Are We Heading into Another Great Recession in 2011?

Donald L. Luskin presents powerful evidence in The Wall Street Journal this week that the current stock market is tracking very closely to the stock market in the 1930’s.  Of particular concern are two critical economic policies that might help trigger another Great Recession in 2011.  Remember, the National Bureau of Economic Research announced a month ago that the recent recession was over.  But, two critical economic policies that might propel America into another Great Recession in 2011 are higher taxes and higher barriers to free trade (also known as protectionism).  Are we heading into another Great Recession in 2011?  What can we do to avoid another Great Recession?  Let’s talk about it now …

According to The Wall Street Journal article, if the Bush tax cuts are allowed to expire in January, the average after-tax income of working Americans will be cut 3.3%.  Using a direct calculation, a 3.3% after-tax income reduction means that GDP in 2011 would drop about 2.3%.  With such a drop in GDP, it’s not a stretch to conclude another recession would begin in 2011.  Added to that fact, our current recovery is very weak.  So, another recession on the heels of the previous Great Recession might be particularly hard on Americans.

If that’s not bad enough on the American economy, consider all the talk about protectionism.  Protectionism is the opposite of free trade and it generally leads to reduced economic growth.  Protectionism impedes economic growth by reducing trade among nations that enrich both consumers and producers of products and services.  For example, if America raises the costs of goods coming out of China with a new tariff, who gets hurt?  Americans pay more for the goods they do buy at higher prices, while China gets less income because they sell fewer products.  Protectionism is a lose-lose policy.  Free Trade, in sharp contrast, is a WIN-WIN policy.

Historically, many economists believe the Smoot-Hawley Tariff Act was the proximate cause of the Great Depression in the 1930’s.  Protectionism is a recipe for economic decline and stagnation.

Now, some people in Washington want to pass a new law that would permit the Department of Commerce to regulate trade among nations based on currency interventions by foreign countries.  For example, if the Department of Commerce does not believe a foreign currency intervention by a foreign country is “fair,” it can decide to increase the costs of that nation’s goods.  Putting bureaucrats (even very well-meaning bureaucrats) in charge of determining what’s fair (or not fair) is not how a free market operates.  It appears to be a backdoor tariff program that will most likely lead to reduced economic growth for America and other nations, as well as potential ill will with other nations.

Bottom line.  Are we heading into another Great Recession in 2011?  Yes, it appears that we might be heading for another Great Recession in 2011, if we maintain our current fiscal and monetary policies; if we allow the Bush tax cuts to expire and hurt economic growth; and if  we create new barriers to free trade that also cut economic growth and increase prices of goods to American consumers.

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.

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