Obamanomics Is a Recipe for Recession
What if I told you that a
prominent global political figure in recent months has proposed: abrogating
key features of his government's contracts with energy companies;
unilaterally renegotiating his country's international economic treaties;
dramatically raising marginal tax rates on the "rich" to levels not seen in
his country in three decades (which would make them among the highest in the
world); and changing his country's social insurance system into explicit
welfare by severing the link between taxes and benefits?
 The
first name that came to mind would probably not be Barack Obama, possibly
our nation's next president. Yet despite his obvious general intelligence,
and uplifting and motivational eloquence, Sen. Obama reveals this startling
economic illiteracy in his policy proposals and economic pronouncements.
From the property rights and rule of (contract) law foundations of a
successful market economy to the specifics of tax, spending, energy,
regulatory and trade policy, if the proposals espoused by candidate Obama
ever became law, the American economy would suffer a serious setback.
To be sure, Mr. Obama has been
clouding these positions as he heads into the general election and, once
elected, presidents sometimes see the world differently than when they are
running. Some cite Bill Clinton's move to the economic policy center
following his Hillary health-care and 1994 Congressional election debacles
as a possible Obama model. But candidate Obama starts much further left on
spending, taxes, trade and regulation than candidate Clinton. A move as
large as Mr. Clinton's toward the center would still leave Mr. Obama on the
economic left.
Also, by 1995 the country had a
Republican Congress to limit President Clinton's big government agenda,
whereas most political pundits predict strengthened Democratic majorities in
both Houses in 2009. Because newly elected presidents usually try to
implement the policies they campaigned on, Mr. Obama's proposals are worth
exploring in some depth. I'll discuss taxes and trade, although the story on
his other proposals is similar.
First, taxes. The table nearby
demonstrates what could happen to marginal tax rates in an Obama
administration. Mr. Obama would raise the top marginal rates on earnings,
dividends and capital gains passed in 2001 and 2003, and phase out itemized
deductions for high income taxpayers. He would uncap Social Security taxes,
which currently are levied on the first $102,000 of earnings. The result is
a remarkable reduction in work incentives for our most economically
productive citizens.
(Continued below.)
The top 35% marginal income tax
rate rises to 39.6%; adding the state income tax, the Medicare tax, the
effect of the deduction phase-out and Mr. Obama's new Social Security tax
(of up to 12.4%) increases the total combined marginal tax rate on
additional labor earnings (or small business income) from 44.6% to a
whopping 62.8%. People respond to what they get to keep after tax, which the
Obama plan reduces from 55.4 cents on the dollar to 37.2 cents -- a
reduction of one-third in the after-tax wage!
Despite the rhetoric, that's not
just on "rich" individuals. It's also on a lot of small businesses and
two-earner middle-aged middle-class couples in their peak earnings years in
high cost-of-living areas. (His large increase in energy taxes, not
documented here, would disproportionately harm low-income Americans. And,
while he says he will not raise taxes on the middle class, he'll need many
more tax hikes to pay for his big increase in spending.)
On dividends the story is about as
bad, with rates rising from 50.4% to 65.6%, and after-tax returns falling
over 30%. Even a small response of work and investment to these lower
returns means such tax rates, sooner or later, would seriously damage the
economy.
On economic policy, the president
proposes and Congress disposes, so presidents often wind up getting the
favorite policy of powerful senators or congressmen. Thus, while Mr. Obama
also proposes an alternative minimum tax (AMT) patch, he could instead wind
up with the permanent abolition plan for the AMT proposed by the Ways and
Means Committee Chairman Charlie Rangel (D., N.Y.) -- a 4.6% additional hike
in the marginal rate with no deductibility of state income taxes.
Marginal tax rates would then approach 70%, levels not seen since the 1970s
and among the highest in the world. The after-tax return to work -- the
take-home wage for more time or effort -- would be cut by more than 40%.
Now trade. In the primaries, Sen.
Obama was famously protectionist, claiming he would rip up and renegotiate
the North American Free Trade Agreement (Nafta). Since its passage (for
which former President Bill Clinton ran a brave anchor leg, given opposition
to trade liberalization in his party), Nafta has risen to almost
mythological proportions as a metaphor for the alleged harm done by trade,
globalization and the pace of technological change.
Yet since Nafta was passed
(relative to the comparable period before passage), U.S. manufacturing
output grew more rapidly and reached an all-time high last year; the average
unemployment rate declined as employment grew 24%; real hourly compensation
in the business sector grew twice as fast as before; agricultural exports
destined for Canada and Mexico have grown substantially and trade among the
three nations has tripled; Mexican wages have risen each year since the peso
crisis of 1994; and the two binational Nafta environmental institutions have
provided nearly $1 billion for 135 environmental infrastructure projects
along the U.S.-Mexico border.
In short, it would be hard, on
balance, for any objective person to argue that Nafta has injured the U.S.
economy, reduced U.S. wages, destroyed American manufacturing, harmed our
agriculture, damaged Mexican labor, failed to expand trade, or worsened the
border environment. But perhaps I am not objective, since Nafta originated
in meetings James Baker and I had early in the Bush 41 administration with
Pepe Cordoba, chief of staff to Mexico's President Carlos Salinas.
Mr. Obama has also opposed other
important free-trade agreements, including those with Colombia, South Korea
and Central America. He has spoken eloquently about America's responsibility
to help alleviate global poverty -- even to the point of saying it would
help defeat terrorism -- but he has yet to endorse, let alone forcefully
advocate, the single most potent policy for doing so: a successful
completion of the Doha round of global trade liberalization. Worse yet, he
wants to put restrictions into trade treaties that would damage the ability
of poor countries to compete. And he seems to see no inconsistency in his
desire to improve America's standing in the eyes of the rest of the world
and turning his back on more than six decades of bipartisan American
presidential leadership on global trade expansion. When trade rules are not
being improved, nontariff barriers develop to offset the liberalization from
the current rules. So no trade liberalization means creeping protectionism.
History teaches us that high taxes
and protectionism are not conducive to a thriving economy, the extreme case
being the higher taxes and tariffs that deepened the Great Depression. While
such a policy mix would be a real change, as philosophers remind us, change
is not always progress.
By MICHAEL J. BOSKIN
July 29, 2008
Mr. Boskin, professor of economics
at Stanford University and senior fellow at the Hoover Institution, was
chairman of the Council of Economic Advisers under President George H.W.
Bush.
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