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October 11th 2013 print

Steve Kates

On Planet Janet the spending never ends

It should come as no surprise that Barack Obama would tap a believer in perpetual pump-priming to head the Federal Reserve. The real shocks will come later, when the frantic quest for revenue reaches a grasping urgency

Barack Obama has nominated Janet Yellen to replace Ben Bernanke as chairperson of the US Federal Reserve and the quantitative easing crowd are in ecstasy. It will be a flood money until recovery sets in, which means it will be a flood of money for near-on ever and a day.

As it happens, I met Janet (why not first names, as we were then) when she worked for the OECD and I was representing Australian employers at an OECD meeting in Paris, this one, if memory serves, on some aspect of the business cycle — I think it was on consumer and business-confidence surveys.

I remember well our close encounter for a lot of reasons, but the one that stands out was that the OECD wanted us to agree that the economics profession had conquered the business cycle and made recessions things of the past. I led the rebellion against such idiocy, as embodied  by Janet Yellen, who was the OECD person responsible for trying to get us all to agree. It was her bad luck that she had to deal with me because the probability that I would have agreed to such a thing was in the vicinity of zero-point-zero. Then and now, she has been just one more specimen of that same macro menace which continues to lead us from one disaster to another.

At the OECD her potential for damage was generally limited. If confirmed, however, there is no end to the harm she might do.

The appraisal below is from one of her big supporters, although I suspect her detractors would say exactly the same thing:

“The Fed will be looser for longer. The FOMC will continue to print money until the US economy creates enough jobs to reignite wage pressures and inflation, regardless of asset bubbles, or collateral damage along the way.”

On past performance there is little doubt she will do exactly that because that was the mentality I met up with all those years ago. But if you would like to see the other side of this same question, you could do worse than to read this article from The American Thinker, “The Black Swan in the Perfect Storm”.

There are many fascinating paragraphs to choose from, but let me jump to the section outlining a sketch of the kind of world Janet Yellen and her approach may be laying out for the US as everything finally falls apart — “the perfect storm” of the article title. What follows is not my own forecast; I provide it merely as a contrast to the belief that all will be well as long as we keep flooding the market with money and distorting factor markets for as long as it takes until Janet Yellen finally realises that things are not working out.

“As the perfect storm approaches, the regime will address it the only way it knows how — as a revenue, rather than a spending, problem.” 

“…as the regime becomes more desperate, unwilling to make cuts to anything other than the military, it will look for opportunities to increase revenue, all the while being indifferent to, or ignorant of, the negative economic impact of taking more money out of the private sector and transferring it to the government. Like throwing gas on a fire to put it out, it has the opposite effect.” 

The article then goes on to list “prototypical examples, not literal predictions, of measures an increasingly desperate regime may well implement:

“One-time tax on all Individual Retirement Account balances…

“Reduce the face value on all short-term (2-3 years) Treasuries if redeemed at maturation…

“Forgive student loans to placate young voters disaffected by the unexpected — to them — high cost of their health insurance under the ACA… 

“Offer federally subsidized, reduced-interest loans for first-time ‘poor’ home buyers…

“Remove tax-exemption on debt incurred by major municipalities (over 500,000 residents)…

“Remove interest deductions on all mortgages over $300,000…

“Require 401Ks, IRAs and Pension Funds to have a certain portfolio percentage in Treasuries…

“Accelerate the schedule of required minimum withdrawals from IRAs to kill the stretch IRA concept and boost tax revenues…

“Install a national federal sales tax at 1% on all goods and services (soon rising to 2%, and then up)…

“Remove the tax-exempt status of all non-profit organizations, including churches and charities…

“Collect a yearly tax on the endowments of religious and educational institutions…

“Eliminate deductions for state income tax payments… 

“Install a yearly tax on vehicles based on miles driven (a 2011 CBO suggestion)…”

All in all, a ledger of the approach a desperate government might take to raise revenue. Gruesome, of course, but by no means impossible.

We live in dangerous times.

 Steve Kates teaches economics at RMIT University. His most recent book is Free Market Economics: an Introduction for the General Reader