It's a good bet right now that Barack Obama will be a one-term president. The enthusiasm that once shielded this hyphenated American has dissipated. His supporters, although still numerous, have discovered that he lacks Bill Clinton's centrist instincts, and even his charm. The anti-Bush mania that swept the country from 2006-09 finally burned itself out.
It's always possible that the Republicans will nominate a dud. That has happened so often that it should even be considered likely. Not since 1980 has there been an outstanding GOP candidate. But at this stage it's too difficult to predict the 2012 nominee, so I'll drop that subject.
Most important from Obama's point of view is the economy. It is still in poor shape and is likely to stay that way. The unemployment picture has not brightened. In California it is 12.6 percent, while in Michigan it is 14.9 percent. In Europe, meanwhile, the economic picture ranges from uncertain to grave and I'll have more to say on that.
I was glad to hear the news media's unofficial position on Obama's prospects the other day when I bumped into an old friend, Jim Barnes, the political correspondent for National Journal. He was at a cocktail party that our esteemed publisher gave for Bob Tyrrell's excellent new book, After the Hangover: The Conservatives' Road to Recovery. I last saw Barnes when he was a researcher at the American Enterprise Institute in the early 1980s. He was nonpartisan then and so he remains today -- as befits the creator of National Journal's Insiders Poll. Sometimes he appears on Gwen Ifill's PBS program Washington Week, which features three or four Washington journalists who help Ms. Ifill frame the conventional wisdom of the week.
When I asked Jim Barnes about Obama's political chances he said he had heard talk of the parallel between the president's position now and that of Ronald Reagan in 1982. Reagan had been in office for a little more than a year and the economy wasn't doing so well then, either. But it recovered strongly in 1983, and of course Reagan easily won reelection. So this was a reason for Obama's supporters to look on the bright side.
A week later I heard the same analysis on Meet the Press from Robert Shrum, a longtime Democratic insider. He worked for Sens. Kennedy, Gore, Kerry, and Kerrey, and for other liberals too numerous to list, but not for Clinton or Obama. (Eventually he was considered jinxed, all eight of his candidates having failed to win the presidency.)
Anyway, Bob Shrum too compared Obama's situation to Reagan's in 1982.
Here's why I think that analogy is wrong. It could even be that our situation is the opposite of what it was in 1982. The economic recession that year was to some extent the inadvertent by-product of the big Reagan tax cut of 1981. That very desirable legislation reduced the top income tax rate to 40 percent, from 70 percent, which is where it had been since the mid-1960s. The 1981 law also allowed tax brackets to be adjusted for inflation, then much higher than it is now. Nominally higher wages were moving taxpayers into higher tax brackets, producing a contraction throughout the economy.
The liberals as usual understood nothing. Ronald Reagan did understand what was going on, however, which is why he became a hero to the "Reagan Democrats." The Reagan tax cut, enacted within months of his becoming president, was one of the most important changes in tax law in the postwar era; it also inspired Margaret Thatcher to enact comparable tax reductions in Britain.
But the new U.S. law had this problem. It didn't take effect until 1983. The delay encouraged the postponement of earnings and economic decision-making until 1983, when the much more friendly tax rates took effect. Thus the slump of 1982.
Today we may well be in the opposite position. The new tax laws for 2011 are still unclear. "Tax extender" legislation is making its way on Capitol Hill even as I write, and its final shape is uncertain. That is an important reason why capitalists are sitting on a lot of capital right now and hiring is sluggish.
But it is clear that tax rates on upper incomes and on capital gains will increase, perhaps sharply. We know what Obama thinks about the rich, even if he is one of them. He thinks they should be punished. He wants tax law to reassert its punitive role. He is actually the opposite of Reagan in this as in many other respects.
With tax rates on capital and upper incomes set to increase next year, 2010 may well turn out to be a good year in which to complete pending or moveable financial transactions. So tax prospects may even be stimulating the economy right now, in contrast to slowing it in 1982.
The argument for introducing much lower tax rates in the 1980s was known as supply-side economics, and two things should be immediately said: it was very successful economically and very unpopular with the intelligentsia. They never stopped complaining about it and now, a generation later, they have regained the upper hand. Supply-side ideas are so unfashionable that no one even wants to talk about them.
Supply-siders -- prominent among them Robert Bartley and Jude Wanniski of the Wall Street Journal, and the late congressman Jack Kemp (none of them economists) -- introduced incentives into fiscal policy. As economics is all about incentives, this was an important if belated innovation.
Liberals were strongly opposed, however, and what they disliked was the rebuke to their statist ambitions. Supply-siders argued that government couldn't just grow indefinitely without harming the economy. The great delusion of the Communists had been that it could. They thought government could take over everything and run things more efficiently by command than by the messy and wasteful methods of exchange, consent, and competition. Leftist intellectuals were not disabused of their fantasies of controlling the lives of others until the fall of the Berlin Wall in 1989.
Lots of strange ideas held the stage 30 years ago, just as they do today. Trained economists thought (some still think!) that economic growth is inflationary, for example. Savings disappear into an unproductive "sump" and so were discouraged. To this day the tax code rewards debt and punishes saving. Static revenue estimating at the Congressional Budget Office implied that increasing tax rates would not affect the volume of transactions, which is like assuming that failing department stores today could recover if only they would raise their prices across the board.
After Al Regnery's party I went to an event for Tom Pauken's new book, Bringing America Home. Pauken was the chairman of the Texas Republican Party and a Reagan appointee. I have known and admired him for years. He has always stood for the kind of conservatism that I think should have prevailed along with Reagan but somehow never did. In his new book he is critical of George W. Bush, Karl Rove, and the big-spending philosophy that made Republicans in Washington hard to distinguish from Democrats.
Lots of good people were at the party, including Ken Tomlinson, the former editor in chief of Reader's Digest (now in bankruptcy!); Jon Utley; and others; but to me the most interesting guest was Bruce Bartlett, a former Republican Treasury official and today a Forbes columnist. He worked for Jack Kemp on the Kemp-Roth bill that formed the basis of Reagan's 1981 tax cut. Then he wrote The Supply-Side Solution. Last October he published a rather different book, The New American Economy: The Failure of Reaganomics and a New Way Forward. Before that came Imposter: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.
I have been encountering Bruce at such events for years, so I asked him what had happened. The man who had helped formulate supply-side ideas had turned against them? I didn't take notes but I think the essence of what Bruce said went like this:
The tax rate reductions of the 1980s were a good idea and the economy dramatically improved. But the influence of the supply-siders began to distort the economic debate. The old idea had been that spending increases would have to be paid for with tax increases. So the fear of new taxes was enough to hold spending in check. And it did. That was fiscal conservatism the old-fashioned way and the way Bruce likes it.
Supply-siders then encouraged the belief that spending didn't matter so much; the important thing was to ensure that taxes were never raised. That became so influential that people stopped worrying about spending because supply-siders would always see to it that the accompanying tax increases were stopped.
But that encouraged the big spenders to abandon restraint. If conservatives only ever worried about tax increases (said Rove & Co.), then let's go for the new spending on its own. Which is what happened. We got unfunded wars and drug subsidies for seniors. Result: today's massive deficits. Obama entered the picture at that point, and the same problem was magnified still further. As a percentage of GDP, deficits today are about four times what they were in 1980.
Bartlett makes a case, although one should note that runaway spending showed up in Britain too. After Thatcher, the Labour Party did raise some taxes, but spending still raced ahead.
The bad news for Obama is that the advocates of tax increases are now in the saddle and he is their champion. New financial regulations -- unintentionally, they will work to the advantage of the big Wall Street firms -- will further discourage new employment.
Exacerbating the problem, the bad economic thinking of today has spread to Britain, just as the good ideas did when Mrs. T cut tax rates in 1981. Last year the top income tax rate in Britain was raised to 50 percent (from 40 percent), and Britain's doltish new prime minister David Cameron, conservative in name only, has accepted that increase. The capital gains tax rate has also soared.
One dismal result will take years to play out. The financial hub of London known as the City will decline. Since Thatcher's time, the City has been the preeminent financial center of Europe, a position that has now been kicked away. Switzerland's tax structure is still good but friends in London tell me that the costs of moving there, including housing and schools, are prohibitive. Over time, international financial talent will leave London and reassemble in the Far East. This is just one reason why the recent British election result was so bad.
On top of that we have had the crisis of the euro, an elite project gone sour. The underlying problem is that all the countries in the European monetary union have broken the rules by running massive deficits. As here, living on borrowed money became a way of life, and that cannot last. The recent trillion-dollar euro bailout simply added new debt to old. European countries will talk about spending cuts (which may not materialize) and tax increases (which will). Then the crisis will reappear with a vengeance. The decline of markets in Europe will be a further drag on the U.S. economy.
It has been a generation since Reagan and Thatcher made their free market reforms, and good things have happened around the world. China and India have decentralized their economies and repudiated the command model. Across the world, this will bring great material progress in its wake. China, surely, is destined to become the world leader, just as the U.S. did 100 years ago. The U.S., too, will recover from its present malaise, but that will take a few years: not soon enough to save Barack Hussein Obama.
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