The President Declares War — 19 September 2011

The President is stuck, following policies that have failed, but unable to change course.  For the last two years, voters have been telling him in no uncertain terms that they don’t like the direction of his policies: first it was the summer of the angry town hall meetings; then the elections of Governors Bob McConnell in Virginia and Chris Christie in New Jersey; then Scott Brown’s seizure of Ted Kennedy’s sinecure; then the shellacking of November 2010; then last week the loss of a seat in Brooklyn that had been Democratic for 93 years.  In all of these, the Obama policies were the main issue, and in all of them voters gave an emphatic thumb’s down.

Obama’s response is to do more of the same.

His “jobs” plan would be laughable if the consequences weren’t so serious.  Its two main problems are a) it won’t create jobs, and b) it won’t become law.  The second is obvious – despite Obama’s repeated assertions in his speech that the provisions have been supported in the past by Republicans and Democrats alike, they add up to nothing more than Stimulus II; given how little enthusiasm there is on the right and in the middle for that kind of policy, the chances of passage for this plan are between slim and none.  Obama knows that; he has no expectation that this plan will do anything other than frame the debate for the 2012 election – meaning that he has no intention of helping the millions of people who have been out of work for months and years until after he begins his second term.

But beyond the politics of it, this is bad policy.  Almost all of the prescriptions are temporary measures that will expire at the end of 2012.  The payroll tax cut, the aid to financially strapped states, the subsidies for hiring vets or the long-term unemployed, and so forth: the money is there for a year, then you’re on your own.  It is a mighty Hail Mary that is wagering that a year of Stimulus II will give the economy such a jolt that it will fire into life and be chugging along by the time the breaks expire.

It had better.  Because not only do all the tax breaks expire at the end of 2012; the economy will also be burdened by the expiration of the Bush tax cuts, and by the imposition of new taxes and fees that start to blossom with the full implementation of Obamacare.  And, as we’ll see below, the President announced today even more tax hits for the top earners at the start of 2013.  If the economy is not chugging like a steamroller by then, it will surely grind to a halt.

And because business owners can see those tax hikes coming, they will be reluctant to invest and to hire next year despite the extra cash with which Obama would like to soak the country.  If demand does in fact spike, it will be met with temporary measures to match the temporary nature of the demand – overtime, part-time and contract workers, third shifts in existing factories.

This is the crucial failure at the heart of Keynesian economics: if indeed all that government cash has a stimulative effect on the economy, it must also have a counter-stimulative effect when it stops flowing.  And stop flowing it must, eventually.  When temporary tax breaks come to an end, taxes go back up.  When extra cash for states to hire teachers and firemen comes to an end, the states either have to lay them off or come up with the money themselves (unlikely, that).

Worse yet, in Obama’s world, these temporary gimme’s are funded by permanent increases in taxes.  That’s a helluva price to pay for a shot of adrenaline.

Obama promised that his jobs plan will be fully paid for, and sure enough, today he laid out his proposal to pay for the jobs plan and to reduce the deficit by $3.5 trillion over ten years.  It amounts to a two-stroke policy: first, no matter how unaffordable the promise of our various entitlements, they are sacrosanct; second, raise taxes on millionaires, billionaires, and anyone else we can mark as unattractive and thus good targets.

The proposal is chock full of cynical gimmicks.  Fully a third of the promised reductions come from not spending at surge rates for the wars in Afghanistan and Iraq – no courage in coming up with that, since it’s going to happen anyway.  We could probably save an additional trillion, jokes Charles Krauthammer, by not invading Canada.

They claim about $500 billion in savings from Medicare, but not by touching one hair on the chinny-chin-chin of seniors’ benefits.  Instead, the White House came up with the brilliant idea of cutting back on the money that will be paid to health care providers.  Bogus, of course: not only have they wrung every nickel out of that ploy with Obamacare, it also will not actually happen.  The first attempt at this was to cut back on doctors’ pay back in the late ’90’s, and periodically ever since they have had to find about $250 billion to pass the “doctor fix” deferring again and again the actual implementation of the law.  In the final analysis, any cutbacks on providers’ payments will result in poorer care for seniors, as practitioners leave the unprofitable market.

Of course, the most cynical device of them all is the promise to whack “the most fortunate among us” with more taxes, so they pay “their fair share.”  Fortunate?  The entrepreneurs who put their savings at risk, work 80-hour weeks, and have the courage and vision to launch a successful business?  And what, precisely, is “fair share”?  Already the top 1% of taxpayers pay nearly 40% of all income taxes, twice their share of national income.  How much more would be “fair”?

Obama has made a big deal out of what they are now calling the “Buffet Rule,” after the sage of Omaha, the billionaire who famously pays a lower tax rate than his secretary.  The Rule wants to ensure that if you make over $1,000,000, you pay the same tax rate as a middle-income taxpayer.  However, the vast majority of well-compensated taxpayers already pay a rate higher than that.  It’s those whose money comes from capital gains and dividends – like Buffet – who pay a low rate.

That was a deliberate policy choice made years ago and reaffirmed by both Democratic and Republican administrations – because it’s good policy.  Capital is what vaults an economy into higher levels of productivity and wealth.  Keeping taxes on capital low encourages capital formation and helps ensure growth.  Raising taxes on capital has the opposite effect.  This is so even if the taxes are applied to someone who’s rich and therefore “can afford” to pay more.  It is bad for the economy to tax capital.

But Obama doesn’t care about that.  This is about his re-election.  He is looking at the wreckage of his grand coalition and figuring he needs to rebuild at the roots.  Thus the tack to the left.  The liberal talk show folks are delighted – “he’s finally talking like a Democrat!” they are saying.

But he’s got to remember all those voters who turned away from him over the last two years.  They are not likely to buy the class warfare rhetoric, and they are bright enough to see through the superficial appeal of more government handouts.  They see Greece.  They know that if we are to avoid their predicament, the answer is growth and spending cuts, not taxing and spending.

Obama is fond of the car-in-the-ditch analogy.  So here’s an extension.  The car is in ruts up to the hubcaps; the wheels are spinning, mud is flying.  Obama’s idea – give it more gas.

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