From the November 9, 2008 The Times (London)
November 9, 2008
by Irwin Stelzer
Investors in America are trying to figure out just what Barack Obama’s sweeping victory will mean for the economy – and for them. Here are a few guesses.
The president-elect meant it when he promised to redistribute income from families earning more than $250,000 (£155,000) a year to those earning $50,000 (£30,000) or less. Taxes on the “richer” families will go up to fund cheques that will be mailed to the lower earners who now pay no income taxes.
Congressional Democrats will try to persuade the new president to lower the $250,000 cut-off point to the $150,000 his vice-president, Joe Biden, favours. Obama’s advisers say he will hold the line at $250,000, and some hint that he won’t risk exacerbating the recession by raising taxes immediately. Instead, he will simply allow the Bush tax cuts to expire at the end of 2010, returning taxes on high earners to the levels prevailing during the Clinton years.
So, too, with inheritance taxes: they will go up after 2010 to preBush levels, perhaps with some forgiveness for those passing on modest inheritances or small businesses. In the end, it will cost high earners more to live and more to die.
But taxes are only one area of concern to the business community. The Bush administration has handed Obama significant control over the commanding heights of the economy. The new president inherits ownership of parts of most big banks, insurance companies and other financial institutions, and has the funds to extend government ownership into other sectors of the economy. There is little doubt that he will use that control to restrict executive salaries, direct funds to homeowners who are behind with their mortgage payments, pressure banks to lend to constituencies he and his congressional allies deem worthy, and otherwise exercise more control over the allocation of the nation’s capital resources than any of his predecessors was able to do, with the exception of Franklin Roosevelt during the second world war.
Some analysts are arguing that Obama will be constrained by the huge budget deficits he will face. Not entirely. Many items on his wish list don’t require government money. He will fulfil his pledge to support legislation to eliminate the secret ballot in union-recognition elections. The Environmental Protection Agency probably does not need new legislation to change the rules on carbon emissions so that Obama can achieve his goal of making new coal-fired power stations totally uneconomic. The Federal Communications Commission can impose “fairness” rules that make it more difficult for conservative talk radio stations to challenge his government’s policies. The Food and Drug Administration can make it difficult if not impossible for pharmaceutical companies to gain permission to market new drugs that the industry’s critics contend are “merely” improvements on existing drugs, or are not sufficiently efficacious in the eyes of regulators.
In short, Obama can impose large portions of his agenda without asking Congress for new funding. Some decisions will undoubtedly be challenged in the courts, but most judges are unlikely to constrain actions that enhance the powers of the government, although they have vetoed many Bush attempts to shrink such powers.
Some sectors are likely to see big changes. Housing will be the first. The government has placed the two giant mortgage writers Freddie Mac and Fannie Mae into “conservatorship” – a form of what in Britain is called administration. There is no chance that Obama will try to privatise these organisations, which back about three out of every four mortgages in America. Even Federal Reserve Board chairman Ben Bernanke, not exactly a raving socialist, says there is a role for government to play in the mortgage and housing markets. The best guess is that Freddie and Fannie will be revived in some form, with a mandate to do what has caused much of the mess we are now in – make loans to homeowners who may have difficulty meeting their mortgage payments.
Then there is the energy sector. Apart from Obama’s opposition to new coal-fired power stations and to funding the waste repository that would make nuclear power feasible, House Speaker Nancy Pelosi is adamantly set against offshore drilling. Renewables, even though heavily subsidised, will add only a tiny bit to supplies. So Obama will do what Democrats since the days of Jimmy Carter have wanted to do: ration the use of energy. Not with coupon books, but by increasing fuel-efficiency standards that will shrink the size of cars to European dimensions; rigidly enforcing rules that mandate the use of unsafe lightbulbs; imposing expensive efficiency standards for new appliances.
So consider this possibility, a nightmare for conservatives. By the end of his first term Obama will be exercising control over the allocation of bank credit, and similar if less overt control over the allocation of the nation’s energy resources. The financial-services sector will be crawling with regulators determined to reduce risk-taking. The rich will be paying higher taxes – no problem for billionaires such as Bill Gates and Warren Buffett, but a big deterrent to the establishment of small businesses. The trade unions will be recovering much of the ground they lost when the muscle-based industries gave way to intelligence-based industries. Americans will be driving smaller, less safe cars, and reading by dimmer bulbs. And – here’s the most important part – an economic recovery will be under way sometime before Obama begins his campaign for reelection.
Will it be as vigorous as it might have been with less intrusive government? Perhaps not. But will voters answer in the affirmative the question Ronald Reagan famously put to Jimmy Carter in 1980 – “Are you better off than you were four years ago?”. As Obama’s likely opponent in 2012, Sarah Palin, might put it in a moment of candour, “You betcha”. Voters will be comparing the economy Obama inherited with the one over which he is then presiding, not with what a McCain presidency might have created. On to 2016, which might be a different story.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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