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Feb 25 2009

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Hamlet on the Potomac

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As a nation, we have been adjusting to the series of “firsts” as a result of the rise of Barack Obama; the first African-American to head a major Party ticket, to win the presidency and to be sworn into office.

With his speech on Tuesday, Obama added a concluding act of symbolism to his duties as President by addressing a joint session of Congress and the American people. Amid contentious politics and consequential policy decisions yet to come, it was a brief moment of uniting pride for all Americans.

Speeches before Congress offer the rare opportunity for presidents to define conditions, specify national goals, delineate process and above all, to create a positive vision.

President Obama came into the House Chamber on Tuesday with a laudable set of goals: create jobs and revitalize lending, reform health care, renew our commitment to education and reduce our dependence on foreign energy. He talked about the need for responsibility, both as a nation facing up to our current economic crisis, but also as individual families, responsible to our children. He spoke of our responsibilities to the next generation of citizens.

But in explaining his plan, the President tripped at the crossroads where his ideology meets actual circumstance. He was trapped by contradictions, errors in logic, false-choice rhetoric, and perhaps most distressing, ignorance to how the ideological commitments of his plan will serve as hurdles to economic growth and deficit reduction. The speech was not confidence-building once parsed.

It started small and petty.

In stating that for too long America had not met its responsibilities, President Obama said, “I say this not to lay blame or look backwards.”

But only a paragraph later he was doing exactly that.

A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted…at the expense of a healthy market. And all the while, critical debates and difficult decisions were put off for some other time or some other day.”

We will talk about tax cuts later, but simply stated, the record does not support Obama here; at least not in the fashion he believes.

It was Pelosi and Frank and the other co-conspirators, after all, that prevented regulatory reform of Freddie and Fannie when it was proposed by the Bush administration in 2005.

And when it came to hard choices, it was President Bush who dedicated his second term to Social Security reform, only to be defeated by Pelosi, Emanuel and her gang; politicians who put politics ahead of country on a matter of the utmost urgency.

The slap at Bush and Republicans was only a layup for whoppers yet to come.

I asked Congress to send me a recovery plan by President’s Day that would put people back to work and put money in their pockets. Not because I believe in bigger government, I don’t (emphasis added).”

In only 33 days, Obama has already made the statement preposterous.

The Stimulus bill that Obama lauds for its quick approval was developed in secret and without debate. It was presented as a fait accompli with only modest changes to switch three Republican votes in the Senate to assure passage. In content it is the largest spending bill in American history and the largest expansion of government since the Great Society.

Period.

But Obama has maintained that this bill is a key to recovery, not just a government expansion in the cause of wealth redistribution.

Specifically he stated that the plan will save or create 3.5 million jobs over the next two years. Considering the monumental waste the bill will involve in government transfers that are simply not economic stimulus, the Democrats would have done better to simply divide the money among the 3.5 million job seekers, providing a tidy $212,000 per person, less taxes of course.

Obama had a bold defense too for the Stimulus bill’s tax provisions. He noted, without any apparent irony, that taxpayers will be getting their first checks on April 1st. The “rebate” not “tax cut” as the President said, will be about $7 a week for single filers and $15 for couples.

And people wonder why McDonalds’ stock is up?

In further defense of the bill the President said that the legislation was “earmark free,” a whopper so egregious that I am almost certain Nancy Pelosi’s distracting, vacant and unmoving smile during the address twitched for just a moment.

What made the presentation and defense of the Stimulus so frustrating was that, once done singing its praises, Obama acknowledged the real cause of the current economic uncertainty – lending.

Again without any apparent recognition of his faulty logic or reasoning, Obama said, “Because even if we manage [the Stimulus bill] flawlessly, there will be no real recovery until we clean up the credit crisis that has severely weakened our financial system.”

I am not an “I told you so” person but, in a February 2nd piece as the Obama-nation was being assembled in Congress, Duffy stated:

“That government action is necessary to forestall additional economic hardship is axiomatic. Simply doing nothing, as some conservatives have insisted, will not trigger recovery. Unfortunately, passing the Democratic bill won’t bring recovery either.

Instead of addressing the root causes for our economic maladies, the Democratic package serves only as an umbrella for an aimless assortment of liberal “wish list” spending, and fig leaf tax cuts that will increase our national debt without fixing our national economy. Consider that while the Wall Street crisis has proliferated into a global economic downturn, the root cause has remained the same; a credit crunch forced by financial portfolios of toxic debt that have choked access to capital for consumers and businesses. Without the confidence to borrow and the ability to lend, demand will continue to languish and suppliers will necessarily retrench, a virtue-less cycle that will add to bankruptcies, unemployment and negative growth.”

Oh, if only the President was a “Loyal Reader.”

Obama is completely correct here. Dealing with toxic assets and getting lending started is crucial to economic recovery. I would say the first priority. And we’re going to have to spend to get there.
A lot.

It would not be so difficult for voters to understand this piece – particularly as the President wisely separated personal lending activity from bailouts to nameless financial institutions – if it hadn’t been preceded by the Pelosi-Reid Pork-fest that simply erodes confidence in government as fiscal stewards.

The question remains for Team Obama; if lending is the key to recovery, why did they do the Stimulus first, if not simple partisan politics and ideological satisfaction; reasons beneath the dignity of serious leadership.

Throughout the address the President utilized a near irritating rhetorical device; the “either/or.”  Pollsters do this in the way they ask questions that clearly have more than the provided answers.

In defending the “Porkulus”, Obama said that he was mindful of larger government and national debt, but that failure to act would have made things worse.

Who’s arguing?

Of course government action needed to be taken. But Obama’s point is diversionary. The real question was what action.  By framing the question as a choice between Obama’s plan and nothing, the President utilized a rhetorical device that is simply unfair and unconvincing.

In talking through next steps on the bank bailout, Obama has already put down his marker in the same way. “But while the cost of action will be great, I can assure you the const of inaction will be far greater, for it could result in an economy that sputters along for not just months or years, but perhaps a decade.”

How terrifying.

Still, who could possibly want the economy to sputter on for a decade without action? Duffy supports efforts to unclog toxic debt and to get the banks lending (see “Seeds of Promise” blog), understanding that it’s going to cost. But the choice is absolutely not between Obama’s plan and nothing. The Obama “zero sum game” is not the only game in town and Republicans and Democrats should call him on it.

As an aside here, does anyone else realize that the candidate of change has become a fear-mongerer and that “hope” has become a four-letter word? It seems as if the President has traded-in one false set of pretensions for another.

Sad.

I rather enjoyed him more when he was busy calming seas and curing the sick.

In the same vein, amid all the tortured justifications and rhetorical slights of hand, there was also an unappealing vanity to some Obama statements.

In talking about mortgage financing, Obama said that it was his foreclosure plan that had helped to bring about lower interest rates.

Would I be at risk of condemnation by pointing out that the collapse of the housing market had a profound impact on interest rates well before the sketchy outlines of Obama’s plans have come to light? Obama also talked about “historic” investments in education through the Stimulus, though support for education has been growing and sustained for years.

It was also amusing to watch Obama talk about the Bush-Pelosi-Reid bank bailout last September as if he was a spectator watching it on TV.

I understand that when the last administration asked this congress to provide assistance for struggling banks, Democrats and Republicans alike were infuriated by the mismanagement and results that followed. So were the American taxpayers. So was I.” The then-Senator from Illinois voted for the package, eyes open, though you might not have known that last night from the reeking indignation.

By way of contrast, amid all the disappointment over “mismanagement,” of the first bank bailout, it is historical fact that the Bush bill was debated and amended in the open, at considerable variance for the Obama’s Stimulus.

Just a reminder, when the abuse of funds stories start rolling in. Remember where you heard it first.

Taking a step back, at the core of Obama’s address was a concept to which he alluded but did not state directly – economic growth.

Without economic growth the downward cycle of job losses, consumer spending retrenchment and business cutbacks will continue. Even if you do not agree with the course or effectiveness of the Democrats’ approved spending, the Obama plans are at least notionally intended to spur the economy.

So, assuming Obama’s firm commitment then, two other significant initiatives announced last night strains credulity with the goal of economic growth. Specifically, Obama announced support for a Cap & Trade system for Greenhouse Gas (GHG) emissions, and favors raising taxes on the top 2% of wage earners.

What could be the problem?  Cap & Trade will make the environment cleaner while the Wall Street crooks and thieves deserve to pay-up, right? Like most things Obama, the issue isn’t one dimensional as portrayed.

Cap & Trade monetizes GHG pollution by assigning it a dollar value.

It is designed as an incentive to move to cleaner forms of energy production and use. But the incentive is an effective tax on energy production and use. Yes, that includes Big Oil that everyone loves to hate, but it also includes your local dry cleaner and a multitude of other activities that you may not have considered. It is an obvious tax in some respects, a hidden tax in others.

There are several results here. Costs for energy will increase as energy companies pass along their tax to consumers. Incentives for energy companies to do more investment and production that may have GHG implications will evaporate in the interim. Off shore drilling (which went unmentioned last night), pipelines, refining capacity; we need all of this, and Cap & Trade will tax it. Amid our formidable infrastructure, Cap & Trade could be the trigger for scarcity.

Cap & Trade is an anti-incentive for economic growth, particularly in a recession.

Second, Obama is going to allow the Bush tax cuts to expire, which will raise taxes on the top 2% of wage earners. Last night he tested his critical line of defense in that the tax increase will not affect 95% of the American people.

He’s correct as far as it goes, but this “fair share” argument is little more than disguised class warfare.  It wouldn’t matter as much but for the need we have in a recession for private sector innovators and performers at this moment of peril.

Before you get out your pitchforks and storm the mansion, consider a few facts derived from the following chart:

Levels of Household Income Earners and their Proportion of the Federal Income Tax

Federal Revenue & Spending Chart
Source: SOI Bulletin, Statistics of Income Division

The top 1% of earners already pays nearly 40% of all federal income taxes. The top 5% of earners – ironically the citizens that are ineligible for the Obama “Making Work Pay” McDonalds tax rebate, pay fully 60% of the tax burden.

In a progressive tax system it is essential that those that make the most pay the most, but not to the extent of penalizing success.

So that we are clear, for the rich to pay their “fair share” it is the Obama plan, amid recession, to increase taxes by 5% on the top 2% of wage earners, who already pay more than 50% of the nation’s tax burden. But for populist payback, where is the sense in this? It doesn’t help with growth and it won’t help with revenues in a recession.

Small businesses will take a hit, at least those that are Limited Liability Corporations (LLCs), where income flows through the corporation to the owners who file as individuals. McCain warned about this during the campaign.

Small businesses are our engine of growth and innovation. The tax increase won’t shut down small business creation but it certainly is not an incentive to stimulate it.

In the larger context, in terms that Team Obama might appreciate, the TOP-TWO are a variation of the “means of production. These are not only spenders, but crucially, the investors who will be a vital component in economic recovery.

Tax them too much and where is the incentive?

So if the “fair share” argument fails, then what about simple revenue generation?

This too fails on Economics 101 grounds.

During a recession, tax receipts drop for all brackets as unemployment increases and business contracts. Raising taxes on the wealthiest or otherwise in a recession does not raise additional revenue; it simply inhibits economic growth by penalizing achievement.

In the end, the only people happy here are liberal and populist ideologues who want to redistribute wealth and soak the rich to the own ends.

So, overall, Cap & Trade and tax increases for the wealthy become antithetical to economic recovery, along with the dubious impact of the Stimulus bill.

Seen from an economic perspective all of this appears like intellectual chaos. In this respect, we need to hat tip the Obama campaign and the man himself for a moment of clarity.

He’s only doing exactly what he said he was going to do.

Remember when Republicans were running around the country last autumn, warning that Obama would redistribute wealth, raise taxes, ration healthcare and cut defense, it was dismissed by many as simple campaign embellishments.

However, take the Stimulus bill and the prospective Obama budget and the President’s remarks together and it turns out that the Obama Administration is going to redistribute wealth, raise taxes, ration healthcare and cut defense.

Add to that list add, inhibiting economic growth through anti-incentive policies.

And they say Republicans can’t get anything right.

2 comments

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    1. duffysoa

      Thank you for the compliment. Please come back often and feel free to comment as much as you like. The best course of option is always the product of rigorous debate.

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