The Obama Watch

Obama’s Perverse Plan for Permanent Recession

Perpetual increases in government spending is all that he has on his agenda.

By 6.27.12

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President Obama told the nation in his June 14 economic policy address in Cleveland that his economic policy plans for a second term would "create strong sustained growth;…pay down our long term debt; and most of all…generate good, middle-class jobs…." He then spent almost an hour describing policies that would do just the opposite.

He did not begin the speech with much credibility on how to achieve those goals. He has been President for almost four years, and has done nothing to generate strong sustained growth, pay down our long term debt, and most of all generate good middle class jobs.

And what he proposed in the speech as all sides bemoaned was just more of the same. But apparently he thinks we are too stupid to recognize that these are the same left-wing extremist policies that have failed us throughout his presidency, and, indeed, throughout world history. Certainly that seems to be true of his continued supporters.

No. 1: Raise Tax Rates
Under President Obama's plan, on January 1 the top tax rates of virtually every major federal tax will increase sharply, as he has already enacted under current law. That is because the tax increases of Obamacare would go into effect, and the Bush tax cuts would expire, which Obama refuses to renew for singles making over $200,000 a year, and couples making over $250,000. The English translation of that target for the tax increases is the nation's small businesses, job creators and investors.

As a result, with the Bush tax cuts just expiring for these targeted taxpayers, the top 2 income tax rates would jump by nearly 20%, the capital gains tax rate would soar by nearly 60%, the tax rate on dividends would nearly triple, the Medicare payroll tax rate would skyrocket by 62% for the above disfavored taxpayers, and the top death tax rate would rise from the grave to 55%.

That is all on top of the highest corporate tax rate in the industrialized world at nearly 40%, counting the federal corporate rate of 35% and state corporate rates on average. But under Obama, there is no relief in sight. Instead, Obama is pushing still more tax increases. Under his proposed Buffett rule, the capital gains tax rate would increase by 100%, and would be the fourth highest rate in the industrialized world. Many OECD countries, in fact, impose no capital gains tax at all because it is just another layer of taxation on capital income on top of the corporate and individual income taxes. All of this would leave American businesses uncompetitive in the global economy.

How is this going to produce strong sustained growth and generate good middle class jobs? It is going to do just the opposite, as the multiple tax rate increases would only sharply reduce the incentive for productive activities, such as savings, investment, business expansion, business start-ups, and job creation. That will only encourage even more capital flight from America, and a continued capital strike by the capital that remains.

But in his Cleveland speech, Obama argued that it was the Bush tax rate cuts that caused the recession somehow. He said, "We were told that huge tax cuts -- especially for the wealthiest Americans -- would lead to faster job growth….So how did this economic theory work out?"

So let's review how it did work out. Bush cut the top income tax rate by 11.6%, from 39.6% to 35%, and the second highest rate by about 8%, from 36% to 33%. But he cut the lower rates by higher percentages, including slashing the bottom rate by 33%, from 15% to 10%. Then in 2003, he cut the tax rates on capital, reducing the capital gains tax rate by 25% from 20% to 15%, and the tax rate on corporate dividends to 15% as well.

These tax rate cuts first quickly ended the 2001 recession, despite the contractionary economic impacts of 9/11, and the economy continued to grow for another 73 months. After the rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs over the next 4 years and the unemployment rate fell from over 6% to 4.4%. Real economic growth over the next 3 years doubled from the average for the prior 3 years, to 3.5%.

In response to the rate cuts, business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter. That is where the jobs came from. Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. From 2003 to 2007, the S&P 500 almost doubled. Capital gains tax revenues had doubledby 2005, despite the 25% rate cut!

There is no economic theory under which the tax rate cuts could cause recession. Even Keynesian economics considers tax rate cuts pro-growth. America cannot afford a President who is this confused and deluded.

But in his speech in Cleveland, Obama even opposed tax reform lowering rates in return for closing loopholes. He said it would be a tax increase on the middle class. But no serious tax reform proposal has ever involved a net tax increase on the middle class, because it would be dead before it even got out of the box.

Indeed, Obama is so ideologically opposed to lower rates that, perversely, what he has done throughout his presidency is the opposite of tax reform. He has expanded the loopholes and increased rates. Those loopholes have included new and expanded welfare tax credits and corporate welfare like his green energy handouts. When his own Simpson-Bowles Commission recommended real tax reform closing loopholes in return for reducing rates, Obama only paid lip service to it, but didn't lift a finger to advance the proposals.

But higher tax rates with more loopholes reduces economic growth, jobs, and prosperity. The higher rates discourage critical job creating, pro-growth investment, and the loopholes distort markets and promote inefficiency and waste, which is a further drag on growth. Tax reform with lower rates and fewer loopholes, by sharp contrast, promotes powerful pro-growth incentives while reducing the inefficient drag of market distorting loopholes. That is why the bipartisan tax reform of 1986 under President Reagan, when America was under adult supervision, was so powerful in fueling the generation-long, 25-year Reagan boom from 1982 to 2007.

Obama said in Cleveland, "Over the last three years, I've cut taxes for the typical working family by $3,600. I've cut taxes for small businesses 18 times." But Obama's "tax cuts" have almost all involved tax credits and other loopholes, not reductions in rates, which he is increasing at a historic pace. It is reductions in rates that promote economic growth and prosperity, because the rate determines how much the producer can keep out of what he produces. Tax credits are really no different than welfare checks, particularly the refundable tax credits Obama has favored, which pay the beneficiary the full amount of the credit regardless of tax liability. But welfare does not promote economic growth and prosperity, Nancy Pelosi to the contrary notwithstanding.

No. 2: Increase Regulatory Burdens
A second component of Obama's plan is a blizzard of increased regulatory costs and barriers. The chief rainmaker here is the EPA, which is effectively imposing through regulation the cap and trade legislation that even an overwhelmingly Democrat Congress refused to pass. That is just brewing up, but will effectively be another tax increase of trillions on the economy through higher electricity, gasoline, and other energy costs. Further EPA regulatory storms are forcing the shutdown of coal fired power plants all across the country, and preventing the construction of new ones, exactly the opposite of China. Interior and other regulatory authorities have set over 90% of available federal onshore and offshore jurisdictions off limits for oil and gas exploration and production. Obama's regulatory minions have also refused to allow construction of the Keystone XL pipeline to bring Canadian oil to Gulf refineries.

Another storm front is building through hundreds of new regulations in process under the Dodd-Frank legislation. Those added costs and barriers threaten the availability of business and consumer credit essential for economic recovery and new jobs. Further storm clouds arise from the Obamacare takeover of the entire health care sector, just starting to increase the costs of health insurance and care. The Obamacare employer mandate is already killing jobs before it even becomes effective, as potential employers know they will be required to buy the most expensive health coverage for each of their employees.

These added regulatory costs are all effective additional tax increases on the economy. How are these soaring regulatory burdens going to produce strong sustained growth and generate good middle class jobs? Again, they are going to do just the opposite.

But in his Cleveland speech, Obama just derided the idea of regulatory relief as a Romney GOP policy to "eliminate most regulations." He characterized such relief as the "promise to roll back regulations on banks and polluters, on insurance companies and oil companies" and decried that "They'll roll back regulations designed to protect consumers and workers."

Indeed, Obama argued once again that it was regulatory relief that caused the recession: "During the last decade, there was a specific theory in Washington about how to meet this challenge…. We were told that fewer regulations -- especially for big financial institutions and corporations -- would bring about widespread prosperity. [But] how did this economic theory work out?"

So don't expect any regulatory relief in any second Obama term. Instead expect even more draconian regulatory burdens, as EPAs implementation of effective cap and trade really ramps up, Obamacare is fully implemented (raising health costs still further, still another effective tax increase), and Obama's promise to make "climate change" a top priority in a second term (what happened to the laserlike focus on jobs?) promises to skyrocket energy costs further (still another effective tax increase, if I need to repeat myself).

No. 3: Increase Government Spending
In his Cleveland speech, President Obama continued to propound his fundamental economic theory that what drives economic recovery, jobs, and growth is increased government spending. That is why his 2013 budget proposes the highest government spending in world history, following an $800 billion, 27% increase in federal spending from 2008 to 2012, with a proposed 53% increase in annual federal spending from $3.8 trillion today to a record shattering $5.8 trillion by 2022. This President Obama budget proposes a very grand total of $47 trillion in spending over the next 10 years, another all-time world record.

Is draining all of that money out of the private sector really going to create strong sustained growth, pay down our long term debt, and generate good, middle-class jobs? Or is it going to bring the chaos of Greece and Western Europe to America?

Just as Obama avoids any real tax reform, his budget also fails to propose any significant entitlement reform. As a result, CBO projects that under current policies, with that Obama budget, federal spending soars to 30% of GDP by 2027, 40% by 2040, 50% by 2060, and 80% by 2080. That compares to the long term, postwar, stable, historical average of 20% of GDP that prevailed for 60 years from 1948 to 2008, under which America prospered as the strongest economy in world history. Obama's Huge Government spending breakout from that stable, long term level is just the perfect Grecian formula for America, as it would undoubtedly create the same spending, deficit and debt crisis here that we see in Greece and Western Europe more generally.

Indeed, in his Cleveland speech, Obama criticizes spending cuts, deriding Ryan's proposed budget to restore federal spending to its long term, historical, postwar average of 20% of GDP as a plan "to strip down government to national security and a few other basic functions."

The Causes of the Financial Crisis and Obama's Perpetual Recession
Rather than tax cuts and deregulation causing the financial crisis, it was more nearly the opposite. It was Bill Clinton's overregulation that forced financial institutions to abandon traditional mortgage lending standards, in the name of homeownership for minorities and the poor. Once those standards were demolished for lower incomes, they could not be maintained for higher income speculators. The government's sponsored enterprises Fannie Mae and Freddie Mac, with effective government guarantees, were able to pump trillions into the subprime housing bubble, and spread trillions in toxic mortgage securities based on non-traditional subprime mortgages throughout the global financial community. President Bush then supported a cheap dollar monetary policy following Keynesian doctrine that a cheap dollar boosts the economy by promoting exports. That just pumped up the housing bubble even further, and held back the economy as compared to the earlier Reagan boom built on anti-inflation, strong dollar policies that promote job-creating, wage-increasing investment.

But in his Cleveland speech, Obama used the financial crisis as an excuse for his own failure to achieve a traditional recovery from the recession. He said, "Throughout history, it has typically taken countries up to 10 years to recover from financial crises of this magnitude." Obama is telling us the standard of recovery he wants to be judged by, 10 years to get back on our feet, like during the Great Depression.

But that is not based on the history of American recessions and recoveries. That history is fully recounted at the website of the National Bureau of Economic Research (NBER). That history shows that since the Great Depression, and before this last recession, recessions in America have lasted an average of 10 months, with the longest previously being 16 months. But here we are 54 months after the last recession started in December, 2007, and there has been no real recovery

Moreover, the American historical record is the deeper the recession the stronger the recovery. Based on that historical precedent, we should be in the third year of a booming economic recovery by now. Instead what Obama has produced is the worst economic recovery since the Great Depression, as I have recounted previously.

Obama always wants to measure his performance from the trough, or worst point of the recession. But every recovery is always better than the worst point of the recession. Obama's recovery is to be measured as compared to previous recoveries from prior recessions in the American economy. By that standard, Obama's recovery has been pitiful, again the worst economic recovery since the Great Depression, especially as compared to the all-time record Reagan recovery.

Indeed, if Obama's perverse policies are not reversed, his soaring tax rate increases next year on top of his skyrocketing regulatory burdens and runaway federal spending, deficits, and debt will just throw America back into recession, before there was even any real recovery from the last recession. Then unemployment will soar back into double digits, the deficit will soar to new records over $2 trillion, and President Obama will have added more to the national debt than all prior U.S. Presidents combined, from George Washington to George Bush. The entire period will then look just like a historical reenactment of the 1930s. That should be no surprise that Obama in modeling his Administration after FDR is getting the same results as FDR. That is not fighting for the middle class, that is trashing the middle class.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.