (as Russell has admitted)
ensure that SCOTUS contamination --- as the Senate can still block any
truly objectionable appointments --- I find it far less dangerous and
irresponsible than the alternative.