Our economy is in dangerous territory. Obama inherited a mess; a bubble that was a culmination and a combination of reckless leverage, poor regulation, misguided fiscal policy, major shifts in the global economy, and mistaken monetary policy. A lot of mistakes from a lot of parties led us to a precipice where a rescue was necessary.
The result is an excess inventory of commercial and residential real estate, record unemployment, and record deficits. Citizens are paying down debt, credit is being squeezed, costs are being cut. This devaluation of assets and credit reduction can only reduce consumption and slow the economy.
Given the asset bubble and the debt liquidation the economy would have been rough regardless of who was in office. Equity needed to be restored, property prices needed to fall, and the pain that follows bubbles needed to be tolerated. It would have taken a special leader to convey this message.
If there was a mandate it would have been to restore and implement prudent regulations of the financial system; it was not to “exploit the crisis” and inflict further harm on the economy in the name of ideology.
The Democrats think that spending money to stimulate the economy is the answer. When this Keynesian prescription has failed in the past, it was always because they did not spend enough. When the economy finally did recover far later than it would have without the stimulus, then they took the credit.
It’s like the doctor who says that if I take the medicine I will get over my cold in seven days; otherwise it may take a week.
The Republicans on the other hand think that tax cuts solve every problem. It is true that our corporate tax is among the highest in the industrialized world, and it is true that the Laffer Curve has properly demonstrated that previous cuts in tax rates have in fact increased tax revenues. And as big a fan as I am of tax cuts to stimulate economic growth it is not without some understanding of the limits.
Even theoretically the Laffer Curve reaches a point where increased tax cuts will result in less revenue; if we tax 100% of income we will kill all incentive and get nothing; but we also get nothing if we take the other extreme and tax at 0%. At some point in the curve between those extremes, lower rates will yield less revenues. I do not contend that we are yet at that point.
But lower tax rates cannot be considered in isolation from other factors effecting the business climate. Mandates, uncertainty and anti-business antagonism from the bully pulpit will also chill incentives to economic growth. Any gambler will avoid a blackjack table that they even suspect of being rigged. And the special treatment given to unions and preferred sectors of the economy smacks of a rigged game.
When the president floats an idea to nationalize student loans for college and then allowing loan forgiveness if those student work in the public sector; he is clearly showing disdain for the ‘profit’ motivated private sector that ultimately must fund his endless government programs. Addresses by Michelle Obama have belittled private sector work for the altruism of public service.
Giving such a large benefit to college grads to enter public work only raises the costs of hiring them into private employment.
While tax cuts may not be the answer, tax increases certainly will do substantial harm. But it is the uncertainty, the discouragement of being forced to play a rigged game, and the repetitive disdain for profit seeking enterprise that discourages economic growth. The business man, small or otherwise, sees record deficits, strong pro-union regulation and sentiment, higher health care costs, and other attempts at adding layers of regulation and they know they are the targets of retribution.
The president may target his ire at ‘big business’, but like all populist platitudes he does not want to clarify at what size a business is no longer small; Is it 50 employees, 500, 5,000? Or is it $250,000 in profits or $2,000,000? Like other promises to tax the rich, when you are staring at the kinds of deficits we now face you will be surprised at how low the bar will become to be considered rich.
He fails to realize that big businesses come from small businesses. How can you stimulate economic growth when you demonize small business for becoming big businesses?
The reality is that you can tax 100% of the super wealthy and you would not cover the deficits for a week. Populists prefer demons to solutions.
Tax cuts will not encourage economic growth as they have in the past, when there are so many other disincentives to growth. The leadership that erected these barriers will not likely destroy them.
Until we have clear and fair rules, a responsible budget, prudent financial regulations, and an end to the contempt for profit seeking behavior, private business will not take the risks required to grow and create jobs. Targeted tax credits and promises of tax relief alone will not overcome these greater obstacles.