Friday, February 27, 2009

tax, spend, win?

Well the details of Obama's plans were not long in coming: the largest deficits and probably the largest tax increases in history, coupled with an aggressive effort to increase spending on areas deemed a priority (predominantly energy and health care) and reduce, or at least control it, in others (Medicare, assorted farm programs, etc.) It is a bold plan which effectively ends any pretense of bipartisanship and launches the Administration in an aggressively liberal direction: a change of priorities, as we used to say in the 60s, and as many around Obama still do. Does it make economic sense, and does it have any chance of working?

The first thing than one needs to do is to keep perspective. While experts talk of reversing the Reagan legacy, the plans is actually closer to a reversal of Bush 43 and a second try, under vastly different circumstances, at the Clinton agenda. This is most obvious in health care, but also visible in the tax proposals. Thus, Obama wants to repeal the Bush tax reductions on upper incomes and, if I understand correctly, allow itemized deductions to be taken only against the 28 percent rate. The latter proposal has been around since at least the 1980s: a limited version of the same cutback already applies under current law, and I think originated as a Republican trick (Bush 41?) to increase taxes while claiming that one was not. To repeal the Reagan legacy, one would need to impose tax rates of 50 or 70 percent, which nobody is proposing, at least not yet.

Other proposals, like pollution credits and changes to student loan programs, have likewise been around for years, although it must be noted that the pollution proposal amounts to an indirect tax increase at a time when the economy is already slow.

The problem is not so much any individual proposal as their aggregate effect. At a time when the country already faces the largest deficits ever--and when most people think we may require one or more additional "stimulus" packages--Obama is proposing vast additional spending that is only marginally related to the current state of the economy. While he has receive a lot of credit for "honesty" in his proposals, the candor goes only so far: even Paul Krugman, in today's Times, admits that he would likely need substantial middle class as well as wealthy tax increases to pay for it all. It must also be recalled that these increases come out a time when investors are already pulling money out of the stock market and when entire sectors of the economy--finance, automobiles, perhaps health care--are effectively being taken out of the private sector and thereby depriving the country of further taxpaying capacity. Even if his proposals pass, Obama thus faces a potential vortex of increasing spending, declining tax receipts, and the imperative to nationalize (directly or indirectly) ever-increasing sectors of the national economy. It must be remembered that all of this is before the proposals even begin the congressional review process, which tends inevitably to augment spending (popular) and reduce or at least delay tax increases (not so popular); and assuming no unanticipated crises.

Against this background, I was amused by the criticism of Gov. Bobby Jindal's response to Obama's speech. The danger to Obama is not from the Republicans, who remain in disarray, although one suspects that will change soon enough. The danger is that his proposals will take a serious but essentially cyclical crisis and turn it into a full-blown economic collapse. Who benefits from this potential disarray--Republicans, left-wing Democrats, maybe even Obama himself--is difficult to predict. But I think it is a very real possibility, and a lot of liberal commentators, if one reads between the lines, share my opinion. I was intrigued, in this context, by Obama's proposal to send an additional 17,000 troops to Afghanistan--for a total of 50,000 plus--and the suggestion that he might, after all, be keeping a similar number in Iraq after our "withdrawal." Lyndon Johnson said we could have both "guns and butter;" Obama's version is "yes we can." Both divorced themselves at some point from reality, and the results of such delusion are never pretty.


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