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PeakTrader:

If we avert a double-dip recession, a U-shaped recovery will be completed in 2016 or 2017.

A bigger "Lost Decade" will begin in 2029, when the last of the Baby-Boomers (born between 1946-64) reach 65.

Many people underestimate, or have no idea, how much damage the Federal government has done in placing massive inefficiencies and building-up debt.

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Here's what Joseph E. Stiglitz, Nobel Prize winner, former chief economist of the World Bank and a professor of economics at Columbia University said:

“We were counting on a weak dollar and a strong European economy; instead we got a strong dollar and a weak Europe — that is clearly not good for our economy. It certainly increases our likelihood of a double-dip recession.”

My comment: One bright spot is the interest paid on the national debt. For example, currently, the 1-year Treasury yield is 0.37%. In 2006, it was 4.94%.

However, if it rises to the 2007 level of 4.53%, that's one way to achieve a sharp economic slowdown, given the high level of Federal debt.

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Basic math of the national debt:

When the national debt reaches 100% of GDP:

$15 trillion income (or output)

$15 trillion Federal debt

Interest rate (rises to) 4%

Interest payment $600 billion

Historical Federal tax collection rate 19.5%; round up to 20% equals $3 trillion.

So, 20% of tax revenues to pay interest on the national debt (does not include payment of any principal).

"In 2008, $242 billion was spent on interest payments servicing the debt, out of a total tax revenue of $2.5 trillion, or 9.6%."

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The question should be why is this recovery so slow?

Government has done little to help households get out from under their mountain of debt, and can't wait to pile on more debt, once households work their way through their debt.

Economic rebound slowed last quarter
May 27, 2010

"The economy grew at a 3 percent annual rate from January to March.

During normal times, growth in the 3 percent range would be considered healthy. But the country is coming out the longest and deepest recession since the Great Depression. So economic growth needs to be a lot stronger -- two or three times the current pace-- to make a big dent in the nation's 9.9 percent unemployment rate.

Economists say it takes about 3 percent growth to create enough jobs just to keep up with the population increase. Growth would have to be about 5 percent for a full year just to drive the unemployment rate down 1 percentage point.

After the last severe recession in the early 1980s, GDP grew at rates of 7 to 9 percent for five straight quarters and the unemployment rate dropped from 10.8 to 7.2 percent in 18 months.

The National Association for Business Economics predicts moderate economic quarterly growth in the 3 percent range through the rest of this year."

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A $5,000 tax cut per worker over a year ago (or $750 billion for 150 million workers) would allow households to pay-down or pay-off their highest interest rate debts.

Therefore, they'd have more money each month for consumption, to clear the market of excess assets and goods, and subsequently increase production (paying-down debt would also strengthen banks). The recession would've been more shallow and the recovery much stronger.

It worked under Kennedy in '61, Reagan in '81, and Bush in '01 and '08 [the country was on a path to a mild recession after the early '08 tax cut, until Lehman failed in Sep '08]. When a real recovery is underway, taxes can rise.

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http://taxesandgrowth.ncpa.org/news/are-the-bush-tax-cuts-working

Are the Bush Tax Cuts Working?

President Bush has signed into law three tax bills in the past three years; these tax cuts amounted to $1.3 trillion in 2001, $96 billion in 2002, and $330 billion in 2003. Democratic opponents criticized the tax cuts (particularly the first one in 2001) as fiscally irresponsible and weighted primarily toward the wealthy, while Republican supporters claimed that the tax cuts would stimulate economic growth and return money to taxpayers across the board.

Major Provisions of the Tax Cuts
The 2001 Economic Growth and Recovery Tax Act, by far the largest of the three tax cuts, was intended to provide tax relief to individuals, families and businesses, thereby stimulating economic growth enough to recover from the recession (which ended in November 2001). Some provisions of that bill include the following:1

•Rebate checks were sent to taxpayers in the amount of $300 per individual and $600 per married couple.
•Personal income tax rates dropped from 39.6, 36, 31, and 28 percent to 35, 33, 28, and 25 percent, respectively.
•The child tax credit increased from $500 to $600 (effective 2001), and will increase to $1,000 by 2010.
•The standard deduction for married couples increased to equal twice that of single taxpayers.
•The estate tax would be repealed in 2010.
•Contribution limits for various tax-favored savings accounts (for retirement, education, etc.) were increased.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 accelerated many of those provisions and cut tax rates on dividends and capital gains-small-business equipment write-off amounts were also increased:2

•Effective 2003-2008, the maximum tax rate on qualified dividends will be 15 percent (formerly, dividends were taxed at the same levels as ordinary income).
•The rate on long-term capital gains from sales after May 6, 2003, dropped from 20 percent to 15 percent.
•Many small businesses can instantly deduct 100 percent of most new and used business assets (up to $100,000).
How Has the Economy Changed Since the Tax Cuts?
GDP Growth

After the recession in 2001 and the first round of tax cuts, economic growth speeded up and is expected to pickup even faster in 2004:3

•The real annual GDP growth rate increased from 0.3 percent in 2001 to 2.5 percent in 2002.
•In the third quarter of 2003, GDP grew at a 7.2 percent annual rate.
•Forecasters are expecting GDP to grow by 4.6 percent in 2004, the highest in 20 years.
•2003 and 2004 economic growth levels surpassed Congressional Budget Office (CBO) estimates by 150 basis combined, resulting in $300 billion of additional growth, which is roughly $2,500 per household.
Employment, Jobs, and Productivity4

Though job creation was slow immediately following the recession and during the first stages of the recovery, it had increased dramatically by late 2002 and 2003.

•1.4 million jobs were added in the nine months after August 2003 (the 2003 tax cuts were signed into law in late May 2003).
•The unemployment rate remained steady at 5.6 percent in May 2004, well below its peak of 6.3 percent a year ago.
•The Treasury Department estimates that without the tax relief, as many as 1.5 million more Americans would be out of work right now, and the unemployment rate would be well over 7 percent.
The job growth statistics are particularly noteworthy because of greater-than-expected increases in productivity levels-high rates of productivity tend to mean less employment:

•Productivity grew at a 4.6-percent annual rate in the first quarter of 2004, continuing the trend of large gains in productivity since 2001 due to investments in equipment and technology.
•Higher productivity increases incomes and keeps inflation in check.
Furthermore, unemployment claims are at their lowest since the 2001 recession. The high rates of job growth matched with high rates of productivity point to the overall strength of the economy.

Investment, Spending and Inflation5

Consumer spending is on the rise, as is business investment. Economists credit the tax cuts for some of this growth-taxpayers' disposable income rose after receiving their rebates and businesses increased their inventory to meet increased demand.

•Consumers' real disposable income has increased by more than 10 percent during the first 13 quarters of the Bush administration, compared to only 7 percent during the same period of the first Clinton administration.
•Business investment increased at a 5.8-percent annual rate in the first quarter of 2004.
Though inflationary pressures have risen recently in response to increased business and consumer spending, inflation is low by historical standards:

•The personal consumption expenditure index (the Fed's preferred inflation gauge) rose by 1 percent for an annual 3 percent inflation rate, but when volatile food and energy prices are removed from the index, the inflation rate is only 1.7 percent annually.
•However, personal income growth is growing as well, so inflationary pressure is easier for the average worker to bear.
Dividend Payouts

A study on dividend payouts before and after the 2003 tax cut for all Standard & Poor's 500 companies showed a highly positive response to the tax cut:6

•Annual dividends paid by S&P 500 companies rose from $146 billion to $172 billion, an increase of $26 billion.
•In addition, special dividends of $7 billion have been paid, raising the total first-year dividend increase to $33 billion.
•Thus, dividends increased 18 percent without special dividends and 23 percent with special dividends.
•About 22 companies that did not previously pay dividends have initiated regular dividends.
•Equity values rose more than $2 trillion after the tax cut.
•Since 2003, nearly 19 companies have instituted a dividend payment for the first time, and almost 9 per­cent more companies paid out dividends after the tax cut than before the tax cut.
•Dividends payments to taxpayers increased from an average of $410 in the second quarter of 2003 to $518 in the third quarter of 2005.
•The overall payout of dividends in 2005 was over 36.5 percent higher than the payout before the 2003 tax cut and dividend income increased by a similar margin after the 2003 cut, from $750 to $1,000.
The large and positive response to the dividend tax cut, which is scheduled to expire at the end of 2008, suggests that Congress should make it permanent.

Capital Gains7

•In 1993, 14.5 million Americans claimed capital gains income, by 2003, the number had grown to 21.9 million Americans -- a 51 percent increase -- and the percent of all taxpayers report­ing capital gains income increased from 12.6 per­cent to 16.8 percent, respectively.
•Taxpayers claimed an average of $12,283 in capital gains income in 2003, and shareholder wealth increased by more than $5 trillion.
The Bush Tax Cuts Are Working
The three Bush tax cuts have offered tax relief to every American taxpayer and businesses as well. Individuals and families kept more of their own income and tended to spend it or invest it, which led to impressive economic growth. Tax relief also lowered the cost of capital, making it easier for businesses to expand, increase profits, and hire more workers. Nearly all economic indicators show that we have recovered from the 2001 recession and are in a period of economic expansion.

Unfortunately, many of the Bush tax cut provisions have "sunset clauses" and will expire soon. Nearly all elements of the 2001 Economic Growth and Recovery Tax Act will expire in 2011 if legislators do not make them permanent. If that doesn't happen, taxpayers will face the largest tax increase in the nation's history.

That tax increase raises three legitimate concerns:8

•Higher taxes encourage additional spending; there is no fixed relationship between taxes and spending, but history suggests that tax increases almost surely have the effect of loosening the reins on government spending.
•Higher tax rates hurt competitiveness and growth ; all tax increases cause economic harm because they encourage bigger government but some types of tax increases do more economic damage than others, specifically, higher marginal tax rates on work, saving, and investment reduce incentives to engage in productive behavior.
•The tax rates/tax revenue downward spiral ; if the Bush tax cuts are not extended and the economy is hit by a sizeable increase in marginal tax rates, economic performance will falter, and this translates into fewer jobs, lower incomes, and diminished profits, and that means less money for the government to tax.
Even though, H.R. 4297 is a step in the right direction and the tax cuts have spurred investment, job creation, and economic growth, repealing any part of them would be damaging to American taxpayers on an individual level and to the economy as a whole. Even if Congress allows a tax cut to expire in 2011, investors will respond by locking up their money in short-term projects rather than long-term ones. The U.S. economy is strong, but could become stronger if the Bush tax cuts are made permanent.

Moreover, according to the Congressional Budget Office's "Budget and Economic Outlook for 2006":9

•Before the 2003 cut was enacted capital-gains tax liabilities were estimated to be $60 billion 2004 and $65 billion in 2005, for a two-year total of $125 billion.
•But after the cut, liabilities were lowered to $46 billion in 2004 and $52 billion in 2005, for a two-year total of $98 billion.
•Actual liabilities from capital-gains taxes were $71 billion in 2004 and $80 billion in 2005, for a two-year total of $151 billion.
•Instead of costing the government $27 billion in revenues, the tax cuts actually earned the government $26 billion extra.
The Heritage Foundation also found that overall payout of dividends in 2005 was over 36.5 percent higher than the payout before the 2003 tax cut, and dividend income increased by a similar margin after the 2003 cut, from $750 to $1,000.10 Taxpayers also claimed an average of $12,283 in capital gains income in 2003, and shareholder wealth increased by more than $5 trillion.

In May 2006, President Bush signed the Tax Increase Prevention and Reconciliation Act of 2005 (H.R. 4297) into law which extend the current tax cuts. His signing assures that millions of taxpayers and millions more workers and business owners will enjoy low tax rates on capital gains and dividends and a potentially stronger economy through 2010. Overall, extending JGTRRA's preferential rate structure on capital gains and dividend income will have small -- but positive -- effects on both gross domestic product (GDP) and employment. Personal consumption and business fixed investment are also likely to post modest gains as a result of H.R.4297 because it is only a temporary extension of an expiring provision.11

•H.R. 4297's capital gains and dividend provisions are likely to influence economic activity by increasing personal disposable income by lowering federal tax payments and reducing the cost of capital to businesses by raising the value of U.S. equities.
•Most immediately, H.R. 4297's capital gains and dividend provisions will lower income tax payments; extending JGTRRA's rate structure on capital gains and dividend income will reduce federal tax revenues by a total of some $18 billion in fiscal years 2009 and 2010 and over $50 billion between fiscal years 2008 and 2016.
•This will likely boost personal consumption and business fixed investments over the medium term; this effect is also likely to be largest for the extension of JGTRRA's preferential tax rates on capital gains realizations.
Conclusion: Make the Bush Tax Cuts Permanent
In January 2006, the White House economic team began the push to make the 2001 and 2003 tax cuts permanent because the tax policy program has been shown to help the United States economy to thrive, with steady job creation and strong economic growth.

If the tax cuts of 2001 and 2003 are allowed to expire, millions of working families will see their economic prospects dim, their job opportunities diminish and economic uncertainty rise. Moreover, taxes will rise dramatically for most taxpayers. Between now and January 1, 2011:12