Wednesday, September 29, 2010

Obama Against Jobs, Economy, Middle Class

Of course, Obama says he is for those things, but his actions work against all of them. Ben Franklin said, “Experience is a dear teacher, but fools will learn at no other.” Obama has learned nothing from the Keynesian experiences of the U.S. or other nations. He hasn't even been able to learn from the already evident failure of his own Keynesian policies. For him, it is as though economic history never existed. He fits Nobel Prize-winning economist Friedrich Hayek's observation that the most orthodox disciples of Keynes have consistently “thrown overboard...all that used to be the backbone of economic theory, and in consequence, in my opinion, to have ceased to understand any economics.”

For Obama, his void of economic understanding is filled by collectivist ideology from the likes of leftist radicals like Saul Alinsky. So the president's answer to economic problems is based not on economics but on socialist ideology of “class warfare” and “redistributing wealth.” Alinsky taught that the rich, the greedy corporations were the “enemies of the people.” Obama was a community organizer for the DCP and CCRD organizations in Chicago, which were built on the Alinsky model, where organizers learned how to “rub raw the sores of discontent,” in Alinsky's words. (Notice how Obama worked up support for ObamaCare by cultivating discontent with claims that the best medical system in the world—and just about everything else in America—is “broken” and needs to be “fundamentally restructured” by his administration.)

Obama claims he wants to help small business, the middle class and promote jobs by extending the Bush tax cuts—due to expire at year end—for those making less than $200,000 per year, or $250,000 for families. He refuses to extend the tax cuts for people above those thresholds, saying the country can't afford tax cuts for the rich. That's an appeal for votes from the middle class but contrary to the facts. Deloitte Tax LLP, a tax consulting firm, says a typical family of four with a household income of $50,000 per year will have to pay $2,900 more in taxes in 2011—which gives lie to Obama's pre-election promise he would not raise taxes on the middle class. Furthermore, many middle class Americans who are small business owners file their business income on their personal income tax. Obama dismisses this by saying it affects only 3 percent of small businesses. But according to the Tax Policy Center, if only 2.5 percent of small businesses are affected this way, it will mean 894,000 small businesses will see their taxes go up. That won't be conducive to investment in business expansion and job creation. Since small businesses by definition may have up to 499 employees, the number of workers affected will be many millions.

Drew Greenblatt has a wire basket company in Baltimore that employs thirty people. Since his business income is over $200,000 and is on his personal income tax filing, he faces additional taxes of $20,000 to $40,000. Ray Pinard, who runs a commercial printing company employing 95 people in Boston, faces a similar situation. His taxes will go up by about $120,000. This is money that could be used to expand productivity and create jobs—which would be far more beneficial than having the government spend this money.

Obama has learned nothing from the tax cuts by presidents Ronald Reagan and John Kennedy. In both cases, reductions in tax rates resulted in increased tax revenue for the government. When Reagan became president, he reduced the top marginal income tax rate to 28%, from 70%, but when he left office, tax revenues had almost doubled. During this same period, the inflation rate fell to 4% from 13%, unemployment dropped to 5.3% from 7.5%, 17 million new jobs were created, and the longest peacetime boon in our history was underway. When Reagan took office in 1981, the top one percent of income earners paid 17.58% of all federal income taxes. Twenty-five years later, in 2005, that one percent paid 39.38% of all income taxes even though they were taxed at a sharply lower rate.

In the 1960s President Kennedy cut the highest income tax rate to 70% from 91% with a similar result. Income taxes from the top one percent rose to 1.9% of GDP (gross domestic product) in 1968 from 1.3% in 1960.

Under Bill Clinton, important economic progress resulted from his signing the largest capital gains tax cut ever (exempting owner-occupied homes from capital gains taxes), providing a huge tax cut for elderly workers on Social Security, pushing the North American Free Trade Agreement through Congress, and reducing government spending as a share of GDP.

Presidents Harding and Coolidge cut federal income taxes several times throughout the 1920s, sharply lowering the top rate in steps to 25% from 73%. As the top tax rates were cut, tax revenues soared, as did the proportion paid by the rich. Those earning over $100,000 paid 29.9% of the total in 1920, 48.8% in 1925, and 62.2% in 1929. Between 1921 and 1928 the tax receipts from the highest one percent of income earners nearly doubled as a percent of GDP, to 1.1% from 0.6%.

Well known economist Arthur Laffer concludes: “When you cut the highest tax rates on the highest-income earners, government gets more money from them, and when you cut tax rates on the middle and lower income earners, the government gets less money from them. Even these data grossly understate the total supply-side response. It will lower government spending as a consequence of a stronger economy with less unemployment and less welfare. It will have a material, positive impact on state and local governments. And these effects will only grow over time.”

The effects Laffer explains from decreasing taxing are reversed when taxes are increased. Between 1968 and 1981, under the bipartisan tax increases of Presidents Johnson, Nixon, Ford and Carter, the income tax payments from the top one percent of earners shrank to 1.5% of GDP from 1.9%. And the average annual return from the stock market from the post-Kennedy peak in early early 1966 to the low August of 1982 before the Reagan surge took effect was minus 6% per year for 16 years.

So, when Obama says the country can't afford tax cuts for the wealthy, that doing so would add $700 billion to the deficit over ten years, you know he doesn't know what he is talking about. The record clearly shows that decreasing tax rates for the highest income earners increases tax revenue.

Tax reductions would certainly be far more effective for the economy than Obama's stimulus package. Michael Boskin, professor of economics at Stanford University and former chairman of the Council of Economic Advisors, earlier this month wrote, “The [Obama] administration's 'summer of recovery' has fizzled in almost every way imaginable. The growth rate is less than half what it was at this stage after the 1974-75 and 1981-82 recessions.” In other words, the recovery from the $862 billion stimulus package, which the Congressional Budget Office says cost more than the nine years of war in Iraq, was less than half as effective as recovery from the two previous recessions without such stimulus.

Clearly, government stimulus spending is not the answer. Obama still refuses to accept this because it doesn't jibe with his ideology. He even tried to talk the German government into expanding its very modest stimulus spending, but it was wise enough to refuse, preferring instead to allow market economics to restore the nation's growth. What were the results? The German economy grew a sizzling 9% in the second quarter of 2010 compared to a meager 1.6% for the U.S. economy. And German unemployment was 7.6 percent compared to 9.5% in the U.S.

Obama favors the spending policies of John Maynard Keynes that Franklin Roosevelt employed to try to pull the nation out of the Great Depression. They didn't work then, and they aren't working now. After six years of New Deal policies, the unemployment rate in 1938 was 19 percent—double what we have today. Late in FDR's second term, his Treasury secretary Henry Morgenthau wrote in his diary: “We have tried spending money. We are spending more than we have ever spent before and it does not work....After eight years of this Administration we have just as much unemployment as when we started....And an enormous debt to boot.”

Keynes claimed spending—for anything—was the driver of the economy and that government spending produced a “multiplier” effect, causing the private sector to spend even more. He had no evidence to support this (Keynes' biographer Hunter Lewis says Keynes “wasn't particularly interested in evidence.”) But it sounded superficially plausible enough to provide intellectual cover for what Franklin Roosevelt—and many politicians since—wanted to do anyway: massive spending for political and ideological purposes.

Keynes multiplier didn't work as he supposed. Instead of ending the Great Depression, massive government spending helped to extend it by several years. Nobel Laureate Robert Lucas and Leonard Rapping conclude that on just the basis of Federal Reserve Policy, the economy should have been back to normal by 1935. Economics professors Harold L. Cole and Lee E. Ohanian state: “We have calculated on the basis of just productivity growth that employment and investment should have been back to normal levels by 1936.” FDR's New Deal policies prevented that recovery.

The Obama stimulus bill was based on a Keynesian multiplier of 1.50, meaning the GDP will increase by $1.50 for every additional dollar of government spending. But there is no evidence that multiplier is valid. If the multiplier were really larger than 1.0, the GDP would rise even more than the rise in government spending! Clearly that doesn't happen. If it did, then the government should be spending even more--$20 trillion, $50 trillion, $100 trillion or more--so that the nation would be so wealthy that none of us would have to work.

Harvard economics professor Robert J. Barro has analyzed the effects of large military expenditures during WWII, the Viet Nam war, Korean War and WWI and found a consistent multiplier of only 0.8. Moreover, he states, “There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases.” The late Gerald W. Scully, a professor of economics at the University of Texas at Dallas, analyzed federal outlays and GPD 1947-2007 and found a multiplier of only 0.46.

Then there is the work of a trans-Atlantic team of four economists, John F. Cogan and John B. Talyor of Stanford University and Tobias Cwik and Volker Wieland of Goethe University. They found the Obama administration's estimates for stimulus growth were six times as large as they could produce under modern Keynesian simulation. They calculate the stimulus would produce, at most, 600,000 jobs. That's a far cry from the administration's prediction of 3,675,000 jobs based on a multiplier of 1.50.

Economist Brian Westbrook writes, “If you take a look at the U.S. economy since 1960, the larger the government share of GDP, the higher the unemployment rate. In other words, when it comes to jobs, government spending has a multiplier of less than one—government spending destroys jobs.”

A study by Harvard's Alberto Alesina of 91 fiscal stimulus programs in 21 developed countries 1970 to 2007 found tax cuts were more stimulative than government spending. Mr. Alesina even found 107 periods since 1980 when governments quickened economic growth by cutting deficits. His findings are just the opposite of Obama's program of stimulus spending and increased deficits.

A 2009 study by the World Bank and Harvard University of economic growth and entrepreneurship found lower tax rates on firms are powerful spurs to job growth and business start-ups.

Christina Romer, in a study with her economist husband David before she became Obama's advisor, found large multipliers from tax cuts, which she concluded “have very large and persistent positive output effects.” Yet Obama chose to raise people's taxes by letting the Bush tax cuts expire at the end of 2010.

Several studies suggest that the multiplier effect of government spending may actually be less than zero after a couple of years, because private investment falls by more than government spending rises.

Recently Obama has advocated stimulating the economy by increasing government spending for infrastructure, such as highways and railroads. But two articles in recent years co-authored by Clifford Winston in the peer-reviewed Journal of Urban Economics reached shocking conclusions about how little we get for our money. They show that over the past decade we have reaped a mere one percent return on our highway investments. Furthermore, for every dollar spent trying to reduce roadway congestion, motorists have saved a mere three cents in travel time and other costs.

No country has more completely and energetically put Keynesian policy into practice for longer than Japan, and the results have been disastrous. Two decades of economic stagnation. Yet Obama has failed to learn from the Japanese experience. The Japanese economy crashed in 1990. Japan had 10 stimulus bills between 1992 and 2000. It spent massively on infrastructure, building bridges, road, ports, airfields—even sidewalks—as well as supplying huge subsidies to the biotech and telecommunications industries. The unemployment rate is now more than two and one-half times what it was in 1992. It has never been that low since, and in the last twelve years—even during the best years before the current recession—it was never less than one and one-half times the 1992 level. Japan's stock market (Nikkei average) remains more than 75% below its peak two decades ago. Two decades of Keynesian deficit spending failed to restart the once-mighty Japanese economy. Instead of boosting economic growth, the government's spending spree brought stagnation while boosting the nation's debt-to-GDP ratio to 200%.

The Japan analogy is especially appropriate because two of the people who urged Japan's stimulus programs subsequently were chosen by Obama for his administration. Larry Summers was, until his recent resignation, assistant to the president for economic policy and director of the National Economic Council. Timothy Geithner, current Treasury secretary, was in Japan during the collapse and claims the problem wasn't that Japan spent too much but that it didn't spend enough.