Obamanomics Is a Recipe for Disaster!

Ξ July 29th, 2008 | → 0 Comments | ∇ 2008 Presidential Race, Main, Politics |

Obamanomics Is a Recipe for Recession

By MICHAEL J. BOSKIN

July 29, 2008; Page A17

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?

The first name that came to mind would probably not be Barack Obama, possibly our nation’s next president. Yet despite his obvious general intelligence, and uplifting and motivational eloquence, Sen. Obama reveals this startling economic illiteracy in his policy proposals and economic pronouncements. From the property rights and rule of (contract) law foundations of a successful market economy to the specifics of tax, spending, energy, regulatory and trade policy, if the proposals espoused by candidate Obama ever became law, the American economy would suffer a serious setback.

To be sure, Mr. Obama has been clouding these positions as he heads into the general election and, once elected, presidents sometimes see the world differently than when they are running. Some cite Bill Clinton’s move to the economic policy center following his Hillary health-care and 1994 Congressional election debacles as a possible Obama model. But candidate Obama starts much further left on spending, taxes, trade and regulation than candidate Clinton. A move as large as Mr. Clinton’s toward the center would still leave Mr. Obama on the economic left.

Also, by 1995 the country had a Republican Congress to limit President Clinton’s big government agenda, whereas most political pundits predict strengthened Democratic majorities in both Houses in 2009. Because newly elected presidents usually try to implement the policies they campaigned on, Mr. Obama’s proposals are worth exploring in some depth. I’ll discuss taxes and trade, although the story on his other proposals is similar.

First, taxes. The table nearby demonstrates what could happen to marginal tax rates in an Obama administration. Mr. Obama would raise the top marginal rates on earnings, dividends and capital gains passed in 2001 and 2003, and phase out itemized deductions for high income taxpayers. He would uncap Social Security taxes, which currently are levied on the first $102,000 of earnings. The result is a remarkable reduction in work incentives for our most economically productive citizens.

The top 35% marginal income tax rate rises to 39.6%; adding the state income tax, the Medicare tax, the effect of the deduction phase-out and Mr. Obama’s new Social Security tax (of up to 12.4%) increases the total combined marginal tax rate on additional labor earnings (or small business income) from 44.6% to a whopping 62.8%. People respond to what they get to keep after tax, which the Obama plan reduces from 55.4 cents on the dollar to 37.2 cents — a reduction of one-third in the after-tax wage!

Despite the rhetoric, that’s not just on “rich” individuals. It’s also on a lot of small businesses and two-earner middle-aged middle-class couples in their peak earnings years in high cost-of-living areas. (His large increase in energy taxes, not documented here, would disproportionately harm low-income Americans. And, while he says he will not raise taxes on the middle class, he’ll need many more tax hikes to pay for his big increase in spending.)

On dividends the story is about as bad, with rates rising from 50.4% to 65.6%, and after-tax returns falling over 30%. Even a small response of work and investment to these lower returns means such tax rates, sooner or later, would seriously damage the economy.

On economic policy, the president proposes and Congress disposes, so presidents often wind up getting the favorite policy of powerful senators or congressmen. Thus, while Mr. Obama also proposes an alternative minimum tax (AMT) patch, he could instead wind up with the permanent abolition plan for the AMT proposed by the Ways and Means Committee Chairman Charlie Rangel (D., N.Y.) — a 4.6% additional hike in the marginal rate with no deductibility of state income taxes. Marginal tax rates would then approach 70%, levels not seen since the 1970s and among the highest in the world. The after-tax return to work — the take-home wage for more time or effort — would be cut by more than 40%.

Now trade. In the primaries, Sen. Obama was famously protectionist, claiming he would rip up and renegotiate the North American Free Trade Agreement (Nafta). Since its passage (for which former President Bill Clinton ran a brave anchor leg, given opposition to trade liberalization in his party), Nafta has risen to almost mythological proportions as a metaphor for the alleged harm done by trade, globalization and the pace of technological change.

Yet since Nafta was passed (relative to the comparable period before passage), U.S. manufacturing output grew more rapidly and reached an all-time high last year; the average unemployment rate declined as employment grew 24%; real hourly compensation in the business sector grew twice as fast as before; agricultural exports destined for Canada and Mexico have grown substantially and trade among the three nations has tripled; Mexican wages have risen each year since the peso crisis of 1994; and the two binational Nafta environmental institutions have provided nearly $1 billion for 135 environmental infrastructure projects along the U.S.-Mexico border.

In short, it would be hard, on balance, for any objective person to argue that Nafta has injured the U.S. economy, reduced U.S. wages, destroyed American manufacturing, harmed our agriculture, damaged Mexican labor, failed to expand trade, or worsened the border environment. But perhaps I am not objective, since Nafta originated in meetings James Baker and I had early in the Bush 41 administration with Pepe Cordoba, chief of staff to Mexico’s President Carlos Salinas.

Mr. Obama has also opposed other important free-trade agreements, including those with Colombia, South Korea and Central America. He has spoken eloquently about America’s responsibility to help alleviate global poverty — even to the point of saying it would help defeat terrorism — but he has yet to endorse, let alone forcefully advocate, the single most potent policy for doing so: a successful completion of the Doha round of global trade liberalization. Worse yet, he wants to put restrictions into trade treaties that would damage the ability of poor countries to compete. And he seems to see no inconsistency in his desire to improve America’s standing in the eyes of the rest of the world and turning his back on more than six decades of bipartisan American presidential leadership on global trade expansion. When trade rules are not being improved, nontariff barriers develop to offset the liberalization from the current rules. So no trade liberalization means creeping protectionism.

History teaches us that high taxes and protectionism are not conducive to a thriving economy, the extreme case being the higher taxes and tariffs that deepened the Great Depression. While such a policy mix would be a real change, as philosophers remind us, change is not always progress.

 

Obama: The Audacity of Vanity

Ξ July 23rd, 2008 | → 0 Comments | ∇ 2008 Presidential Race, Main, Politics |

July 18, 2008

The Audacity of Vanity

By Charles Krauthammer

WASHINGTON — Barack Obama wants to speak at the Brandenburg Gate.

He figures it would be a nice backdrop. The supporting cast — a cheering audience and a few fainting frauleins — would be a picturesque way to bolster his foreign policy credentials.

What Obama does not seem to understand is that the Brandenburg Gate is something you earn. President Reagan earned the right to speak there because his relentless pressure had brought the Soviet empire to its knees and he was demanding its final “tear down this wall” liquidation. When President Kennedy visited the Brandenburg Gate on the day of his “Ich bin ein Berliner” speech, he was representing a country that was prepared to go to the brink of nuclear war to defend West Berlin.

Who is Obama representing? And what exactly has he done in his lifetime to merit appropriating the Brandenburg Gate as a campaign prop? What was his role in the fight against communism, the liberation of Eastern Europe, the creation of what George Bush 41 — who presided over the fall of the Berlin Wall but modestly declined to go there for a victory lap — called “a Europe whole and free”?

Does Obama not see the incongruity? It’s as if a German pol took a campaign trip to America and demanded the Statue of Liberty as a venue for a campaign speech. (The Germans have now gently nudged Obama into looking at other venues.)

Americans are beginning to notice Obama’s elevated opinion of himself.

There’s nothing new about narcissism in politics. Every senator looks in the mirror and sees a president. Nonetheless, has there ever been a presidential nominee with a wider gap between his estimation of himself and the sum total of his lifetime achievements?

Obama is a three-year senator without a single important legislative achievement to his name, a former Illinois state senator who voted “present” nearly 130 times. As president of the Harvard Law Review, as law professor and as legislator, has he ever produced a single notable piece of scholarship? Written a single memorable article? His most memorable work is a biography of his favorite subject: himself.

It is a subject upon which he can dilate effortlessly. In his victory speech upon winning the nomination, Obama declared it a great turning point in history — “generations from now we will be able to look back and tell our children that this was the moment” — when, among other wonders, “the rise of the oceans began to slow.” As economist Irwin Stelzer noted in his London Daily Telegraph column, “Moses made the waters recede, but he had help.” Obama apparently works alone.

Obama may think he’s King Canute, but the good king ordered the tides to halt precisely to refute sycophantic aides who suggested that he had such power. Obama has no such modesty.

After all, in the words of his own slogan, “we are the ones we’ve been waiting for,” which, translating the royal “we,” means: “I am the one we’ve been waiting for.” Amazingly, he had a quasi-presidential seal with its own Latin inscription affixed to his podium, until general ridicule — it was pointed out that he was not yet president — induced him to take it down

He lectures us that instead of worrying about immigrants learning English, “you need to make sure your child can speak Spanish” — a language Obama does not speak. He further admonishes us on how “embarrassing” it is that Europeans are multilingual but “we go over to Europe, and all we can say is, ‘merci beaucoup.'” Obama speaks no French.

His fluent English does, however, feature many such admonitions, instructions and improvements. His wife assures us that President Obama will be a stern taskmaster: “Barack Obama will require you to work. He is going to demand that you shed your cynicism … that you come out of your isolation. … Barack will never allow you to go back to your lives as usual, uninvolved, uninformed.”

For the first few months of the campaign, the question about Obama was: Who is he? The question now is: Who does he think he is?

We are getting to know. Redeemer of our uninvolved, uninformed lives. Lord of the seas. And more. As he said on victory night, his rise marks the moment when “our planet began to heal.” As I recall — I’m no expert on this — Jesus practiced his healing just on the sick. Obama operates on a larger canvas.