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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?
AP
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.
Mr. Boskin, professor of economics at Stanford
University and senior fellow at the Hoover Institution, was chairman of
the Council of Economic Advisers under President George H.W. Bush.
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?
AP
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.
Mr. Boskin, professor of economics at Stanford
University and senior fellow at the Hoover Institution, was chairman of
the Council of Economic Advisers under President George H.W. Bush.
