From the March 1, 2009 Sunday Times (London)
March 2, 2009
by Irwin Stelzer
Hey big spender, spend a little time with me. It is not certain that Cy Coleman’s and Dorothy Fields’ lyrics from Sweet Charity were used by Barack Obama when he invited Gordon Brown to visit him later this week, but it is possible. After all, both believe that the way out of this recession is to borrow and borrow and spend and spend; and both are addicted to an expanded role for the state in the affairs of their citizens.
The prime minister will be meeting with a president who has decided on the most radical recasting of America’s priorities since Franklin Roosevelt’s New Deal, or at least since Lyndon Johnson launched his Great Society programmes in 1965 — indeed, “the boldest social democratic manifesto ever issued by a US president”, according to columnist Charles Krauthammer. This should be of interest not only to Americans, but to the rest of the world, which cannot but be affected by a big change in the structure of the American economy.
The most notable feature of the budget is its fundamental reordering of the role of government. In the fiscal year starting in October. Obama wants to spend a 10-year total of $630 billion for a downpayment on a government takeover of the healthcare system, green the nation’s energy economy, make college education an entitlement and otherwise heavily involve the federal government in an education system that until now has been under the control of local and state governments.
That is why spending aimed at getting the economy out of its rut is the least significant aspect of this budget. The president dismisses the notion that we are in the grip of a normal downturn in the business cycle: “We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies’ executive suites to the seats of power in Washington, DC.” Which is why Obama titled the budget document, “A New Era of Responsibility”. What is responsible about a budget that projects deficits rising from $459 billion to $1,752 billion in the first year of Obama’s budget, and remaining at $712 billion as far ahead as 2019, when the economy will be growing, is not clear.
This flow of red ink will persist despite a huge increase in taxes — $1.4 trillion over 10 years. The bulk of that increase is to come from two sources: the rich, and polluters. Those the president calls “the wealthy and well-connected”, a group he feels received too large a portion of the nation’s income and wealth during the boom years, will pay more.
In fact, a taxpayer does not have to be either wealthy or well-connected to serve as Obama’s cash machine. Single people earning $200,000 a year, and couples earning $250,000 will lose the benefits of the Bush tax cuts: top marginal rates will go from 35% to 39.6%, which will hit small firms that are taxed at individuals’ rates. Deductions for charitable contributions and mortgage-interest payments will decline, better-off pensioners will pay more for Medicare prescription drugs, estate taxes will rise, and the profits of hedge-fund managers will be taxed as ordinary income (39.6%) rather than as capital gains (15%).
Economists are debating the effect of these increases, with conservatives arguing they will reduce incentives to start new businesses. But economic arguments matter less to Obama than his own notions of fairness, of the need to tackle what he calls “a growing imbalance of accumulating wealth and closing doors to the middle class”. This is why he favours raising capital-gains tax even if that results in a decline in tax revenues, and why he is calling for a big transfer of wealth from upper- and not-so-upper income families and firms to what he calls 95% of Americans, whose taxes he claims will be lowered and whose benefits will be increased.
But even those lower earners will be hit by new taxes, but taxes that are in the long tradition of the stealthiness for which the president’s visitor, Brown, is justly famous. The proposed cap-and-trade system, aimed at reducing greenhouse gas emissions, will require businesses to pay some $645 billion for pollution permits in 2012-19. That cost will for the most part be passed on to consumers, most of them not rich, in the form of higher prices — for which they will blame their utilities and other companies, rather than the president.
A final feature worth noting is that this budget brings out of retirement that old favourite, Rosy Scenario. The revenue estimates assume that the economy, which the government reported on Friday had declined at an annual rate of 6.2% in the final quarter of last year, will grow at a rate of 3.2% next year and more than 4% in 2011, 2012 and 2013. It assumes that the powerful farm lobby will allow Congress to end subsidies to agribusinesses, and that military spending can be cut without imperilling national security. Most crucially, it assumes that a spendthrift Congress will change its ways to please the president.
Even more important, the underlying assumption of this budget is that the world will be willing to buy a flood of Treasury IOUs. But China, for example, is already worried about its excessive pile of dollar assets and a declining dollar.
Some features of the Obama plan make sense. The tax-deductibility of mortgage interest distorts investment flows, directing too much money to housing, as Margaret Thatcher realised. Taxing pollution makes sense, although cap-and-trade is a flawed means of reducing carbon emissions. Profits from the operation of hedge funds more closely resemble income than capital gains, and should be taxed as such. And estate taxes fall on the undeserving winners of the sperm lottery.
But these virtues are more than offset by the more radical features of Obama’s plan: spending at levels previously thought unimaginable, deficits as far ahead as the eye can see, a significant redistribution of the nation’s income from wealth creators to dependants on the state, government takeovers of significant sectors of the economy, more regulation of almost every business.
RIP the notion that Obama, who campaigned on the left, would govern from the centre.
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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