Obamanomics

I was talking to a Republican-leaning friend the other day and she was asking me why I agree more with Obama’s fiscal policy than McCain’s. I explained to her how, according to the Tax Policy Center, Obama would increase the national debt by $3.5 trillion over 10 years, whereas McCain would by $5 trillion. Both are, to me, not acceptable but less is clearly better.

So she gave me the current Republican talking point line of “so you support the government redistributing wealth?” This is something I’ve heard over and over from both McCain and conservative pundits, which isn’t surprising. When a political party’s entire strategy is built around populism, some serious rhetoric is needed to explain why they’re cutting taxes only for the wealthiest 5% of the populace.

They have to convince the other 95% that making the rich richer benefits them, or at least doesn’t hurt them and is the right thing to do morally, and that’s a tough sell. It’s like trying to convince someone who walked onto your lot asking to buy a used Corolla that what they really need is a brand-new F350.

Trickle-down economics, which used to be the phrase of choice, clearly failed and the populace knows it. Of the last 28 years, 20 of them saw Republican Presidents, and all 20 of those saw an unprecedented landslide of money away from the poor and to the wealthy. The people to whom the money was supposed to trickle down are still waiting for it to rain.

Of course, we all agree that the rich getting richer isn’t a bad thing if everyone else is too, and up until George W. Bush took office that was happening, if maybe not as quickly. But what we’ve seen over the last 8 years is the rich getting richer and the rest of America treading water. To quote Nobel laureate economist Paul Krugman:

Rising inequality isn’t new. The gap between rich and poor started growing before Ronald Reagan took office, and it continued to widen through the Clinton years. But what is happening under Bush is something entirely unprecedented: For the first time in our history, so much growth is being siphoned off to a small, wealthy minority that most Americans are failing to gain ground even during a time of economic growth — and they know it.

And over the last 4 administrations, how did the market as a whole do? Let’s look at the Dow Jones Industrial Average:

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Exact numbers from the opening price on the day they took office to the closing price on the day they left:

President

Open

Close

Change

Gain %

Reagan 970.99 2,235.36 1,264.37 130.21
Bush 2,235.36 3,253.02 1,017.66 45.53
Clinton 3,253.02 10,587.59 7,334.57 225.47
Bush  10,587.59 8,519.21 -2,068.38 -19.54

Given all of the above, it’s not a shocker that McCain is fighting an uphill battle on the economy. So instead of trying to promote his own policy to the public he and his supporters are forced to use rhetoric and redefine it to be more palatable. The current buzzwords toward that end are “redistributing wealth” and “socialism”.

Like most rhetoric from either party, though, it’s largely hollow. McCain’s calls to pay people’s mortgages for them is no less socialist than Obama’s health care plan (and possibly more expensive, we don’t really know due to a lack of details). The same with the bailout that both candidates supported, which actually will have our government buying chunks of equity in private banks.  

As for redistributing wealth, any tax changes or large government actions do that. The Iraq war, for example, has redistributed wealth from civilians to the military industrial complex. Bush and Reagan’s cuts, Clinton’s increases, all moved money from one group of people to another. You can’t simply not change taxes or go to war or build roads when necessary just because money is going from someone to someone else.

That’s just the nature of government, and the only true alternative is anarchy. While I’m certainly not in favor of the government redistributing wealth just for the hell of it, I realize that until our country is perfect, that’s going to happen. It’s part of the political process.

So the question isn’t really about whether or not money should be redistributed, it’s about who the money gets redistributed from, and who it gets redistributed to.

In both candidates’ cases, there’s a significant budget deficit, so much of the money is taken from America in the future. Who is going to pay that? It’s unclear. It won’t be the poor, because they won’t have it and you can’t squeeze blood from a stone. It will either be the rich or all of us collectively when the government is forced to print money to avoid bankruptcy and tremendous inflation ensues. My guess is it will be the latter, because nowadays even the common sense politician has a $350 billion deficit. The steps required to ending our budget deficit before it’s unsolvable are too politically unpopular to occur. Our government’s fiscal policy is much like mine was back when I was 19 and charged my college tuition and a computer to my first credit card, and I see no reason to believe that the eventual results won’t be equally disastrous.

But back to the present (and past). The Bush tax cuts (which McCain originally opposed, and which was one of the reasons I used to be a big fan of his) gave the money almost exclusively to the wealthy. McCain wants to make those (which are set to expire in 2010) permanent. Obama wants to take some money from the future, and some from
the today’s wealthy people, and give it mainly to the lower and middle classes.

So, when given the choice between borrowing from the future and giving to the rich, or taking the money from the wealthy now and (and borrowing less money from the future) and improving the middle class, I’ll take the latter. In fact, people say that voters decide with their pocketbooks, but if that were true, Obama would be leading by 90 points instead of 10-15.

Moreover, I believe we have a serious problem in this country whereby the wealthy are paying half the tax rate of the middle class due to capital gains. Obama is the only candidate addressing this. the lower capital gains tax was designed to encourage investment, inspiring people to start their own businesses and invest in others, which is good for the economy in many ways. It has probably accomplished that somewhat. But unfortunately, what it has also done is ensure that guys like Warren Buffet pay taxes at half the rate of their secretaries, despite making many times more money.

Obama wants to keep capital gains taxes at 15% up to $250k in income, and then increase them to a more reasonable 20% after. This will encourage people to start businesses and invest for their future, while also partially closing the largest personal tax loophole in the history of our country. I personally liked his earlier plan of bumping them all the way up to 28% at the top, which is still significantly lower than income tax, and that’s coming from someone who has worked over a year with almost no salary to start a company that will pay mainly capital gains if/when it succeeds.

So while I’m not happy that both candidates are fiscally irresponsible, I recognize that as an inherent flaw in democracy. It’s a large part of why I liked John Kerry, and probably part of why he didn’t win. So I’m going with the guy who is less fiscally irresponsible and crossing my fingers.

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8 Responses to “Obamanomics”

  1. Great article, might be worth noting that the tech bubble explains in part why the table is so skewed in favor of Clinton over Bush 2.

  2. Matt–I enjoy reading your posts but I disagree with you on some points:

    1. Liberals seem to love pointing out how economic trends coincide with the President in office at the time. It's mostly true that Democratic Presidents have enjoyed more economic success than Republicans:

    http://gregmankiw.blogspot.com/2008/10/republic

    Notice how Clinton reaps the highest return, yet, as Goladus points out, that occurred during the largest economic bubble in the history of the United States and was definitive of a technological *revolution* on a scale that'll forever change the landscape of this world. It would be a challenge for the Presidential administration to have stopped such events from occurring and there is no correlation between the existence of the Clinton administration and the scientific research and culmination of events that gave birth to the tidal wave that was the first Internet boom.

    2. I have never understood the disadvantages of a “gap” between the rich and the poor. Claiming a “gap” is detrimental is assuming that the United States economy is a zero-sum game. If a rich man has an income of $1M and a poor man earns $50K, then their difference in worth is $950K. If both increase their value production by 50%, then they each gain $1.5M, and $75K, with a $1.425M gap. Sure, a larger gap, but a net gain for the U.S. economy. Attribute factors such as inflation and the gap will inevitably rise.

    Most likely, to make over $1M requires a huge amount of wealth production–this person is probably an entrepreneur of some sorts, executive management at a large corporation, or a genetically-fortunate individual that has had success in athletics, theater or some form of entertainment. The $50K is doing a “standard” job and thus produces a disproportionately less amount of value than the other guy. Why soak the rich in favor of the little guy?

    The fact that the economy is NOT a zero-sum game is the reason why the little guy enjoys a superior standard of living to the populations of other first-world countries. It's the wealth of America that sets it apart from the rest of the world. Let's harness these value-creators and let them rise to the top.

    Sure, there are the inherited wealthy that have assets they didn't earn. Let's tax these people. But let's not increase capital gains tax to make the investments that are fueling already-risky entrepreneurial endeavors more expensive.

    3. “As for redistributing wealth, any tax changes or large government actions do that.”

    This statement is kind of true in its own rite. It's not exactly what McCain is referring to in his buzzwordery. The redistribution of wealth *by the government* is the key. For example, tax cuts don't appropriate money from one place to another. They simply eliminate government control over that money. This allows the consumers to appropriate their spending where they wish. That is the Republican ideal that is being preached, NOT whether we should cut taxes for the rich OR the poor. I have a feeling that what you're getting at is that money is simply being transferred between the rich and poor, which is not the case, as though there's a clear distinction between the two (I guess it's become $250K, haha). It's the difference between allowing the economy or the government control consumer spending.

    Well-thought-out post, keep 'em coming.

  3. mattmaroon Says:

    Economists actually believe you're wrong on #2, having a wealthy elite that is too wealthy is the primary difference between us and Latin America. Krugman mentions it a bit in the article I linked. Read it, you'll enjoy.

    And I think it's safe to say the largest economic bubble was the one that just burst.

  4. Can you provide the link? I just see the quote. I am interested in reading it; I've been reading a lot of his writing since he won the Nobel prize for econ.

  5. mattmaroon Says:

    http://www.rollingstone.com/politics/story/1269

    That gets into the topic a bit.

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  8. hey this is really great stuff dude… what a positive explanation and a statistical comparison… amazing dude… great post!!!

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