The Obama Watch

The Big Bamboozler

Despite Obamanomics, here's how to fix the economy for all.

By 8.4.10

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On Monday, at yet another campaign fundraiser, the part-time President, full-time campaigner Barack Obama told Democrat fat cats, with both hands in taxpayer pockets, that Republicans "have not come up with a single, solitary new idea to address the challenges of the American people."

But where are Barack Obama's new ideas? The Keynesian deficit spending of the 1970s, focused on the make-work jobs programs of the 1930s, is not exactly a new idea. Neither is socialized medicine. Neither is raising capital gains taxes, or restoring the death tax, or tripling the dividends tax rate, or raising the payroll tax. Taking us back to the failed economic policies of the 1970s, if not the disastrous economic policies of the 1930s, is not exactly bold new leadership for the future.

But Obama continued, saying that instead of offering new ideas, the Republicans are "betting on amnesia…. They're counting on that you all forgot… that it was the Republican policies of the last decade that got the nation into such a deep hole. They think they can run the okey doke on you. They are trying to bamboozle you."

But the all time champion of okey doke bamboozlement is Barack Obama himself, with his 2008 campaign theme that he would bring an era of post-partisanship to Washington. With no history of bipartisanship in his background, that phony, baloney campaign nonsense fooled a lot of gullible middle Americans into voting for him. Since he got the power of the Oval Office, however, it's been a virtually unbroken record of the most partisan extremism, like his quoted comments above.

When President Obama has supported something Republicans can vote for, like Afghan war funding, they have not hesitated to support him, and that Obama funding request passed only because of Republican votes. But that brief departure from the neo-Marxist party line has been almost as rare as a Chicago Cubs World Series appearance.

The Obama "Recovery": Way Too Little, Way Too Late

Obama continues to campaign as if his economic performance should be measured only from the last trough of the business cycle, apparently thinking he can put together a successful political coalition of the 51% dumbest Americans. But there isn't a majority of Americans dumb enough to fall for that statistical trick. The total of the continuing willfully gullible only adds up to something less than the 26% who tell Rasmussen they "strongly approve" of President Obama's performance. Most of those are liberals who affirmatively believe that the decline of America is a good thing for the world, and so it is logical that they approve of his performance.

But the "recovery" that Obamanomics has produced is way too little, way too late. As I have previously noted, while the average recession since World War II has been 10 months, and the longest previously has been 16 months, in June, 30 months after the start of the Bush/Obama recession, the economy was still losing jobs. Yet, the latest numbers show the "recovery," which has barely nudged unemployment below 10% only because so many have left the work force in hopelessness, is already losing steam. Growth declined from 5% in last year's fourth quarter, to 3.7% in this year's first quarter, to 2.4% in the second quarter. This is less than half the growth in the first three quarters of the Reagan recovery starting in late 1982. That recovery came after Reagan slew a historic inflation to boot, and continued on to become the longest in U.S. peacetime history. Indeed, it continued effectively for 25 years, a generation, with only two short, shallow recessions over that entire time.

That historic Reagan economic boom, moreover, ended not because of "Republican policies over the last decade," but, as previously discussed here, because of the eventual departure from every plank of Reaganomics, and the reembrace of Big Government liberalism instead. This was supported every step of the way by Obama himself.

How to Fix the Economy, For Real

As I discussed last week, we know, based on economic experience, theory, and logic, how to create another economic boom that will last 25 years, or a generation, into the future. Reagan showed us how. Why would we want to exchange what we know works, Reaganomics , for the opposite that has been proven to fail, Obamanomics?

Achieving a booming economy requires us to first adopt the tax code that will maximize long-term economic growth. That involves reducing tax rates as much as possible. Lower rates allow the productive to keep more of what they produce, which builds the incentives to engage in productive activities such as saving, investing, working, starting new businesses, expanding existing businesses, creating jobs, and taking on the risks and burdens of entrepreneurship. That results in more jobs and economic growth. Moreover, rate cuts affect the economy far more than through the amount of any tax cut. The lower rates affect every dollar and economic decision in America, including by those from elsewhere around the world.

If you understood that prior paragraph, you are smarter than President Obama, who has demonstrated repeatedly that he just cannot follow that logic. Indeed, he is out now arguing actually that lower tax rates cause recessions, a nutzoid proposition utterly devoid of economic logic. Maybe he knows that's nuts, but thinks he can fool enough voters with it, again. Either way, it shows how much deep trouble America is in as long as this man is anywhere near the White House.

Instead of rate cuts, what Obama has adopted, and keeps calling tax cuts, are tax credits, which provide a specific amount of reduction in taxes for those who qualify by jumping through government-designated hoops. If the credit is "refundable," then even for those who don't owe any income taxes, the government sends a check for the amount of the credit. Such credits do not change the fundamental economic incentives driving the economy. In terms of economic effects, they are no different from welfare checks, particularly when they are refundable.

To maximize economic growth, we need to first reduce the federal corporate tax rate of 35%, which, along with state corporate taxes, burdens America with virtually the highest corporate tax rates in the industrialized world. A federal rate of 15%, abolishing in return costly, unnecessary loopholes, would restore the international competitiveness of American businesses and employers. We should adopt a 15% flat tax as well, abolishing costly loopholes and deductions, including the slew of Obama credits. We should also maintain the 15% rate for capital gains and dividends. Another key is immediate expensing instead of extended depreciation deductions for capital investment in plant and equipment.

This tax system would probably generate at least the revenues of the current system, more if the economy booms as a result, as is most probable. We need then to shoehorn spending into whatever this system generates, achieving a permanently balanced budget within 4 years. Start by repealing all unspent TARP and stimulus funds. Return spending for all programs except Social Security, Medicare and Medicaid to 2007 levels, saving $670 billion per year, and more over time. Abolish all corporate welfare, including President Obama's corporate crony green energy bailouts, and long outdated agriculture subsidies. Repealing Obamacare would save another $2 to $3 trillion over 20 years.

For entitlements, instead of trying to slash our way to a solution, we must think outside the box, and adopt fundamental structural reforms that can maintain the social goals of these structurally outdated programs with far less in government spending. Extend the enormously successful 1996 block grant reforms of the old AFDC program, which reduced its rolls by 67%, to the other remaining 184 federal means tested welfare programs, including Medicaid. Secondly, phase in, at whatever pace feasible, personal savings, investment and insurance accounts eventually financing all benefits now financed by the payroll tax, ultimately displacing that tax entirely. Shifting all of those benefit payments off federal taxpayers to the private sector would involve an enormous long-term payoff in reduced federal spending.

Another basic component of economic recovery is fundamental reform of the Fed, to stop the asset bubbles and the boom and bust cycles that have resulted from poor Fed monetary policy. New legislation should restrict the Fed to focusing solely on maintaining a stable dollar and price level. The Fed can then conduct monetary policy by focusing on market prices, especially for inflation sensitive commodities, including gold.

Finally, a deregulation component should focus on unleashing the private sector to provide America with a vast, domestic supply of low cost, reliable energy from all sources. With the right policies, America can be the world's number one producer of oil, natural gas, coal and nuclear power. That would promote booming job creation in these energy industries alone. But a low cost, reliable supply of energy would promote the entire economy, particularly manufacturing, which would enjoy a blue collar renaissance in America.

All government barriers standing in the way of alternative fuel sources such as wind, solar, ethanol, etc. should be removed as well. But these potential energy sources need to be freed to compete in the marketplace along with the others, which means an end to corporate welfare taxpayer subsidies. If these energy sources are not cost competitive and can't stand on their own two feet, then it would be economically counterproductive to subsidize them into existence.

With these policies, the American economy would take off in another generational, world-leading economic boom. America would be back. The Left whines that the market economy has not produced much in wage gains in recent years. But the fundamental problem there is the new global competition in the modern world economy. Achieving success for working people in this new environment requires even more strict adherence to free market polices, as outlined above.

The New Civil Rights v. The Equal Sharing of Misery

The socialists are not stupid. They are evil. They know darn well that these policies would work. But they oppose them because the termination of government redistribution they involve, and the resulting economic boom, would work contrary to their fundamental goal of economic leveling. (Too many people would get rich in a boom for the Left's tastes).

Booming economic growth, however, is much more beneficial for working people, minority communities and the poor than counterproductive, socialist redistribution to achieve equality of results. A booming market economy produces a much higher standard of living for working people, minorities, and the poor. This is especially so when policies are structured as explained below to channel the flows of booming economic growth through them. Economic experience, theory and logic shows that outdated, throwback, socialist redistribution, by contrast, inevitably leads to lower standards of living, stagnation, and decline.

Personal accounts to finance all the entitlement benefits currently provided through the payroll tax would empower every working family with a personal ownership stake in America's business and industry. Two earner, middle income families investing in such accounts over their entire working careers would reach retirement with close to a million dollars or more, at just standard, long-term, market returns. This would do far more to achieve a more equal distribution of wealth than anything the socialists can imagine, absent mass executions of the productive, or counterproductively chasing them out of the country altogether. It would also provide working people, minorities, and the poor much higher benefits than Social Security even promises, let alone what it can pay.

Block granting welfare back to the states would enable the states to each establish their own, new welfare systems, based on work. Such a system should involve no free benefits for the able bodied. Instead, the new system should involve local job sites where the poor can go to receive guaranteed job assignments for the day, receiving payment at the minimum wage at the end. Since the poor would then have to work in any event, this would terminate all the counterproductive disincentives of welfare for non-work and illegitimacy. The poor would respond to the incentives of this new system by taking available jobs in the booming economy, dramatically reducing the burden on taxpayers. Yet the poor would be far better off, working, learning job skills, and climbing the ladder of success with real private sector jobs. (The truly disabled who cannot work should be provided generous public assistance.)

Through block granted Medicaid, states should provide poor and low income workers with vouchers for the purchase of private health insurance. That would free the poor from the Medicaid ghetto, where the government so badly underpays doctors and hospitals that the poor often can't get essential health care on a timely basis, or at all. But with this Medicaid voucher system, the poor would enjoy the same health care as the middle class, because they would enjoy the same health insurance as the middle class.

Those who need child care to work can bring their children with them to the work assignment centers, where free child care for the day will be provided, with some of the mothers assigned to provide such care as their work assignment. What's important is to get the incentives right. With that in place, the great majority will get their own private sector jobs, and arrange for their own child care, most likely through relatives, as experience proves.

The real poor, in contrast with the hardened socialist ideologues who claim to speak for them, would love this system as their ticket to middle class prosperity. Poverty would decline rapidly as a result. Indeed, with assured jobs and income, health care, child care, and a supplement like the Earned Income Tax Credit, poverty would be eliminated entirely as a matter of definition.

Finally, school choice through vouchers or tax credits would also empower children of the poor and minorities to get a real education in a competitive marketplace, assuring their bright future.

This vision of prosperity and opportunity is, in fact, the New Civil Rights. That involves replacing entirely any social goal of equality of results with equality under law and comprehensive safety nets assuring all essential goods and services. Redistribution to achieve economic equality beyond that is economically counterproductive and morally the equivalent of theft.

This New Civil Rights would be far better for the poor and minority communities than brain dead, throwback, dead end, socialist redistribution, which guarantees only the equal sharing of misery, as Churchill explained. But the old fashioned East Coast establishment stuck rigidly in the deep past is thoroughly wedded, emotionally and intellectually, to the outdated socialist vision. They are spiritually mired in the romanticism of the social struggles of the rise of the industrial revolution in the late 19th century, over 100 years ago. It is long past time to think anew, and move on, for the good of all.

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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.