Larry Kudlow makes the case that the economy is now headed for a traditional V shaped recovery — down fast and up fast. He cites economic growth and jobs data to support his optimistic assessment and warns conservatives not to invest too much political capital in predicting the demise of the economy under Barack Obama.
But, even if we assume he is correct, the real question is whether the V is to stand alone or just be the precursor to a W shaped economy — down fast, up fast, down fast, and then, eventually, we hope, up again.
The elections of 2010 and how the Republicans act if we take back Congress will determine the answer to this key question.
The massive budget deficit that is providing temporary kindling to the economic recovery will, itself, prove that recovery's undoing if it is either allowed to remain at record levels or if we reduce the deficit by raising taxes. Only if we cut the deficit by ratcheting back Obama's record spending levels do we have a hope of avoiding the second V (the back end of the W) which would send us back down again.
When Obama took office, his goal was to increase the size of the federal government. This statistic, which really defines socialism, stood at 30% when he took office and has now zoomed upward to 35%. When health care is fully implemented, it will rise up to 40% — bringing us equal to the United Kingdom and close to the levels of socialist nations like France, Germany, and Sweden.
But Obama couldn't raise taxes to accomplish his goal, so he raised spending and borrowed the money. Now, the key question is: Will he be able to use the pressure of the deficit to force Republicans to pass higher taxes?
If he does, the result will be predictable — a downward spiral in the economy, sapping growth and costing us jobs. Those who will bear the brunt of his tax increases are precisely the ones who invest and create jobs. The increase in capital gains taxes alone will choke off growth and the huge increases that loom in personal income taxes will complete the process of strangling our economy. (Remember that trillion dollar annual deficits loom far into the future even assuming that Obama does not renew the upper income Bush tax cuts.) The Democrats will likely propose to raise the top bracket up to 45% for "millionaires" in addition to the 4% Medicare tax and state and local levies. Bye bye growth.
But we cannot let the deficit persist at over $1 trillion. When interest rates return to normal (after the Fed raises them and stops printing money), debt service will absorb almost a trillion dollars a year — twice as much as defense spending and more than Social Security, Medicare, and Medicaid combined. We will be like the family that has to hand its paycheck over to the mortgage company each month to pay their debts.
So as if we indeed begin to ride the back end of the V that Kudlow predicts, let's focus ahead and make sure the V does not become a W. The only way to do that is to elect a Republican Congress of true believers in 2010.
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