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Come on Guys, a Little Cyanide Never Hurts

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Published : November 19th, 2012
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Category : Editorials





Sometimes I ask myself, "Are our leaders just confused on economic policy, or is it something worse?" Take for example the president's recent comments after the election:

"Well, obviously, we can all imagine a scenario where we go off the fiscal cliff. If despite the election, if despite the dangers of going over the fiscal cliff and what that means for our economy, that there's too much stubbornness in Congress that we can't even agree on giving middle-class families a tax cut, then middle-class families are all going to end up having a big tax hike. And that's going to be a pretty rude shock for them, and I suspect will have a big impact on the holiday shopping season, which, in turn, will have an impact on business planning and hiring, and we can go back into a recession.

"It would be a bad thing. It is not necessary. So I want to repeat, step number one that we can take in the next couple of weeks: provide certainty to middle-class families ..."

At first, this got me really excited – he seems to get it here. Tax increases are a bad thing. Well, actually, he's even a bit more pessimistic than me here. A tax hike would hurt the economy, but I don't think it would send us spiraling into a major recession. Look back at the history of recessions over the past 100 years. You know what they pretty much all have in common? They weren't caused by tax hikes. I'm not trying to blow off the tax increase as unimportant, but it's just not as huge of a problem as something like the housing bubble. Regardless of your opinion of Obama, we should at least applaud him for recognizing in this case that taxes are not good things for the economy. Before I could get too happy though, his statements were followed by this:

"As we've already heard from some Republican commentators, a modest tax increase on the wealthy is not going to break their backs; they'll still be wealthy. And it will not impinge on business investment.

"So we know how to do this. This is just a matter of whether or not we come together and go ahead and say, Democrats and Republicans, we're both going to hold hands and do what's right for the American people."

OK, so I'm trying to follow the train of thought here. Tax hikes on the middle class are bad for the economy. But tax hikes on the rich don't matter? I'm just trying to figure this out. It doesn't really make sense to me.

Furthermore, Obama said that tax hikes on the middle class would "have a big impact on the holiday shopping season, which, in turn, will have an impact on business planning and hiring, and we can go back into a recession." But for the rich he says, "it will not impinge on business investment." So wait… if I'm a business and I make less money because middle-class consumers are facing higher taxes, then that's bad for my business planning. However, if I have less money because I'm being taxed more, then my business planning won't be affected?

On a side note, it's always disturbing to hear this line repeatedly by both parties – keep people spending and endlessly in debt, and the economy will be fine.

Maybe I'm a little slow or something, but it seems to me that in both cases I have less money and that will affect my business planning to some degree. Also, what about businesses catering to the upper class? Won't rich consumers do some holiday shopping as well? What about the effect on high-end business such as Louis Vuitton, Ritz Carlton, etc.? Just because they're high end doesn't mean that the bartender at the hotel or the salesperson at the mall is a high roller. Even if you are rich, higher taxes will slightly curb your spending.

Economics is based on a very simple premise: there's no such thing as a free lunch. The administration is suggesting that one could get money from the rich without any adverse effects, essentially a free lunch. Of course, a tax hike on the rich isn't going to make them start clipping coupons, but there will be an effect – that's just basic economics.

I've seen a couple of pundits defending the plan by saying that the tax cuts on the rich will barely affect the economy. However, even if that's right, it's no excuse. That position is like saying, "Just take a little of this cyanide pill. Don't worry; it won't kill you." It doesn't matter if the tax hikes would negatively impact the economy a little or a lot. We shouldn't be doing anything that could hurt an economy still crawling away from a crash.

I understand that some people want bigger government. I get it. But what really frightens me is when our leaders can't even piece together an internally logical argument. Hey, the Republicans don't get a break here either. Somehow spending cuts work great when it's on food stamps, but not when it's on bombs.

The problem is that the two parties must reach some sort of compromise. But it's hard to reach a reasonable solution when both groups are coming to the table with incoherent economic ideas. When two idiots sit down and compromise, the end result isn't a problem solved, but more often than not, another one created.

Now that the election is over, you'd think members of Congress would put their differences aside and tackle the formidable problems facing the country. Unfortunately, both parties are digging in for an ideological battle that seems more and more likely to end in a stalemate.

So what happens if they don't stop us from careening off the fiscal cliff? Is another recession around the corner? What about quantitative easing? What happens to the purchasing power of our savings if the Fed keeps its easy-money policies?

To provide answers to questions like these, the folks at Mauldin Economics are putting together a free online video event featuring some of the world's leading economists and investing experts. They include John Mauldin of Mauldin Economics... Mohamed El-Erian of PIMCO... James Bianco, president of Bianco Research, LLC... Barry Habib, vice president and chief market strategist of Residential Finance Corporation... Barry Ritholtz, CEO of Fusion IQ... Richard Yamarone, senior economist, Bloomberg Brief... and Gary Shilling, president of A. Gary Shilling & Co., Inc.

These financial luminaries will shed light on such critical issues as the fiscal cliff, exploding budget deficits, entitlements, artificially low interest rates, and where the world economy is headed.

More important, they'll offer strategies that you can implement right away to protect what's yours from new risks in the post-election economy.

This event will be held online at 2 p.m. Eastern time on Tuesday, November 20. Learn more and sign up here.



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Vedran Vuk graduated with a BBA in Economics from Loyola University of New Orleans. Currently, he is pursuing a M.S. in Finance at Johns Hopkins University. He also spent time on a PhD. Economics program. His publications include academic journal articles, book chapter contributions, newspaper columns, and online articles. Prior to Casey Research, he worked in think tanks, government affairs, and corporate governance. Utilizing his experiences with academics, Washington politics, and financial knowledge, Vedran’s analysis often seeks to find the mid-point between these different areas.
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