Eurostagnation. Dick Morris explains:
When Obama took office, he had one paramount goal in mind — to increase the size of the federal government....
Socialism is not an epithet or even an economic philosophy. Whether a nation is socialist or not is determined by a single, simple statistic — what percent of the economy (GDP) goes to the public sector? When Obama took office, the U.S. public sector (federal, state, and local) spent about 30% of GDP. Now it is 36%. If Obamacare lives to be fully implemented, it will pass 40%.
The United Kingdom has a public sector that accounts for about 40% of its economy. Germany is at about 48%. France is at 50% and Sweden at 54%. If Obama is allowed to let the public sector expand to 40% of our GDP, we will become a European socialist democracy, to our everlasting detriment. We will thereby inherit the sclerosis that afflicts Europe — permanently high unemployment and low economic growth. (Again fully documented in our book 2010).
But after his swearing-in, President Obama couldn't say that he was going to raise taxes to move us toward socialism. So, instead, he raised spending to do it and borrowed the money to pay for it. Now, with interest rates set to rise (because the Fed is not printing money as fast as it was), our debt service burden will be so onerous that it will become obvious to everyone that the deficit Obama has created is unsupportable.
Now, we pay an average of 3.5% interest on our $12 trillion national debt. That works out to an annual debt service bill of about $400 billion. While large, it's not impossible. Defense spending, for comparison, is $550 billion, Social Security is $400 billion, Medicare is $300 billion, Medicaid about $200 billion.
But, when interest rates rise to 7-8 percent — as they must now that the Treasury cannot just borrow newly printed money but must get real loans from real lenders to finance its deficit — the burden will grow to close to $1 trillion, about a quarter of our budget. Put differently, the entire take of personal income taxes in the United States comes to about $900 billion. All of it will go to debt service.
The United States will become just like the subprime mortgage holders who borrowed at low teaser rates only to see their interest grow until they had to sign over their entire paychecks to the mortgage company.
Obama has been expecting this outcome all along. It is how he will achieve socialism in the United States. He will use the pressure his deficit creates to force higher taxes that will permanently expand the public sector.
Reagan increased the deficit to force liberals to stop spending. Obama has increased it to force conservatives to vote for higher taxes.
Once a spending increase is matched by a tax increase, it lasts forever. That is how Obama plans to move the government's share of the GDP permanently over 40% — into socialist territory.
But the Republicans can and must stop him. By refusing to vote for a tax increase and cutting back Obama's crazy spending, slicing his stimulus package and ratcheting back federal Medicaid payments (by zero funding the increases built into Obamacare), Republicans can cut the deficit without higher taxes.
Indeed, the party should commit to lowering taxes by cutting Capital Gains levies to stimulate investment, jobs, and revenues. The only tax that works economically is a tax cut!
Such a defiant stand, in the face of withering criticism from the media, economists, and the Federal Reserve, can only be made by hardy souls. Indeed, such a stance by a Republican Congress will lead to exactly the same sort of government shutdown — when Obama vetoes the budget — as discredited the GOP in 1995-1996 and led to Clinton's re-election.