Gauging the financial tipping point
Probability is for a new global downturn
Despite the encouraging U.S. jobs-report data last week, the fiscal situation in the United States and most of the rest of the world continues to deteriorate. The European Central Bank said the eurozone’s economy is likely to contract this year. Greece finally formally defaulted last week. The situation continues to get worse, and many observers think Greece will need another bailout within a year. The next time, the world’s taxpayers, rather than private banks, will be holding the bag. The situation in Portugal also is getting worse at an accelerating rate.
It’s not just Europe that is having problems. Last week, the Chinese reduced their expected growth rate from 8.2 percent to 7.5 percent for 2012. There has been growing political deadlock in India, stopping many reforms, which will negatively impact economic growth. There are indications that Brazil also may be facing an economic slowdown.
The 10 largest economies account for a little more than two-thirds of the world gross domestic product (GDP). The United States alone accounts for about 23 percent of global GDP. Of the 10 largest economies, only China and India have economic growth rates higher than their deficits as a percentage of GDP, which means all of the others have a rising debt-gdp ratio, as can be seen in the accompanying chart. Studies have shown that once net debt-gdp ratios rise above 90 percent, it is very hard for countries to avoid debt default and/or high inflation and very painful austerity. The United States, France and the United Kingdom are uncomfortably close to the 90 percent mark. Any further turndown in economic growth that would sharply reduce tax revenues or any unexpected spending because of war or natural disaster would push these countries over the tipping point.
Italy may muddle through, thanks to partial economic reform and a large underground (untaxed) economy. Japan is well past the standard tipping point for most countries and has had two decades of very slow growth but has been saved from a Greek-style meltdown because of its very high domestic savings rate, which finances most of its debt. Even so, any adverse circumstance could push Italy or Japan into a downward fiscal spiral.
Of the 10 largest economies, only Brazil and Canada are in sufficiently strong fiscal positions to weather another global recession without hitting the tipping point. Germany has had strong economic growth and has managed its economy much better than most of the other Europeans, but it depends heavily on exports of machinery and high-tech goods, and as its customers weaken, it will follow them down.
Most of the rest of the world — the other one-third of world GDP — looks little better than the big 10. On every continent, there are many smaller countries
Forecast for 2012 with uncomfortably high debt-gdp ratios, and it would not take much to push them into a crisis situation.
The United States is in the best position to make the reforms necessary to take care of its own economic problems and thereby become an engine of economic growth for the world, but the Obama administration continues to head in the wrong direction. It presented a budget that was both economically and politically unrealistic and did nothing to stop the rise in the debt-gdp ratio. The administration has proposed massive tax increases on job creators and continues headlong in its rush to implement job- and economy-killing regulations.
Last week, President Obama said that “reducing the demand for oil would cause its price to drop” and also, “increasing the supply of oil would not cause its price to drop.” Huh? Which is it? What the president has done with his endlessly contradictory statements and actions on the economy is prove that he is the most economically illiterate president at least since Jimmy Carter.
What is unambiguously clear is that without a major course correction in the United States and the other major economies, a new global recession will occur sometime in the next few months or the next year or two at the latest. The economic growth and deficit numbers in the accompanying table are the best that are likely to happen. An incident in the Persian Gulf or elsewhere could send oil prices skyrocketing, which would ricochet quickly throughout the global economy, leading to a new global turndown. The U.S. recovery has been so tepid and incomplete that there is no margin for error. Any major policy error by the Federal Reserve, which is skating on very thin ice, or further economic lunacies by the administration — like blocking the Keystone pipeline — could be the trigger to push the economy beyond the tipping point.
A good economic forecaster looks at the probabilities of all of those things that could go wrong and those that could go right. Yes, it is possible to describe a scenario in which the United States and the world could get out of their current economic fix without too much pain. Unfortunately, even though I am basically an optimist, the probabilities are much more likely that some event will push much of the world over the tipping point within the next 24 months. It didn’t have to be this way.
Taxes, like death, may be inescapable. But, at the very least, taxpayers have always enjoyed the freedom to offload the headache of doing their taxes to the tax-return preparer of their choice.
Or rather, taxpayers used to enjoy that freedom.
Now, in an outrageous and unlawful power grab, the Internal Revenue Service seeks to control who you may hire to prepare your tax returns and even to nudge you toward a large tax preparation firm by eliminating many of their independent competitors. It has enacted a sweeping new licensing scheme that affects an estimated 350,000 tax professionals nationwide.
The licensing scheme requires tax preparers — who have always had the freedom to prepare tax returns for anyone who sought out their services — to secure permission from the IRS if they want to earn a living preparing taxes. Getting permission means satisfying expensive, unnecessary and timeconsuming new requirements that threaten to drive many independent preparers out of business, leaving tens of millions of taxpayers searching for a new preparer.
Waiting in the wings for all these new customers are large tax preparation firms such as H&R Block, which supported the regulations, and the American Institute of CPAS, which successfully lobbied for an exemption from the licensing requirements for preparers supervised by CPAS. These powerful special interests stand to benefit tremendously from the reduced competition and increased prices that will result from these regulations. Meanwhile, the costs of the regulations will fall disproportionately on independent tax preparers and small tax-prep businesses.
Consider Sabina Jones, who worked for a decade as an accountant for banks and financial service companies before recently opening Loving Tax Services in an impoverished neighborhood on the South Side of Chicago. She has been offering an affordable, personable alternative to the large tax-prep companies for the members of her community, many of whom are low income. These new regulations will force her to raise her prices, making it more difficult for her to compete with large tax-prep companies. The regulations also prohibit her from hiring and supervising additional tax preparers, stifling job creation in a state with a 9.7 percent unemployment rate.
One hundred miles to the Northwest, Elmer Kilian is a retired Korean War veteran living in the small village of Eagle, Wisc., where he hangs a wooden shingle outside his house advertising his business, Eagle Tax Services. Mr. Kilian has prepared taxes seasonally for more than 30 years on his dining room table, but he will be forced out of business by the cost of the new regulations, depriving the 80-year-old of an important source of income.
These new licensing regulations represent true crony capitalism, expanding government power to protect politically powerful interests from honest competition. But the IRS’ new regulations aren’t just an affront to economic liberty and consumer freedom — they’re unlawful. Congress never gave the IRS the authority to license tax preparers, and the IRS cannot give itself that power. That is why Ms. Jones and Mr. Kilian have joined with the Institute for Justice, a national public-interest law firm that protects the rights of entrepreneurs, to file a federal lawsuit against the IRS, challenging its statutory authority to impose these regulations on them and other entrepreneurial tax preparers like them across the nation.
Tax preparers such as Mr. Kilian and Ms. Jones have a right to earn a living independent from the big tax-prep firms without getting permission from the IRS. Taxpayers have the right to decide for themselves whom they want to prepare their taxes. A win for Ms. Jones and Mr. Kilian will benefit not just the 350,000 tax-return preparers nationwide who are subject to these regulations, but the tens of millions of taxpayers they serve each year.