The president seeks a fairer distribution of wealth; he claims not to admonish prosperity, but seeks to be sure it is shared.  There is a proven method to this noble objective and it lies under his nose. Instead of promoting it he is effectively destroying it.

In The Wall Street Journal, 1/26/12 Henry Nau writes Lessons from the Great Expansion.  (p A15 in the print version, the link may require a paid subscription, which I encourage.)

Excerpts:

Yes, “the middle class has shrunk,” as Mr. Obama said while campaigning last month. But not because it’s getting poorer, rather because it’s getting richer.

According to Stephen Rose of the Georgetown University Center on Education and the Workforce, fewer people live today in middle-class households with incomes between $35,000 and $105,000, while the percentage of households making less than $35,000 has remained the same. Where did the missing households go? They became richer. In the past three decades, the percentage of households making more than $105,000 in inflation-adjusted dollars doubled to 24% from 11%.

Even more importantly, the global surge in growth spread wealth from the rich to the poor countries, creating greater equality in global markets than ever before. Throughout this period, developing countries grew two and even three times faster than developed countries. As a result, the share of world GDP held by emerging markets increased to 22% from 13%, while the U.S. share remained steady at approximately 26%. The “Great Expansion” created a global middle class of some 600 million-800 million people in China, India, Brazil and other developing countries.

What were the policy trends that produced this Great Expansion? Precisely the free-market policies of deregulation and lower marginal income-tax rates that Mr. Obama decries.

HKO Comments:

Capitalism replaced the feudal societies where capital was allocated based on rank and privilege with an allocation based on merit and innovation.  The re-emergence of a more state controlled economy is in a very real sense a return to allocating capital based on privilege and power as opposed to individual merit and freedom. By overreacting to a short period of correction and adjustment this administration risks damaging the very best system for achieving the objectives he claims to value so highly.

Suppose you had no job and no investments.   All of your assets existed in your checking account.  The only tax you paid was a six per cent sales tax.  A friend of yours has a job and pays 25% income tax.  He complains that since you are paying just a six percent tax on your purchases that you are not paying your fair share.

You could argue that you already paid taxes on your income, or that the sales tax does not compare to income tax.  But the emphasis on fairness seems silly in the light of these two different taxes.

This example was used by Neal Boortz on his radio show to explain the ludicrous comparison of Warren Buffet’s income to his secretary.

Some rich pay a lower percentage of their total income because a bigger percentage comes from investments that are taxed at a lower rate.  They can avoid taxes with tax free municipal bonds.  Do we want to eliminate that favored status and raise the financing costs of our cities and states?

Buffet’s income is largely capital gains tax while his secretary is likely to have mostly earned income.  Is Obama suggesting that capital gains tax should be as high as income tax? If he is then this would surely drive us into another recession, longer and deeper than the one we just left.  We compete in the world market for capital. We have one of the highest corporate taxes in the world and China has a capital gains tax rate of zero. I doubt if he could even get the  Democratics in Congress  to raise the taxes on capital gains as high as the income tax or eliminate tax free munis.

If he is not suggesting an equalization of capital gains and dividend tax rate to income tax rates, or the elimination of tax free bonds, then his whole argument is intentionally false and misleading.

This whole debate has become a distraction from the serious work of reducing the deficit and shrinking the size of government.  There are reforms in the tax code that have merit and should be considered.  A limit on mortgage interest deduction would be at the top of my list.  But this is far secondary to the more urgent and important task of reducing the size and expense of our government.

Even Warren admits that this higher tax rate will not seriously impact the deficit.  And Obama has admitted that higher rates may reduce revenue. But both are so enamored with a sense of fairness that they are willing to make a public deficit problem worse. How is that fair for anybody?

The president’s jobs bill is a non starter, a desperate attempt to do something by doubling down on failed policies.

Point  one- He offers tax breaks to workers by extending the reduction in FICA taxes, and making up the deficit with higher taxes to the general fund.  He promotes  incentives to get employers to hire the chronically unemployed and to raise wages, yet plans to fund this effort by raising taxes on the same employers.

Point two-  While he demagogues about the millionaires and billionaires, the truth is that there is not enough of them to fund his programs and thus he has to define ‘rich’ down to include the small business people which he cherishes in rhetoric but clearly knows nothing about.

Point three- Businesses do not create long term jobs with short term incentives.  After the ‘tax breaks’ wear off, the business is left with the full fare for the new jobs.  Often creating such jobs  requires investment in new equipment and those pieces of machinery still cost after the incentives have expired.

Point four- The bureaucracy required to utilize these tax credits, and the conditions are so onerous that few of the small business will be able to use them.  If you are only able to hire a few workers it just isn’t worthwhile to ramp up and learn how to comply with an incentive that will only last a few years.  Like most other regulations it is an advantage to larger companies with the infrastructure and the mass to justify the expense of compliance.

Point five-  By giving incentives to hire the chronically unemployed we are creating a perverse incentive to penalize the workers who have NOT relied on the largesse of the extended unemployment benefits.  If I have a choice between two workers and one has been unemployed for a month and the other has been unemployed for a year, I will lean more toward the one who has not been out of the work force for so long.  I will question the work ethic of the worker who has managed not to work for a year.  The advantage of the proposed tax break will not offset the natural incentive to hire a worker with a better motivation. This may seem unfair, but  trust me- this is how most small business employers will think.

At a recent business conference owners and employers from several different small businesses told similar tales.  I could sum it up with two observations: Generous unemployment benefits have made it hard to hire low level jobs such as dishwashers and busboys, and the uncertainty of pending regulations and tax increases has stifled business incentives to expand.  For the amateur economists in the room (and there were several professional economists there as well) it seems obvious that if you create incentives such as generous unemployment benefits not to work, and you also create incentives not to hire (Obamacare, Dodd-Frank, NLRB, higher taxes pending) then you should not be surprised if unemployment remains high.

Solyndra made solar panels, a green energy dream company.  Obama saw that they got a $500 million dollar loan from the taxpayers.  The company has now shut down and has laid off over a thousand employees and the taxpayers are on the hook for a half billion dollars.

Solyndra used a different technology from the polysilicon used in other solar panels.  They used cylinders (hence the name) coated with chemicals. It proved more expensive to manufacture as the price of polysilicon plummeted.  Solyndra’s price per megawatt became multiples of the traditional panels.  When you lose money on every sale you cannot make it up with more volume.

There was already a market for solar panels, and the market has picked polysilicon panels.  Obama picked the losing technology and used your money (our money) to do it.    It did not cost one thin dime out of his pocket.  There were other investors in Solydra that lost money, but it was their money.  This is how markets are supposed to work.

Meanwhile, Boeing has spent billions to bring new jobs- real jobs- to South Carolina.  They are using their money.  But the NLRB has blocked their effort in  the name of saving union jobs in another state,  yet there is no loss of any union jobs in that state.  These are additional jobs.  By making it hard to create jobs in a right to work state they hope to create more union jobs in union friendly states.  What they are more likely to do is create an incentive to create jobs overseas where such companies as Boeing don’t have to put up with such bullshit.

The House has just passed a bill forbidding the NLRB from interfering with the location decisions of private companies.  It remains to see if the Senate will pass it, or even consider it.  If they do, the President will be forced to take a stand on the NLRB issue. He could have, and should have already.

These two companies are clear examples of why Obama has lost all credibility on creating jobs.  His absolute inexperience in the private sector and his undying faith in the government to solve all problems has made a bad situation worse. His ‘public-private’ partnership with Solyndra has proved the axiom, “whenever you get in bed with the government, somebody gets screwed.”

Thomas Sowell writes Best Way to Aid Economy? Just Do Nothing in the Investors Business Daily, 9/14/11.

Excerpts:

The grand myth that’s been taught to whole generations is that the government is “forced” to intervene when there is a downturn that leaves millions of people suffering. The classic example is the Great Depression of the 1930s. What most people are unaware of is there was no Great Depression until after politicians started meddling in the economy.

There was a stock market crash in October 1929 and unemployment shot up to 9% — for one month. Then unemployment started drifting back down until it was 6.3% in June 1930, when the first major federal intervention took place. That was the Smoot-Hawley tariff bill, which more than a thousand economists across the country pleaded with Congress and President Hoover not to enact.

But then, as now, politicians decided they had to “do something.” Within 6 months, unemployment hit double digits. Then, as now, when “doing something” made things worse, many felt the answer was to do something more.

Both President Hoover and President Roosevelt did more—and more, and more. Unemployment remained in double digits for the entire remainder of the decade. Indeed, unemployment topped 20% and remained there for 35 months, stretching from the Hoover administration into the Roosevelt administration.

In 1987, when the stock market declined more in one day than it had in any day in 1929, Ronald Reagan did nothing. There were outcries and outrage in the media. But Reagan still did nothing. That downturn not only rebounded, it was followed by 20 years of economic growth, marked by low inflation and low unemployment.

The Obama administration’s policies are very much like those of the Roosevelt administration during the 1930s. FDR not only smothered business with an unending stream of new regulations, he spent unprecedented sums of money, running up record deficits, despite raising taxes on high-income earners to levels that confiscated well more than half their earnings.

Like Obama today, FDR blamed the country’s economic problems on his predecessor, making Hoover a pariah.

Yet, six years after Hoover was gone, and nearly a decade after the stock market crash, unemployment hit 20% again in the spring of 1939.

HKO Comment:

Sowell dispels the narrative that government must save us from the imperfections, or at least the short term dislocations inherent in capitalism. Perhaps the opposite is more true.  The political battle centers on who controls the narrative and which one we accept.

Tips to Gary Meyers.