Two interesting pieces of economic news hit the airwaves this week, and they do not bode well for anyone who hopes for a quick economic rebound. First, the economy actually contracted by .1% in the fourth quarter, reflecting the pressure of looming defense spending cuts by our deficit-laden federal government (Bloomberg). While the sources in the Bloomberg piece twist themselves into pretzels trying to put a positive spin on the statistics, the reality is the same. An overspending government must eventually retrench, and an economy overly dependent on its spending will feel the pain.
The second news item brings this basic fact of life into sharper focus. Consumer confidence dropped sharply in January, reflecting the impact of higher Social Security taxes as the “tax holiday” of 2011 and 2012 came to a close.(USA Today). The tax rate on employee wages rose from 4.2% to 6.2% on January 1. For an employee making $40,000 a year, this represents an annual tax increase of $800- enough to be very noticeable.
It is becoming clearer that policy choices favored by both liberals (spending) and conservatives (tax cuts) can not cure the basic ailment affecting our economy: spending fueled by deficits is not sustainable, while growth prospects are stunted in an economy being strangled by regulation, waste, the looming burden of Obamacare and the unpredictability of the ever-intrusive policy mavens of Washington DC.