Stimulus?

Regardless of whether or not you believe that an economy can be 'stimulated' by government spending, it would seem that if you are trying to get out of a recession, you would spend the stimulus money now, not later. However, according to the Congressional Budget Office, of the $787 billion appropriated in the final bill, $236 billion won't be spent until 2011. That's 41% of this monster. If the true nature of this bill was to stimulate the economy, $236 billion could have been cut and still provided the necessary stimulus. The truth is that this bill is a sham and will burden current and future generations with a mountain of debt. George Bush and Congress (both parties) took 8 years to dig a deep deficit hole, it has only taken Obama and Congressional Democrats days to dig a deeper one.

I Fear for the Future

On the front page of The Ann Arbor News today there was a little box with a letter to incoming President Obama. In part the letter said:

[...]I think you deserve to be the president because you are going to do smart and good stuff, like give poor people homes and a life.

Granted this letter was from an 8 year old, but this thinking of the President as some sort of Superman is pretty pervasive, and to some degree represents the type of thinking taught in our schools today. I've seen similar comments from adults as well, which is also pretty scary. I really hope that Obama does well as President, but based on concepts and policies coming out during the transition I can't say that I'm very hopeful. Couple many bad ideas with a Congress that is even worse and I fear that a return of the Carter era 70's is quite likely, and possibly something much worse.

Wishonomics

It's really disappointing that the McCain campaign isn't doing a better job exposing Obama's economic plans for the sham that they are. They should be pointing out wherever they can that raising taxes, particularly during an economic slowdown, is a recipe for failure. Spending money you don't have compounds the problem. I call this 'wishonomics' because you have to wish that economic realities don't exist in order to believe it will work.

Obama wants to raise taxes on dividends and capital gains. History has shown that when you raise these taxes you get less revenue. Obama knows this, but is on record as saying he doesn't care. He will do this to impose his notion of 'fairness'. Raising taxes on investment will result in less investment, or misallocated investment. Instead of investing in higher risk, perhaps a new business or idea, investors will stick with safer investments. Capital which has gains, will stay locked up as people avoid paying the higher tax rate in the hopes that down the road saner heads will prevail. The net effect of raising taxes on dividends and capital gains is to reduce revenue to the government at a time when it will certainly be needed, and to reduce investment in productive economic activity, again, at a time when we desperately need it.

Obama also wants to raise taxes on people earning over $250,000. IRS data shows that the majority of individual filers who report income over $250,000 are actually people who own businesses and are reporting business income on their personal return. Raising rates effectively reduces the amount of money that these business owners can use to invest in making their business grow. Small businesses are the largest employers and hurting them seems counter productive. People who cheer the idea of making the rich 'pay their fair share' should realize that they are simply shooting themselves in the foot. People like to mock 'trickle down' economics, but the simple fact is that if you hurt the ability of small businesses to grow, by reducing their access to operating capital, you will cause businesses to either fail or grow slowly or not at all.

In the face of a recession, where tax revenue will naturally decline, and with the almost certainty that his tax policies will futher reduce revenue, Obama then proposes spending even more money than Bush. Everywhere he appears, he is promising that he will have a refundable tax credit for this, that or the other thing. If these promises are kept, all that will be accomplished is an explosion of debt. I really fear that we are entering a period very similar to the 1930's. I don't think we will go into a deep depression, but I feel that the poor economics of our current president (playing the role of Herbert Hoover) will lead to the election and destructive policies of Obama (playing the role of FDR). I expect that there will be plenty of stupid laws passed and further restrictions of freedom that will take decades to repair.

Is it a tax or forced savings?

When the subject of taxation is brought up, particularly in who shoulders the most burden, defenders of Obama's tax plan like to claim that it is the lower and middle classes who have the tax burden, and those in the top 5% who aren't paying their 'fair' share. This flies in the face of the facts which clearly show that those making over $250,000 pay a far greater share in federal income taxes than do the remaining 95% of earners. Ah, but this excludes the payroll tax, say Obama's supporters. When you factor in that regressive tax, things change.

So here's my question. For years we've been told that the payroll tax, i.e. FICA, is going to fund Social Security and Medicare. Social Security is continually sold to us as a form of retirement savings. Social Security payments are made in a decreasing proportion to the amount of money collected from payroll taxes over an employees working career. Those who make less and paid in less, receive a higher percentage payback than those who earned more and paid in more. So, if people are getting a retirement benefit based on their 'contributions' to Social Security via FICA, doesn't that mean that FICA isn't really a tax? Isn't it more of a forced savings plan? If so, then we certainly shouldn't be counting FICA as part of a persons tax burden any more that we should be counting any savings the person makes as a tax burden.

On the other hand, if people want to claim that FICA is a tax, then let's admit that Social Security is nothing more than a welfare program and simply eliminate it. If we want to keep the payments, have them come from the general fund. Eliminate the payroll tax entirely. At least then we might be able to have a rational discussion about true tax burden, rather than having FICA muddy the waters.

Tax. Spend. Dictate.

Tax. Spend. Dictate. These three words completely summarize the economic policies of Barrack Obama.

On taxation, Obama believes that the 'rich' pay too little in taxes so his plan is to raise taxes on those earning more than $250,000. Why $250,000? I assume because he feels that the number of people earning more than that are in sufficiently small numbers that they won't affect his polling numbers. Obama also wants to increase taxes on dividends and capital gains, again playing to a myth that only the 'rich' will be hit by these taxes. Obama doesn't even care if these higher taxes will actually raise revenue, he wants to do it simply to fit his notion of 'fairness'. Of course he doesn't stop there. Obama also wants to change the way Social Security gets funded so that people earning over $250,000 will have to pay additional taxes over and above the wage cap. This completely eliminates the charade that Social Security is anything but a welfare program. Finally, as part of Obama's energy policy, he wants to tax the 'windfall' profits of oil companies. Of course, what defines 'windfall'? In Obama's world it must simply be a large dollar number earned by an unpopular industry, because on a profit as a percentage of sales, the oil industry is positively middle of the road. Again, in a zeal to appeal to populist instincts, Obama would prefer to do something harmful rather than being courageous and doing something sensible.

Other than increasing 'fairness', what does Obama plan to do with all this extra cash he hopes to raise? Why spend it, of course. Every day there is an article in the newspaper about how Obama is going to give $x billion dollars to support this, that or the other thing. If there is a problem, Obama's solution is to throw money at it. It doesn't matter if this is a good solution, it doesn't matter if the origin of the problem is government meddling, if you throw money at it, the problem will go away, right? It's worked so well in the past. Obama wants to be the national Santa Claus, handing out goodies paid for by people who work for a living while he takes the credit. None of this, of course, is the President's job, but that doesn't stop him from convincing an ignorant electorate that he should be elected because of his generosity.

Tax and spend are two big impediments to true liberty. Taxation takes money by force. Your labor isn't all yours, part of it is owned by the government. Government spending is taking decisions away from the people and replacing them with decisions made by the political class (which includes corporations and other influencial people) However, Obama isn't content with attacking your liberty through tax and spend, he also want to dictate how you live your lives. For example, as part of his energy policy, he wants to ban conventional light bulbs, forcing everyone to buy CFL's. I have no problem with CFL's, they have there place, but I certainly don't want to replace every light in my house with a high mercury device which is expensive, ugly and has a host of other problems. This doesn't matter to Obama, he and his technocrat advisors know what is best for you and me and therefore he will use his power (not really granted by the Constitution) to force us to live the way he wants us to live. Health care will be a similar thing. Obama wants to implement a medical insurance scheme which will continually force us to obey new government restrictions. I predict a host of new laws to promote a 'healthier' person so that we don't cost the government so much money in health care. Again, dictate it and it will be so!

Obama is campaigning on 'Change'. I don't see this as change, but more of an acceleration. We've had continual growth of government and continual reduction in liberties. Under Obama I would expect this trend to continue. Make no mistake, John McCain isn't much better, but at least he would be a Republican President presiding over a Democrat controlled Congress. Some gridlock is bound to happen. With Obama as President and a Democrat controlled Congress there is virtually no limit to the damage they could do to this country. Just look at what happened when Bush presided over a Republican Congress.

The Fallacy of 'Buy American'

There has been an ongoing debate in our local newspaper on the topic of buying foreign cars vs. buying American cars. In addition, we've had letters stating that we shouldn't buy anything from a foreign country. The idea is that buying American will save American jobs. The reality is that this action would actually cost American jobs.

When people buy foreign products, it's entirely possible that there will be Americans who lose their job because their company can't compete with the foreign company. When American car companies are suffering because people aren't buying their products, we can see the result, some works lose their jobs. However, this isn't the entire picture.

By buying products with the most value, we conserve our wealth. If we simply purchased products because they were supposedly made in American, we might be spending more money that we would have to. By spending more money on one product, we have less money to spend on others. This may save the jobs of some American auto workers, for example, but it may cost jobs of workers who make other products or provide other services that we would have been able to spend our money on if we weren't over paying. In addition, if we only buy American products, American workers who work in the shipping industry would lose jobs because there would be no products to import. If we aren't importing, we can't export. Nobody would have any dollars with which to purchase our products. Again workers involved in import/export would lose their jobs. Why are auto workers jobs more important?

We can even take this scenario further. Surely if it is wrong to import products from foreign countries, it also wrong to import products from other states. If it's wrong to import from other states it must also be wrong to import from other counties. Taken to it's logical conclusion, no one should by anything from anybody. We should all just make our own stuff. Guess what? We've been there, done that. I personally wouldn't want to go back to a world where everyone makes their own clothes, grows their own food, builds their own houses, etc. Trade is what allowed our standard of living to dramatically improve. Trade is a personal thing which isn't and shoudn't be constrained by artificial political boundaries.

No Surprise

I was reading this weekend that Hillary Clinton has chosen not to listen to economists regarding her gas tax holiday. Big surprise there since it's obvious from her other economic positions that she chooses to ignore sound economics on a regular basis. She has an amazing ego which convinces her that whatever she wants she will get, regardless of reality. More likely, she feels that if she appears to be attacking a problem she will get credit, and when it doesn't work she'll have some other scapegoat for why it didn't happen.

On the gas tax proposal, she is completely out of touch with reality. She claims that her proposal will help those people who are struggling with high gas prices, when in fact the opposite will occur. Gas prices, like all prices, are driven by supply and demand. When demand is high and supply is low, prices will rise. Cutting the gas tax will, for a short period of time, reduce prices. However, lower prices will release additional demand and prices will soon move up again. In addition, her idea to implement a windfall profits tax on oil companies will actually reduce supply. Why would an oil company spend valuable reasearch and development dollars trying to find and produce more oil, only to have profits from those risky ventures taken by government. The net effect will be to reduce supply, thereby raising prices even more. It's not like this is rocket science. The same thing happened the last time we had a windfall profits tax on oil.

Hillary has some other proposals which are equally bad from an economic point of view. She wants to raise taxes on capital gains and dividends. Of course this will just cause people to hold on to profitable investments longer than they would like, rather than being able to take their gains and move into other investments. This has the effect of hindering mobility of capital. Capital is what is needed to start and keep new businesses running. It is this business creation which creates the jobs which help everyone. Ms. Clinton's short sited fixation on 'fairness' ignores the greater reality that she is really hurting the very people she claims to want to help. We only need to look at the infamous 'yacht tax' to see what happens when you try to punish the rich through excessive taxation.

The policies that Hillary Clinton proposes are almost universally bad from an economic standpoint. However, there are places in the world where such policies may be welcome. I understand that Cuba will likely be looking for a new president in the near future. Perhaps Ms. Clinton should take up residence in Cuba and run for president of that country. Certainly her policies are more consistent with Cuba's socialist paradise than the capitalist United States.