Get ready for 35% unemployment

Original article here

“Some are asking, “Can America survive?” The answer to that rests not in the lap of government, but in the hands of the American people.

According to the economic soothsayer you choose to believe, the US economy will continue to limp along, is headed for a ‘double-dip’ recession, or poised to plummet into the turbulent depths of the Third Great Depression.

“We find the level and direction in jobless claims somewhat troubling and the increase is likely to feed double-dip fears,” said John Ryding, an economist at RDQ Economics in a note to clients.

Yet no matter whom you choose to agree with, it’s obvious that economists at both ends of the political spectrum agree the US economy is in shambles and that the bright light at the end of the tunnel may well be an approaching freight train, loaded with dynamite.

Major train wreck

The economy of the United States has never been in such bad shape.

From the monetary crisis of the early Republic that Hamilton addressed, to the banking scandals of the 19th Century, the Great Depressions of the 1880s and 1930s, or the mounting debt in the years of Jimmy Carter’s stagflation, no period of US history has experienced the confluence of economic forces that have coalesced to create the proverbial perfect storm.

None, that is, until now.

Liberal economist Krugman’s anger

Paul Krugman is angry, or perhaps livid is a better word. Recently the renowned economist penned an OpEd piece for the New York Times. In the article he outlined his thoughts on why the US economy is headed for the Third Great Depression and launched a scathing attack on the policies of the Obama administration. He condemned the lack of focus and half-hearted fixes.

Other economists from diverse political camps agree. They too see the US economy continuing its freefall into financial oblivion. They assert that the policy coming from Washington is driving the country into long term financial ruin.

While fixes are available, the political temperament does not seem to exist to implement a turn around. Failed policies are followed by failed policies. “Tens of millions of unemployed workers…will never work again,” Krugman gloomily predicts.

“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost–to the world economy and, above all, to the millions of lives blighted by the absence of jobs–will nonetheless be immense.” [1]

But Krugman’s vision of a Long Depression pales by comparison to the potential firestorm of debt looming in the years ahead. It’s a debt that the apolitical Office of Management and Budget calls “unsustainable.” For while the budgetary deficit is projected to surpass the entire GDP of the US by 2014, the unfunded long term debt driven primarily by Social Security and Medicare/Medicaid is now seen to be a mind-numbing 100 plus trillion dollars by 2040. That astounding figure incredibly surpasses the entire world’s GDP. [2]

Conservative economist Laffer’s warning

From the other political camp comes the equally bleak picture. Arthur Laffer has analyzed the direction of the federal government over the past two years and hears alarm bells going off. The savvy economist, an advisor to Ronald Reagan and creator of the famous “Laffer Curve” economic model has studied the potential impact of the historic debt, an economy hovering just above a depression, and the building pressure to raise interest rates when inflation rises in the future, and compares the current ship of state to the Titanic.

“Today’s corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market,” writes Laffer in the Wall Street Journal article, “Tax Hikes and the 2011 Economic Collapse.” [3]

Laffer calls attention to the one thing that has kept the economy partially afloat, as poor as the economy has been: the Bush tax cuts. When they expire (on January 1, 2011), “federal, state and local tax rates are scheduled to rise quite sharply.” Dividend tax will skyrocket from 15 percent to a whopping 39.6 percent, the capital gains tax will increase 25% and the estate tax will jump from zero to 55 percent.

These taxes—a triple whammy to the economy—will serve to further depress business growth and hiring, depress real estate further and add an even greater burden on the ability of the consumer to spend discretionary income, which will sink like a rock. To all that must be added the re-introduction of the infamous “marriage penalty” that could lead to more home foreclosures. [4]

If all that is not bad enough, tax rates will be raised further on income earned outside the US, payroll taxes will rise in 2013 squeezing the middle-class wage earner more, the alternative minimum tax will affect people at lower income levels and taxes are scheduled to be imposed on so-called “Cadillac health care planes.”

As Laffer puts it, “State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.”

Because the economic future is filled with taxes almost everywhere one looks, much of the capital and spending activity has been shifted from 2011 and is occurring this year, 2010. This is to avoid the coming squeeze. Laffer believes the evidence is strong that the slight rebound in the economy is solely due to the shift from 2011 to 2010. ” …the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010.”

Taxes: Hammer into anvil

The philosopher Johann Wolfgang von Goethe once observed that “You must either … be the anvil or the hammer.”

In the case of the current US economy the anvil is the American corporate and individual taxpayer and the government at the federal, state and local level wields the iron hammer: taxes.

The revered judicial philosopher Judge Billings Learned Hand once stated that the government has the power to destroy. No where is that power more vividly seen than the intention to tax (and thus effectively inhibit) Americans’ ability to create new wealth to pull out of the economic tailspin.

When the much maligned Bush tax cuts expire on January 1, 2011 the financial markets will be gutted, the ability to raise new capital will wither, and home foreclosures will accelerate. [5]

As the so-called recovery fizzles, the debt spirals upwards and consumer debt default spirals out of control, many real estate experts are preparing for the coming shocks of accelerating foreclosures.

Although some point to foreign money arriving to bolster the US real estate market, such as the recently published numbers revealing that real estate bargains in Florida are being snapped up by Canadian buyers–and 55 percent of them pay cash, eschewing any mortgage commitments–foreign investments and capital cannot save the US economy in the end as starting in 2011 the US will have the highest corporate tax rate in the world.

It is an irony, however, that a socialist state like Canada that has a relatively weak economy, now has a currency in parity with the dollar and is considered one of the world’s stronger economies.

Such an irony is endemic of the crisis in the US economy and bodes ill for America’s chances to pull itself out of its current death spiral.

‘Sovietized’ Detroit the future face of America?

Modern day Detroit is reminiscent of the bad old days of East Berlin. The shell-shocked city has been in a depression for years and the current unemployment rate in some sectors is over 60 percent–a statistic only whispered at politically elite cocktail parties and then only after a second or third shot of Jack Daniels.

According to which demographic one chooses to analyze, the current unemployment rate in America varies by region, age, skill set and race. The highest unemployment rate racially is among young, undereducated blacks at 55 percent. The construction industry is hovering over 45 percent, younger people in general (under 30) are running at about a 25 to 30 percent unemployment rate–again, depending on the numbers you are willing to believe.

And that’s part of the problem. The unemployment rate numbers are being massaged and spun so much it is difficult to get a clear picture of just how many people are actually unemployed, especially when it varies significantly between group to group, state to state and city to city.

It is safe to say, however, that a consensus of experts tends to agree that the real rate–when factoring in those collecting unemployment, those that have dropped off the government unemployment role statistics, those that are underemployed or have just given up seeking employment–is at a whopping 18 percent nationally.

Fears among some analysts now are that between 2011 and 2012, the actual unemployment and underemployment ranks will swell to a mind-boggling 35 percent … one-third of America’s able workforce.

Government policies a prescription for failure

650,000 more workers have given up and ceased looking for employment. They have dropped off the unemployment roles.

But the private sector is not the only part of the economy taking a hit as mandatory layoffs are skyrocketing in the public sector too. The state and local governments are reeling as they scramble to stop the hemorrhaging of red ink and find a way out of the Kafkaesque system they created with state and local pension plans and unionized guarantees. The in the worst trouble are Nevada, California, Illinois, New York and Michigan with a slew of others close on their heels.

More here, including footnoted sources