Obama's Radicalism Is Killing the Dow
By MICHAEL J. BOSKIN
It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.
The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.
Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.
To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.
The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).
Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.
Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.
As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.
Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.
The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.
The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.
A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.
The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.
Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.
New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.
From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.
Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.
On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.
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The recipe to socialism, get a majority of voters who pay no taxes, but yield the most benefits from our Mega Government...
"New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government. "
Now watch the usual morons, (probably only two in reality) trash MICHAEL J. BOSKIN.
All hail King Obama !!
MICHAEL J. BOSKIN is an intelligent, qualified individual. He says things that make some sense. There are others that are equally intelligent and qualified that disagree. We can follow the path we had been on that led us to where we are or we can try a new direction. 8 years of one path or 40 days of the new path. I voted for Bush twice. I voted for Obama. I want to try this new path for a while longer before I pass judgment.
"...the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours"
Boskin is looking at averages to make that statement. When you include the U.S. superwealthy in anything that is based on an average the number is significantly skewed. Using a median, or including other quality-of-life factors, the U.S. is well behind European states like Sweden, Holland and Denmark in true standard of living.
Enter these words "world standard of living index" into Google and see what you find.
I wonder why placer_democrat is posting pices critical of Obama, though? Strange.
A frequent contributor to the WSJ, Michael J. Boskin, is the Director of Exxon-Mobil. He holds a B.A, M.A. and PhD in economics and is a Friedman fellow of economics at the Hoover Institution. He was the Chairman of Council of Economic Advisers for George Bush.
Of President Obama, Dr. Boskin wrote:
"What if I told you that a prominent global political figure in recent months has proposed: abrogating key features of his government's contracts with energy companies; unilaterally renegotiating his country's international economic treaties; dramatically raising marginal tax rates on the "rich" to levels not seen in his country in three decades (which would make them among the highest in the world); and changing his country's social insurance system into explicit welfare by severing the link between taxes and benefits? [...] Sen. Obama reveals this startling economic illiteracy in his policy proposals and economic pronouncements."
Miuwtant,
Oh my! Oh my! Could it be that placer_democrat really IS rational_thinker, and AnInComPost, and Prospector?
It wouldn't be the first time.
Several years ago the regular AJ bloggers got fed up with his lunatic ravings, pointless provocations and personal attacks, so we simply agreed to ignore R_T.
The first week, his smears and abuse stopped and his demeanor changed to being mildly agreeable. But we continued to ignore him.
The second week, he was pleading for someone to respond to his posts which had become fawningly servile. Still we ignored him.
By the middle of the third week, R_T was in utter desperation, pleading for a response, promising to be good, and begging the group to not ignore him anymore. The anguish in his last posts convinced some of us that he might even be suicidal, so we relented and included him back again.
Less than a week later, R_T was his mean-spirited, ignorant, racist, insulting bigoted self again.
Naturally, he will deny any of this ever happened, but my experience confirms that ignoring R_T actually works. He simply cannot stand it. R_T is here for the attention he gets, rather than to rationally debate current issues. Playing the abrasive jerk gets him needed attention.
R_T was probably the ugly fat kid who nobody wanted to sit near at lunch; the geek who never got invited to the other kids' parties, so instead he learned to interrupt the adults with showing off: "Look at me! Hey, look at what I can do!" When that failed, he got into trouble. Either way, it got the attention he craved.
My only comment on this thread is this..
I have enjoyed the blogging on the AJ web site. But, it has come to my attention that most that post here are more interested in yelling at each other,casting insultus, innunendos and blatant disrespect for one another rather than carrying on a honest conversation about the listed topic....... again in this thread the topic has been lost on the person cra.....p flying around. Yea, I probalby have been guilty of some of that, but I have tried to remain above the fray and be respectfull of others and their opinions.
Each of us live in our "OWN" house that is painted how we want it to be. What is so terribly wrong with looking into someone elses house to see how it is painted. And to politely accept that they think differently than we do? And engage in a intelligent conversation with mutual respect for one another? Have we gone so far that we are no longer able to learn from one another or respect one another? And to agree to disagree without the insults???? Have we gone that far down the wrong path?
Thank you Mitchell for finally saying what most of us have wanted to say during these past few months. I completely agree!
I too agree.... Many times I think we lose focus.... There are corrupt leaders in both parties. I think the average person is getting it stuck to them by both reps and demos. United we stand and divided we ..... keep us divided I guess!
Socialism, once abhorrent to most Americans, is increasingly being embraced. According to the CIA World Factbook, nine European countries place ahead of the United States in terms of per capita GDP and standard of living: Luxembourg, Norway, Iceland, Ireland, Switzerland, Denmark, Sweden, Finland, and Netherlands. All are socialist countries.
Laissez-faire capitalism unfairly concentrates power and wealth among a small cabal that controls capital, maintains inequality, owns all political power, and denies equal opportunity and equal justice to the rest of society. Unfettered individualism and imperialist-style capitalism simply does not work, as the last thirty years are now proving.
I'm ready for a little of that European-style socialism. So are a majority of Americans, given the results of the past few elections. We say, "Bring it on, President Obama."
septic really IS just a dope isn't he?
Rolandmc: Since you at least made an effort to respond to the post, please tell me what your response is to my comment...
"The recipe to socialism, get a majority of voters who pay no taxes, but yield the most benefits from our Mega Government...
"New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government. "
Is this not a pathway to totalitarianism?
Look at Hugo Chavez...he nationalizes their oil, then gives away the freebeies, and a majority of people vote away the restriction on terms served.
Is this really what we want to happen in the USA?
rational placer democrat,
You are just peddling exaggeration and fear and you know it. "Is this not a pathway to totalitarianism?", you say. Sounds like an ad I have seen recently online with a photo of a young widow and her son at the funeral of their husband and father. It asks if you can afford to not have insurance because anything can happen at any time -- be fearful; buy our product. You are nothing more than a snake oil salesman, selling your brand of snake oil political theory by relentlessly exaggerating and mischarecterizing different ideas.
"...get a majority of voters who pay no taxes..." you say, implying that these people are deadbeats because they don't pay federal income tax. You conveniently gloss over the fact that they pay sales tax, state income taxes, gas taxes, Medicare and Social Security...the list goes on and on. The less well off pay a disproportionate share of their income in taxes and mandatory payments to the government. Your statement "the president's budget...would cement a permanent voting majority with no stake in controlling the cost of general government" totally mischaracterizes the facts.
Then you go on to raise a bogeyman, Hugo Chavez. "Whooo-ooo! Beware! Listen to me or Barack Chavez will nationalize oil companies in the United States and become our permanent president." Just like gay marriage leads to marriage with animals, right?
Your simple tricks may work with people who can't or won't think, such as brain-dead AIP. I'll just continue to pick your nonsense apart for what it is. Tricks, after all, are for kids.
Miuwtant,
You're eloquent when you're mad.
R_T; my response is this. People are loosing their jobs, tax reductions will not help them. Business have no customers, no income, tax reductions will not help them. Businesses that have no customers or income do not stay in business. I lost my job, the company I worked for lost their business. Neither of us were/are deadbeats. It's the 1st time in 38 years I've been unemployed/underemployed - over a year now. When I was "temporarily" laid off last Feb., it was "seasonal." The season never happened and the doors of the business closed. My IRA lost 50% of the value it had prior to the election in November. I saw the handwriting on the wall. For the 1st time in my life I voted for a democrat for any elected office above a county position.
I've exhausted my networking options, pound the streets, and am grateful...my wife is gainfully employed with wonderful benefits.
I'm ready to try something different. I think there are many of us that are ready for things to be different. I believe there is openness in this presidency...I don't like the the partisanship in the Congress.
I am not afraid. Fear will settle nothing. Fear from either side...
Skeptic,
Thanks. This guy gets me mad. Notice he has dropped out of the string, as usual. How could he respond to Roland's post otherwise?
.
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Roland,
I'm very sorry you are going through what so many others are experiencing. Several years ago I had the pleasure of receiving a layoff package, too, but was lucky to immediately find another job. But it's frightening. My wife's income would not keep us in our house. I wish you the best and like you believe the only thing we have to fear is fear itself. Not some bogeyman raised by a discredited political snake oil salesman.