Confirming your suspicions about Obamanomics.
by Matthew Continetti
Hello and welcome to Advanced Obamanomics at WEEKLY STANDARD U. If you are in this class, you have passed Remedial Rubinomics, Identity and Globalization in the Works of Barack Obama, and Introduction to Contemporary Religion with Professor Jeremiah Wright. Also, your check has cleared. Congratulations.
As noted in the syllabus, the required reading for today's class includes The Audacity of Hope pp. 220-257; Obama's March 27, 2008, speech in New York City on "Renewing the American Economy"; Richard Thaler and Cass Sunstein's Nudge; David Leonhardt's indispensable August 24, 2008, New York Times magazine article "Obamanomics," from which the title of this class is drawn; and Robert Kuttner's Obama's Challenge.
Now, most of your classmates probably spent last night experimenting with the booze luge they had constructed out of plywood and a bag of crushed ice. You, however, made it through the required reading without--and this is no small feat--falling asleep. This means that there is a bright future in store for you at either the Bureau of Labor Statistics or the Congressional Budget Office. Good thing you didn't miss this incredible opportunity by going to last night's underwear party, getting wasted, and setting a couch on fire.
Since this is a conservative institution with the highest academic standards, each class will begin with a quiz. Who said the following?
NUMBER ONE: "I accuse the present administration of being the greatest spending administration in peace times in all our history. . . . I regard reduction in federal spending as one of the most important issues of this campaign."
NUMBER TWO: "The market is the best mechanism ever invented for efficiently allocating resources to maximize production. . . . And I also think that there is a connection between the freedom of the marketplace and freedom more generally."
Correct! Speaker number one is then-presidential candidate Franklin Delano Roosevelt, campaigning in 1932. And speaker number two is presidential candidate Barack Obama, campaigning in 2008. It's often forgotten, today, how FDR campaigned for the presidency as a budget balancer who was going to rein in federal spending. And while Obama may be a liberal who spent his youth as a leftwinger, he has plenty of nice things to say about the free market. He is not going to collectivize agriculture or nationalize the banks. The Bush administration has already done that anyway.
The larger point of this quiz is to illustrate just how unpredictable politics is. As Professor Barnes likes to say, the future is never a straight-line projection of the present. This is true in life, culture, economics, and politics. A corollary is that presidents almost never govern in the manner in which they campaigned. Stuff happens. Woodrow Wilson ran for reelection on a peace platform. FDR ran as a fiscal conservative. George H.W. Bush promised he wouldn't raise taxes. George W. Bush said the United States ought not to "nation build." In each case, events interfered.
So, as we examine Obama's economic policy proposals, we ought to look at them with a skeptical eye. Many of the proposals won't become law. Others will be modified beyond recognition. Still others will be cast aside, as unforeseen developments force the rejection of old ideas and the adoption of new ones. The economy could worsen. The wars in Iraq and Afghanistan could worsen. The United States could become involved in new conflicts in Darfur, Iran, Pakistan, the Korean peninsula, Taiwan, or someplace no one has ever heard of. Al Qaeda could strike again. And don't forget Putin.
There are, however, a few basics we can take for granted. If Obama is elected president in a few weeks, not only is enrollment in this class going to spike, but federal taxes, spending, and the deficit--at least in the short term--are all going to rise. As taxes on the rich go up, the income threshold at which one becomes "rich" is likely to go down. Obama wants billions in new spending, and, if the Bush presidency is any indication, he won't stop Democrats in Congress from spending even more. And the new spending, combined with the loss in revenue from an economy in recession, will increase the deficit.
The outcome of many policies will be unrelated to their author's purpose. Sometimes those outcomes will be perverse. They'll exacerbate the problem. And the whole darned thing will be extremely difficult to roll back. As a wise man once said, the closest thing to immortality in this life is a government program.
It's possible to divide Obama's economic agenda into three parts: the Not-So-Bad, the Bad, and the Really, Really Bad. Let's take a brief look at each.
Obama is a cool character. It's rare that you see him ruffled in public. He claims he's a "pragmatist," but he's actually a gradualist. He likes taking things step by step. He doesn't go for one-size-fits-all solutions. He's cautious, calm, and even mellow. This has sometimes been a liability, since his supporters are constantly urging him to ramp up the attacks on Bush and McCain. But other times his steadiness works well. For example, his tempered response to the current economic crisis has been rewarded in recent public opinion polls.
If he becomes president, Obama's temperament will be a plus. The markets need to see confidence in the political leadership. They react sourly to brashness and unpredictability. Obama's gradualism, moreover, could serve as a check on a liberal Democratic Congress. His health care plan, for instance, does not contain an individual mandate. His cap-and-trade proposal includes a private auction for carbon permits in order to avoid rent-seeking and corruption. He wants to make 401(k) savings programs mandatory and automatic. He could urge the Democrats who run the legislative branch to pare down their grand designs and outrageous expenditures. He might even veto a spending bill or two, although that's probably asking too much.
Obama's economic advisers aren't so bad either. His team might not include any supply-siders, but it does contain, almost exclusively, centrist Democrats who are sympathetic to markets. Obama's chief economic adviser, Jason Furman, is a protégé of Robert Rubin, who has said, in the past, and this is not a joke, kind things about Wal-Mart. Another adviser, University of Chicago economist Austan Goolsbee, got into some trouble earlier this year when, it was reported, he told a group of Canadians that Obama didn't really mean all the nasty things he was saying about NAFTA. One hopes Goolsbee was right.
Other Obama advisers include the aforementioned Rubin; former Fed chairman Paul Volcker, who, alongside Ronald Reagan, helped crush inflation in the early 80s; former Clintonite Laura Tyson; and of course mega-investor Warren Buffett. These are not revolutionaries. They have no history of pushing the envelope. Buffett couldn't be exciting if he tried. They are likely to suggest that Obama adopt, by and large, the economic policies of the Clinton years, with perhaps a little less focus on deficit reduction. And the economy, you may recall, wasn't exactly Clinton's weak spot.
The Democratic party's left wing didn't like it when Obama named Furman to his team last June. It thought Furman too centrist. And this is another not-so-bad part of Obama's economic agenda, namely, the left isn't thrilled. There are plenty of economists and journalists who argue Obama isn't left-wing enough. Robert Kuttner worries Obama will turn his back on "transformative" politics in favor of Clinton's balanced-budget economic stewardship. He'd rather have Obama transform America into Denmark. John Cassidy wrote that--and he did not mean this as a compliment--Obama "appears to be unduly influenced by the need to preserve choice." And during the Democratic primaries, Paul Krugman was a fierce critic of Obama's health care plan. As long as parts of the left are angry at Obama, he can't be all that bad. Which brings us to:
THE BAD There are all sorts of taxes that can be raised, and a President Obama is going to raise almost all of them. He's going to raise federal income taxes on families making more than $250,000 a year. He's going to raise capital gains and dividend taxes. He's going to raise the corporate and estate taxes. He's proposing a windfall profits tax on oil companies. He'd like to tax "carried interest" as private income. He's suggested lifting the cap on income subject to the payroll tax.
Obama says that, under his plan, tax rates on incomes below $250,000 will not change, and that "95 percent" of Americans will actually get an income tax cut. But this is misleading. Plenty of Americans pay very little, or absolutely no, federal income tax. So it's hard to give them a tax "cut." What Obama is actually proposing is a refundable tax credit--it's unclear whether it's a one-shot deal or permanent--of $500 per person. The credit will be, in David Leonhardt's words, "applied toward income taxes based on payroll taxes paid." Meaning that everyone who pays payroll taxes will get $500. If your federal income tax burden is less than $500, you'll get the balance via government check. This is not the only tax credit Obama would make fully refundable. He would apply a similar logic to education, mortgage interest, savings, child care, and hybrid car credits.
It's true Obama would eliminate capital gains taxes for "start-ups and small businesses," although he hasn't said how he'll distinguish between actual start-ups, and companies--General Motors, say--that will call themselves start-ups for tax purposes. It's true that, under Obama's plan, seniors who make less than $50,000 a year won't pay any income taxes at all. But it's still not quite accurate to call Obama a tax cutter. Obama is more of a tax carver. He wants to take the federal tax code and carve out all these credits and exemptions so that the overall tax burden becomes slightly more progressive, and more government benefits flow to the middle class and poor. That means an already complicated tax code is about to become even more complicated. And that income tax hikes on the wealthy are going to finance benefits for some people who don't pay any income tax at all. This isn't "cutting" taxes, by which one usually means across-the-board, permanent rate cuts. It's another form of spending.
A conservative economist would tell Obama, politely, that effective tax reform is flattening the tax rates while broadening the tax base. And Obama would tell him, politely, to go jump in a lake.
THE REALLY, REALLY BAD Still, it's unlikely Obama will raise tax rates to the point where they distort incentives to work, invest, and produce, as they did during the 1930s and the 1970s. It's axiomatic, however, that when you tax something you get less of it; Obama's higher taxes will therefore result in less investment and risktaking on the part of the wealthy, whose capital finances new companies that create jobs. This is the wrong thing to do during a recession, but Obama and the Democrats in Congress will do it anyway, which probably means that the economic downturn will last longer than it ought to. Such is life. It's not the end of the world.
But the end of the economic world as we know it--this only a slight exaggeration--is exactly what might happen if Obama follows through on two other aspects of his economic agenda.
The first is his opposition to free trade. Obama has opposed every trade deal under consideration since he's been in Congress, which, admittedly, isn't all that long. During the Democratic primaries he called for renegotiating NAFTA. He may praise free trade in interviews with the financial press, but he clams up when faced with a large crowd. And unlike Bill Clinton, Obama has nary a positive word for free trade in general, even though it has produced undeniable benefits for Americans and people worldwide. Obama attacks "companies that ship jobs overseas," but he doesn't have much else to say about the global economy. Democratic economists will tell you Obama knows better and is just saying what's politically expedient. Talk about a profile in courage.
The problem is the economists could be wrong--this happens on occasion--and Obama could actually mean what he says. We'd have an anti-free trader in the White House for the first time in decades. And this would be an absolute disaster. The global trading system has already reached an impasse, with rich countries unwilling to end agricultural subsidies and level the playing field for farmers in poor countries. A no-trade Obama presidency could let the system degrade even further. And if he were to implement anti-trade policies--tariffs and other protectionist measures--the result could be a trade war that would raise prices, kill jobs, and increase enmity between nations. For the sake of the U.S. and global economy, Obama can't allow the AFL-CIO and other unions to dictate trade policy.
But they just might, because Obama has shown no sign of breaking with the unions on any issue. This is the second-most disturbing aspect of his economic agenda. Obama has said he would sign the so-called "card-check" legislation that Congress will undoubtedly consider, and probably pass, next year. The legislation would eliminate the secret ballot in union elections and allow the bosses to unionize a shop once a certain number of names had been written down on a card. Card-check is an ugly piece of work. One can see how the opportunities for graft, fraud, and intimidation under this sort of scheme would be enormous. And the democratic ideal of the secret ballot would be undermined.
Card-check would also lead to a rapid jump in unionization. This is not, despite what your Teamster friends might tell you, a good thing. Union participation in the private sector has been on the decline for decades and, not coincidentally, during this same amount of time, on average, productivity has skyrocketed while unemployment has plummeted. Unions produce frozen labor markets, which increase unemployment and class stratification while lowering productivity and economic growth. And the unions' politically negotiated wage gains also encourage inflation.
When did the world understand Ronald Reagan was serious about ending stagflation? When he fired the air traffic controllers and broke their strike. A President Obama could demonstrate similar independence and fortitude by vetoing card-check. But don't bet on it. It's more likely he'll cave, and the economy and labor-force democracy will suffer the consequences.
For those of your who arrived late to class--don't think I didn't notice--here's the CliffsNotes version of today's lecture: Obamanomics equals higher taxes, more government spending, a larger deficit, a more complicated tax code, increased regulation, a slowdown in global economic integration, and the resurrection of the labor unions, all brought to you by a cool-headed gradualist with a team of brilliant advisers. Not a pretty picture. But, as the saying goes, conservatives should always prepare for the worst, because they ought to expect nothing less.
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