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The Economy in 2015 Might Shock You ^ | November 19, 2012 | David Sterman

Posted on 11/19/2012 7:44:40 AM PST by Kaslin

In the summer of 2015, either one or both political parties will begin the search for their next presidential. By that time, the whole tenor of political positions will have sharply changed.

At least, we can only hope so.

That's because our economy is unlikely to handle three more years of gridlock, which keeps us stuck in a phase of higher government spending and shrinking revenue. Any day now, the ever-rising mountain of debt will need to be addressed. In the face of inaction, the bond market will have spoken by 2015 anyway, as "bond vigilantes" force the government to get a grip on the never-ending deficits.

Let's hope it doesn't come to that, but just in case, you need to be prepared.

Right now, we have a pretty clear read on the broadly-staked positions of the Democratic Party. Yet signs are emerging that we'll see a bruising battle for the heart and soul of the Republican Party. How it plays out will help shape what the U.S. government looks like in 3-4 years.

Make no mistake, the ascent of the tea party in 2010 followed by the Republican Party's defeat in the Presidential Election (along with key Senate races) in 2012 will likely set up a pitched intra-party battle in early 2013. Already, signs are emerging that more moderate members of the GOP have hinted at a willingness to compromise with their Democratic counterparts in addressing the coming "fiscal cliff" and longer-term budget repairs. Until now, almost every member of the GOP has voted in line with the party platformWhat it means If you buy into the logic that our budget deficits will have to be addressed and if you believe that bipartisan compromises will be the only way to achieve that, then we already know how some of this will likely play out...

1. Defense Spending
For example, defense spending is bound to shrink, though not nearly at the draconian rate that the current fiscal cliff scenario envisions. President Obama appears committed to increasing defense resources for the Asia/Pacific region, especially in terms of naval strength. By definition, this means a reduction in ground forces elsewhere, and a cutback in other forms of hardware. The Amex Defense Index seems to ignoring this looming change in defense spending.

2. States begin to suffer (again)

Early in his term, President Obama sought to help out the 50 states, many of which were facing drastic revenue shortfalls. The salaries of teachers, police officers firefighters were temporarily supported by federal grants -- yet the notion of further support for states has become anathema.

Even as states have started to plug budget gaps through widespread layoffs and slowly rebounding tax receipts, there's more pain on the horizon. Unless we see significant reworkings of public sector labor agreements, especially in the area of health care and pensions, then state-level finances will only worsen with time. In the absence of federal support, the culling of local and state labor forces is bound to continue.

3. Obamacare's effect in full view

In terms of health care, the recent decision by the Supreme Court to uphold the key tenets of the Affordable Care Act is just a step in the process. Containing total health care spending while expanding coverage is a lofty goal, but many changes are likely to be made along the way until we get it right. This likely means even fewer dollars per patient when it comes to drugs, devices, home care services, hospital stays and other health care items. If you own the stocks of health care companies, then you need to figure out if they will be more useful or less useful in world where every cost comes under pressure. [For my take on this, read this article.]

As this chart shows, Japan spends roughly half as much on healthcare as we do, yet arguably has superior outcomes (in areas like longevity and infant mortality). Though this chart is from 2009, little has changed since.

4. Deductions down, taxes up

Perhaps the biggest changes to come involve the tax code. Right now, many are focused on the possible extension or elimination of Bush-era tax cuts. It looks increasingly likely that taxes -- at least for the wealthiest Americans -- will be going up. Conservative economists such as Bruce Bartlett and David Stockman who have worked for past Republican Presidents now concede that prolonging our fiscal crisis by extending tax cuts on top earners starts to become detrimental for the economy, which greatly affects the "investment class."

Yet even a return to the tax rates of the Clinton administration won't simply close out budget gaps -- even if government spending shrinks. That's why a wide range of tax deductions will eventually be on the chopping block. By eliminating deductions, politicians can essentially claim that they didn't raise tax rates.

For example, it's hard to see how deductions for mortgage interest and charitable giving can survive any budget fix. These deductions may get preserved to an extent, but are likely to be trimmed to some degree.

And we're not just talking about individual income taxes. Both parties have taken note of the fact that U.S. companies face some the highest tax rates in the developed world, and a drop in those rates could boost corporate effectiveness. To achieve that, both parties have expressed a willingness to trim tax deductions so that major corporations such as GE (NYSE: GE) no longer get away with an effective tax rate of 10% -- or less. In effect, the stated tax rate for all corporations may go down, but total tax receipts from corporations are likely to go up.

5. National sales tax?

With a tax code larded up with deductions, the reality is that many Americans end up paying a lower tax rate than they realize. And although many members of the GOP are loathe to raise taxes, they would like to see a simplified tax code. However, the goal of reducing the overall tax rate to just a few basic categories may still end up expanding our budget mess.

Yet some of these same legislators have suggested a reasonable fix: tax consumption.

By adopting a national sales tax (known as a Value Added Tax or VAT in other countries), the government could raise revenue without hiking income taxes. Using's platform as an example, "every person living in the United States pays a 23% national sales tax on purchases of new goods and services. This rate is equal to the lowest current income tax bracket (15%) combined with employee payroll taxes (7.65%), both of which will be eliminated."

That's a pretty stiff VAT rate -- even higher than what is seen across Europe, and would surely raise the hackles of any consumer-facing business. If we are to get a VAT, then it is likely to be closer to 5%, and other income taxes would stay in place (and not be eliminated as these folks suggest).

Yet the appeal of a VAT is undeniable. Taxpayers would benefit from a less complex tax code, and the ability to cheat on taxes would be reduced.

Grow our way out of it?
Both parties may have been dragging their feet in tackling these tough choices in hopes that economic growth would help save the day. After all, a rising economy in the 1990s helped bolster government tax receipts to the point where a chronic deficit briefly become a surplus. That's unlikely to happen these days for the very simple reason that the budget mess is partially responsible for the uncertain economic environment that is leading to tepid job creation.

Washington can't sit and wait for things to get better. The large budget deficits have been a concern for almost a decade now, and every year, the can has been kicked down the road. Yet it's impossible to see how this can last much longer. That's why we'll be talking about a different set of issues by 2015, when the next election season rolls around. By then, we'll have already been forced to make major changes -- which by definition mean higher taxes and a smaller government. That's a Solomonic solution that few will relish, but is nearly unavoidable.

Action to Take --> The concern isn't simply that taxes will go up for those that already feel over-taxed. Or that the government's support of a wide range of programs will sharply erode. Instead, it's the actual effect of a change in the tax-and-spending dynamic on the economy and stock market.

Though persistent budget deficits have many harmful effects on our future economic competitiveness, they provide a clear boost to the economy and the market in the short term. Think about it... A government that spends more than it takes in is adding liquidity to the economy. In recent years, we're talking about hundreds of billions of dollars of liquidity.

Yet a move to raise taxes and shrink spending does the opposite. It sucks money out of the economy. Of course, eliminating budget deficits simply moves the government into a neutral posture. But our total government debt is so high that this neutral posture may not last. Instead, the government will eventually be forced to reduce our massive debt, which means running a government surplus--which pulls money out of the economy. That was manageable in the late 1990s when the economy was on a robust plane of growth. But today's politicians -- nor the ones who will be pondering a run for the White House in 2015 -- will likely be operating in an environment of robust growth.

TOPICS: Business/Economy; Culture/Society; Editorial
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To: Kaslin
No need to worry about 3 more years of gridlock. Boehner is about to get rolled!

21 posted on 11/19/2012 8:50:13 AM PST by Buckeye McFrog
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To: All

Folks are still asking,”How did Obama win the election with such a bad record the past four years?” He gave away the store, money, food phones, free entrence to the country, free schooling, you name it. How...?? Whose money did he give away and how, since the House of Represenatives is supposed to handle money?? If he did take power this way, how long will it last, and is this debt piled on debt?? Please someone, give an answer that makes it sound reasonable!! I’m not asking about what is coming down next, just how he won by giving away almost everything (we have, earn, own, and work for)!!

22 posted on 11/19/2012 8:55:53 AM PST by cousair
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To: Kaslin

he kenyan’s party controls the vote count. It doesn’t mater even a tad what bobdole the Republicans cough up in 2015.

23 posted on 11/19/2012 9:11:39 AM PST by arthurus (Read Hazlitt's Economics In One Lesson ONLINE
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To: Kaslin

I highlty doubt that anyone hear would recognize the US of 2016. The beginnings of a socialist revolution are occuring here and now. With the level of denial I see, the transformation should be well under way within the next four years. A lot of nations didn’t think it could happen to them, they thought wrong.

24 posted on 11/19/2012 9:20:12 AM PST by factoryrat (We are the producers, the creators. Grow it, mine it, build it.)
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To: SkyPilot

Please explain how, since i have contributed yearly since 1968, social security is an entitlement.

25 posted on 11/19/2012 9:24:05 AM PST by wtc911 (Amigo - you've been had.)
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To: wtc911
First, the definition of "entitlement program" appears to be widely misunderstood; second, many also don't understand the math behind Social Security and Medicare. On the first point: While "entitlement program" has become a pejorative phrase in some circles, with the insinuation that people are getting something they didn't earn, it's really just a term for any government program guaranteeing certain benefits to a segment of the population. In short, it has nothing to do with whether recipients are deserving, nor it is linked to a cost-benefit analysis on taxes paid versus benefits received. That bring us to the second point: Social Security and Medicare are not just entitlement programs, they also are very much an example of redistribution. Sure, American workers pay a specific tax to fund the Social Security and Medicare systems, and Social Security benefits are correlated to work history and earnings. But especially when Medicare is taken into account, most senior citizens end up receiving more in Social Security and Medicare benefits than they paid into the system during their working years.

I absolutely empathize with the difference of morality on this issue. To wit - there is a vast moral distinction between Social Security benefits earned by those who paid payroll taxes during their working years vs. those Social Security Disability, direct welfare payments, EBT Food Stamps, Section 8 Housing, Aid to Families With Dependent Children, etc.

However, that does not negate the fact that Social Security is still an entitlement by both definition and by law.

26 posted on 11/19/2012 10:12:20 AM PST by SkyPilot
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To: Kaslin
That was manageable in the late 1990s when the economy was on a robust plane of growth. But today's politicians -- nor the ones who will be pondering a run for the White House in 2015 -- will likely be operating in an environment of robust growth.

Either the author's been misquoted, or he punted the last clause by dropping the "not" which would make sense of his statement.

Item, the author pimps (Un)'s nostrum of a VAT, the principal objects of which are

The author needs to get stuffed, and his FairTax allies and Alinskyite buds with him.

Now let all the FairTaxers appear and cry "ignorance!" and "prejudice!" and "negativity!" and "try it, you'll like it, and anyway Practicality Demands Compromise!" (with Democrat Alinskyite attack-dogs from hell).

And oh, btw, the rate isn't 23%; if you calculate it not as a lying FairTaxer, but as an honest businessman, you get something more like 33% or more, if you calculate the tax rate as an increment added to the basic cost.

As a coda, this article also serves as further evidence that Townhall is being taken over by Friends of Barack, preaching tactical Alinskyite prolefeed to the unwashed.

27 posted on 11/19/2012 10:18:25 AM PST by lentulusgracchus
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To: wtc911

The money you “contributed” was spent as soon as it was received. It has been clearly defined as a tax by the US Supreme Court. Under that ruling you have no legal right to any benefit other than whatever Congress votes to give you. Congress can change or eliminate the benefit at its whim.

28 posted on 11/19/2012 10:23:50 AM PST by Go_Raiders (The wrong smoke detector might just kill you -
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To: SkyPilot
To wit - there is a vast moral distinction .....[h]owever, that does not negate the fact that Social Security is still an entitlement by both definition and by law.

Franklin Roosevelt lied reflexively (so Gen. MacArthur told us) to the American People to talk them into things that were against their interest, and of benefit primarily to FDR and the Democratic Party. One of the biggest was about the nature of Social Security and its real purpose.

It is a Ponzi scheme created to elect Democrats.

FDR chose a moment when his People were in an agony of want and doubt, to knife them with a poisoned blade. His monument should be a 50-foot-high dagger.

29 posted on 11/19/2012 10:25:39 AM PST by lentulusgracchus
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To: DesertRhino
“That’s because our economy is unlikely to handle three more years of gridlock, which keeps us stuck in a phase of higher government spending and shrinking revenue.”

Did I miss something?
Doesn't "gridlock" bring us Sequestration, which brings us less government spending, and less revenue? (Higher tax rates, but most likely crashing revenues)

30 posted on 11/19/2012 1:36:33 PM PST by Nevermore (...just a typical cracker, clinging to my Constitutional rights...)
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