BERKO: An economic triple whammy
Dear Mr. Berko:
What is your opinion of our economy for the next couple of years, and what do you think will happen to stock prices if Congress allows the Bush tax cuts to expire? And do you think it will make any difference if a Democrat or a Republican is elected to the presidency?
Dear D.L.:
It doesn’t make a tinker’s damn worth of difference whether a Democrat or Republican sits in the White House next year. It’s Congress that makes the economy purr, bark, cough or spit. Congress passes all the legislation governing the business of economy, labor laws, tax laws, commerce, banking, securities regulation, etc. But beware of the Three Whammies!
Congress may allow the Bush-era tax cuts of 2001 and 2003 to expire this January. This is especially difficult for retirees, who figured that $1,760 in dividends from 1,000 shares of AT&T Inc. ($33,000) taxed at 15 percent is better than $330 interest on a $33,000 CD taxed at ordinary rates of 28 percent. If the tax rates on dividends increase to 28 percent, fixed-income folks will spend a lot less on housing, electronics and other “stuff.” Then the value of AT&T and other income stocks may also decline, because higher dividend taxes make income issues less attractive to own. This may be Whammy No. 1.
Then our Social Security payroll tax cuts are also due to expire, and millions of workers will be taking home about $85 less each month, or $1,000 a year times 150 million of us in the work force. That’s $150 billion of spendable money removed from the economy. This could be Whammy No. 2.
And finally, under the Budget Control Act, automatic government spending cuts of $1.2 trillion will take effect this coming January. These cuts will be a killer, crushing our gross domestic product (GDP), putting more Americans out of work and increasing the 2013 deficit well beyond the anticipated $1.2 trillion number. This looks like Whammy No. 3.
How very clever of Congress to plan for those Whammies to occur after the November elections. Certainly this Triple Whammy event does not bode well for the 2013 economy and beyond. Congress, as many expect, will remain gridlocked until after the November elections and possibly into the lame-duck session that follows. And some members of Congress are whispering about shutting the government down on Oct. 1, the beginning of the new fiscal year. Why must Congress play this game?
Finally, a frustrated Federal Reserve Chairman Ben Bernanke recently and forcefully warned Congress of a pending “massive fiscal cliff” that portends a serious depression. So the outlook for 2013-15 is: 10 percent unemployment, a flat to negative GDP, enormous budget deficits, an increase in federal/state taxes, continued declining home prices, lower retail sales, declining corporate revenues and earnings, falling stock prices and years of a rolling recession similar to the era of the 1930s just prior to our entry into World War II.
Meanwhile, traders, hedge funds, investment banksters and Wall Street pirates expect that the Dow Jones industrial average will nose-dive in December as investors rush like lemmings to take capital gains and avoid higher taxes in 2013. And one bearish fund manager suggests a “Black December,” believing investors may resort to panic selling by year’s end. However, because we are in an election year and Congress must keep voters happy and dumb at least until November, these scenarios are kept under a very large rug. Then after the election brouhaha calms, a dysfunctional Congress may try to resolve the problems. But the usual partisan politics, marauding special interest groups and 38,641 registered lobbyists buying favors suggest that the economy will continue to flounder and founder for 99 percent of us.