The U.S. economy has now completed a full four plus years of stagnation. Always before in downturns (with the single exception of the Hoover/Roosevelt ten year war against capital in the 1930s) the economy has hit bottom and recovered rapidly. Won't it finally get going some time soon? Sadly, there is every reason to think that it will not.
Start with the broadest aspects of macroeconomic policy. On a cash basis we have trillion dollar plus annual deficits. Nothing about the "fiscal cliff" negotiations even treats this issue as if it were a significant problem. Tax increases on high earners might reduce the cash basis deficit by 5% or so at unknown cost of undermining incentives for investment. The real annual deficit, taking account of reasonable accruals for unfunded health and retirement obligations, is more like $7 trillion per year, and the proposed tax increases on high earners will address less than 1% of that amount. The Fed proposes to monetize essentially all of the cash basis deficit to maintain zero interest rates.
Does anyone actually believe that these huge deficits and this money printing year after year constitute some kind of "stimulus" to the economy -- what I call "fake Keynesianism"? If you do, kindly look at Japan, now going into year 23 of stagnation and doubling down yet again on the exact same failed policies. In reality the huge deficits represent the displacement of efficient and dynamic private economic activity with wasteful and inefficient government spending, a massive and ever-growing drag on the economy.
And just in case the private economy actually shows some signs of starting to overcome the government's crowding it out, the ideologue Obama bureaucracy is going to make sure that that won't happen. The latest bad news comes from the Federal Court of Appeals for the D.C. Circuit, which last week denied rehearing en banc of a case challenging the unbelievable EPA "greenhouse gas" regulations under the Clean Air Act (CAA). In essence, the D.C. Circuit has upheld the EPA's position that under the CAA it can regulate and require permits for any economic activity emitting as little as 100 tons of CO2 per year. Just about every business meets this criterion -- every factory, every office building, every school, every hospital. Your household might even meet this criterion if you do a reasonable amount of breathing, driving, flying, and you use light, heat, air conditioning, refrigeration and computers. EPA itself estimates that the number of entities that would require permits if it exercised its maximum authority would be "millions." Anyway, the only thing standing in the way of this steamroller of economic destruction is the Supreme Court, and, for reasons set forth below, I wouldn't count on rescue from that direction.
There is a tortured history leading to this latest D.C. Circuit opinion, and I'll give just the briefest summary. CO2 -- a colorless, odorless gas with no harmful health effects -- is emitted in large amounts in the 90 +/- % of economic activity not powered by nuclear, hydro, wind or solar. The only knock on CO2, if it is a knock, is the alleged threat of global warming. After the global warming scare got going in the 90s, and in the face of pressure from environmental groups, the EPA during the G.W. Bush administration declined to undertake regulation of CO2 as a "pollutant" under the CAA. A coalition of environmental groups sued, and was then joined by several blue states, led by Massachusetts (Romney was governor!), seeking to force the EPA to regulate. After the D.C. Circuit issued an ambiguous decision, the plaintiffs petitioned to the Supreme Court. In a 5-4 decision in 2007, the Supremes held that CO2 met the CAA definition of pollutant and ordered the EPA to regulate unless it determined that CO2 did not "endanger public health or welfare." The Supreme Court decision came just in time for the Obama EPA to take over. No amount of lack of evidence of warming was going to convince the Obama EPA to forego this opportunity for power. The "endangerment" finding came out in December 2009.
At that point the EPA had to confront the problem that if CO2 is a pollutant and if it were to follow the literal words of the CAA, regulators would need to consider and issue or deny literally millions of permits. Not even possible! They addressed this problem by coming up with the so-called "Timing and Tailoring Rules," under which they basically say that we'll start by requiring permits for facilities issuing 75,000 tons of CO2 per year and up, and then later (but we won't say when!) gradually clamp down on smaller and smaller emitters until everyone in the country has to answer to us. Another coalition of opponents sued (this time business groups and red states), but a panel of the D.C. Circuit upheld the EPA back in June. Then last week the full D.C. Circuit denied rehearing en banc. Two judges (Brown and Kavanagh) issued spirited dissents, but to no avail. Nowhere left to go but back to the Supremes, where the only question is whether Justice Kennedy has yet figured out that he got scammed back in 2007. Don't count on it.
So unless by some miracle the Supreme Court turns it around, the EPA (along with equally committed brethren in state environmental regulators) now has won the authority to veto essentially any and all economic activity. These are zealots who think that economic activity is evil and that by shutting it down they are "saving the planet." They have no idea that they are impoverishing the people. Literally trillions of dollars of economic activity are at stake.
So is there any real chance of the economy getting going in the next four years? Unlikely.