Obama and Haley: Part II Economic Policy

by

Howard Adelman

On economic policy, Governor Nikki Haley criticized Barack in six areas: excessive taxation, excessive expenditures, excessive debt, and the failure to provide adequate support for innovation, education and ensuring increasing incomes for average Americans. What did Obama claim about his record on taxes and policies going into the future?

He advocated raising taxes for those who avoided taxes by opening offshore accounts. On the other hand, he also argued that the Trans-Pacific Partnership (TPP) will both make more jobs for Americans, but also cut $18,000 in taxes on products made by Americans. With respect to businesses, Obama argued that his policies were intended to lift up businesses, not oppress them by more taxes, at least those businesses which try to do right by their workers in terms of the rules of the TPP which will recognize the benefits for their shareholders, customers and communities when they did.

Republicans proposed much more extensive slashing of taxes on personal and corporate incomes. Texas Sen. Ted Cruz proposed lowering the rate to 10%, Florida Sen. Marco Rubio proposed eliminating it, while Donald Trump wanted to set capital gains tax rates at 20%.  Who would benefit from a reduction? To a considerable extent, and certainly disproportionately, wealthier Americans! Certainly proposals to cut rates on capital gains and on qualified dividends would as well. After all, almost 80% of federal and state taxes from the latter two sources come from the very wealthy, in fact, the top 1%. Capital gains taxes on assets held for more than a year and then sold, as well as taxes on corporate dividends, in 2003 were reduced to 5% in the lowest two income tax brackets and 15% in other income brackets constituting the vast majority of income from capital gains and dividend taxes. Obama extended these provisions of Bush’s Tax Prevention and Reconciliation Act of 2005 to 2010, but in The American Taxpayer Relief Act (2012) signed in January of 2013, that tax was raised to 20% for those in the highest 39.6% tax bracket. The rich were still entitled to pay 50% of normal income taxes on these two taxes. And the rich were overwhelmingly the beneficiaries of this type of reduction in taxes. (Cf. Thomas Hungerford (2010) The Economic Effects of Capital Gains Taxation.)

If Republicans eliminate estate taxes altogether, federal coffers would be deprived of $30 billion a year. These were figures cited in a New York Times op-ed piece last week by Mike Lofgren, a former Republican staff member who served on both the House and Senate Budget Committees and authored the book, The Deep State: The Fall of the Constitution and the Rise of a Shadow Government. As it is, inherited property is only taxed for capital on the difference between its value at the time the property was inherited and when it was sold at the time it was sold. This means that there is no capital gains tax, that is zero tax, from the time a person acquired the property to the time of his/her death and bequeathing that property to a heir. Hence, the proliferation of “trustee” adults who effectively live as rentiers on the wealth accumulated by the family members who bequeathed them their property.

This supports Obama’s argument that the democratic deficit in American politics is fed by economic distortions and the widening gap between the wealthy and the rest. Cutting taxes is a formula for enhancing the control of money over American democracy, not reducing it. The state would be starved in its ability to do much of anything for the middle and lower classes, quite aside from damaging infrastructure and environmental projects that would benefit all Americans.

In contrast, like the new Liberal government in Ottawa promises to do, Obama did increase taxes on the wealthiest Americans, those earning in excess of $250,000 per year, including decreasing the level of charitable deductions from 35% to 28%. But as he said in a speech when he was first running for election in 2008 (23 October), Obama promised those earning less than a quarter million a year would not pay an additional dime in taxes. That included 98% of small businesses. Joe the plumber would not be affected, only Joe the CEO and Joe the hedge fund manager. In fact, most middle class families saw their income taxes decrease. The typical middle-class family received about $1,000 in tax relief, paying taxes 20% lower than under Ronald Reagan. His original budget gave a tax credit of 6.2% of earned income up to $400 for single workers making less than $75,000 a year and $800 for married couples making less than $150,000 per year.

On the other hand, by eliminating “tax credits that have outlived their usefulness,” closing corporate tax loopholes, and reversing a portion of the tax cuts awarded to the wealthiest 2% of families, the treasury recouped greater revenues overall while cutting income taxes overall, taking a smaller ratio of GDP through income taxes than under Reagan. By reducing net overall taxes at the same time as tax loopholes were closed and tax credits eliminated where they were no longer useful, it is estimated that the government took in or is on the verge of taking in at least 600 billion in extra revenue over the last seven years. Contrast the tax cuts of the Bush administration that distributed twice that amount, about $1.35 trillion over 10 years, mainly to the wealthy, but also families with children. IRS data released showed that the average effective tax rate for the richest 400 Americans rose in 2013, but only to 22.9% compared to 16.7% previously. No wonder the very wealthy and the Republicans that represent those interests have been irate.

What about capital gains taxes, taxes on dividends and estate taxes? On the latter, taxes of 35% on estates and individuals worth over $5 million and on family estates worth over $10 million were restored. Obama when he took office proposed dividend tax rates 39% lower than what George W. Bush proposed in his 2001 budget tax cuts. On capital gains tax, Obama continued the rates set by George W. Bush. It is not clear why since this certainly benefits the wealthy most of all since lower capital gains taxes means a decrease in revenues for the state with no offset whatsoever in economic stimulus though no correlation with decline either. (Cf. Len Burman (2012) “Capital Tax Rates and Economic Growth (or not),” Forbes, 15 March 2012; See also the independent Congressional Research Service (CRS) in its report (subsequently withdrawn under pressure from Senate Republicans), Taxes and the Economy: An Economic Analysis of Top Tax Rates Since 1945 and Small Business and the Expiration of the 2001 Tax Rate Reductions: Economic Issues.)

It would appear that Haley’s criticisms of Obama in this area were simply a repetition of a Republican mantra with little if any basis in fact. What about Haley’s complaints about exploding expenditures under Obama? She certainly has a case for 2009. In seven months, the American Recovery and Reinvestment Act (ARRA) led to over an additional $240 billion being poured into the American economy. In total, by the end of March 2011, over $630 billion additional funds were invested in the U.S. economy. These were not expenditures in the normal sense of the term, but capital investments in infrastructure, in bailing out the automobile companies and saving the American economy. Obama has every reason to boast and no reason to regret making those expenditures (investments), though some criticism seems warranted on who received the benefits of those investments.

What about deficits? The budget was last balanced in 1998, with credit going largely to Bill Clinton even though Republicans controlled Congress at the time, for Clinton had fulfilled his promise of reducing the deficit, as had George Bush Sr., his predecessor. As a contrast, the leading Republican contender, Donald Trump, would add a staggering $12 trillion to the deficit. Though his competitors are all far behind in such an extravagance, the average addition to the annual deficit would be $3-4 trillion. George W. Bush inherited a $236 billion budget surplus from Bill Clinton but by the time he left office in 2008, the deficit was $408 billion and the national debt had doubled. As Mike Lofgren, the Republican budget staffer quoted above, opined, the Republican ritual denunciation of deficits is a fraud. As my son, an economic historian at Princeton wrote me, “It’s the worst kept secret of the last 30 years that the Republicans are reckless on the economy, but they still froth about fiscally profligate Democrats…”

Haley may be much more civil than the current Republican candidates for President, but on the economy she sings from the same denial of economic facts that has become the habit of Republicans. Tax cuts, especially those that are erroneously targeted, undercut the government’s abilities to create and maintain infrastructure and support new initiatives. Ever since the Reagan administration using voodoo economics drastically cut taxes while enormously increasing its investment in the military, the result has been huge deficits and enormous increases in the national debt. In contrast, Obama has reduced both. Conrad Black after Obama’s first year as president lamented that a $10-trillion national debt accumulated from 1776 to 2008 had become a $16-trillion debt while leaving 50 million citizens in poverty and the entire middle class living on an economic knife-edge. However, during Obama’s presidency, the debt has been enormously reduced, though he took his base line 2009 rather than 2008 with some justification since he inherited his economic woes from George W. Bush’s gross mis-management of the economy. In the last year of Obama’s term, the American national debt as a percentage of GDP is lower than in 1945 in spite of the enormous debt accumulated in saving the economy during his first term.

What about fostering innovation? Haley spoke of the need to reignite the spirit of innovation among Americans. Did she have an advance copy of Obama’s speech? Obama insisted that America’s best corporate citizens are the most creative, but nevertheless asked, in similar words to Haley’s: “how do we reignite the spirit of innovation to meet our biggest challenges?” for the “spirit of discovery is in our DNA.” Contrary to Haley, however, Obama claimed that his administration over the past seven years had “nurtured that spirit” by ensuring the internet remained open and increasing access to that internet for students and low-income Americans. Obama launched next generation manufacturing hubs and online tools. In other words, government played a significant role in fostering innovation.

Obama, however, insisted the government could do much more and, in the spirit of the space program that he had cited earlier, he named Joe Biden as head of Mission Control to launch a concerted effort to finally conquer cancer once and for all, just as the government had facilitated landing a man on the moon in just twelve years. The one area, other than health Obama cited, was the issue of climate change where a similar order of commitment was needed, a subject which Haley did not mention. For Obama, climate change deniers were relegated to a lonely existence of the margins as America’s military, business leaders, the majority of Americans and almost the entire scientific community as well as 200 nations around the world agreed that climate change was indeed a problem that had to be solved. There was a bonus in such recognition: America’s businesses, led by America’s spirit of innovation, could and should produce and sell the energy of the future. After all, over the past seven years, investments in wind power had now paid off since wind power was now cheaper than conventional power and employs more people than the coal industry. On top of that, America had cut its imports of oil by 60% and cut carbon pollution more than any other country on earth. Obama called for accelerating the transition away from dirty fuel by putting the costs of pollution on the backs of fossil fuel producers and investing in a 21^st century transportation system.

So Obama argued that money will be saved, jobs will be created and the planet will be preserved by such measures. Jennifer Rubin, a right wing economic pundit in her op-ed, “Obama’s challenge: Why give a failed president another chance?” (The Washington Post, 3 September 2012) before his second term election, challenged Obama for falling back on failed policies of raising taxes on the upper income group, expanding investments in teachers and education and enhancing infrastructure investments. Ashe Schow, in her article, “President Obama’s Taxpayer-Backed Green Energy Failures,” in The Foundry (18 October 2012) argued that all the eco-companies in which the U.S. had invested large sums had failed in their initiatives: Geothermal ($98.55 million), Babcock and Brown ($178 million), Ener1 ($118.5 million) (Ener1 was sold to a Russian), Johnson Controls ($299 million) while others filed for bankruptcy – Abound Solar ($400 million) (the company actually only received $68 million when the government cut its loan off) and A123 Systems ($279 million) (the Chinese conglomerate, Wanxiang Group, bought A123 for 1% of its share value at its peak evaluation), Solyndra ($535 million). (For example, http://www.greentechmedia.com/articles/read/nec-snatches-a123-energy-storage-biz-from-wanxiang should be read regarding A123e.) The attacks continued unabated over the last four years paying little or no attention to the data that contradicted their contentions.

After the inaugural address of Obama’s second term, Charles Krauthammer accused Obama of promising “a state-created green energy sector, massively subsidized (even as the state’s regulatory apparatus systematically squeezes fossil fuels, killing coal today, shale gas tomorrow).” (Charles Krauthammer: “Obama Unbound,” Washington Post, 24 January 2013). Capitalists count on most of their investments not paying off but counting on the minority that do. If those government investments are compared to private ones, even though the private sector was far more risk averse, a comparison indicates that government investments, surprisingly, may have been more successful. (World Economic Forum http://www.weforum.org/content/closing-green-investment-gap)

To repeat what I wrote 3 years ago at the time Krauthammer wrote his piece, “The right wing economic critics of Obama’s various economic strategies work by repetition of stock phrases, are selective in their citations, and ignore analyses that might falsify their beliefs. It is possible that their position could be right to some degree. However, they create a caricature. The evidence when weighed does not demonstrate that the economic conservatives are right. Instead the evidence suggests that ideological conviction rather than comparative detailed analyses yield their conclusions.”

Finally, let me add the response to yesterday’s blog before he had a chance to read the above.

I agree Haley deserves credit for being a voice of civility in a party of spoilers.  But she did NOT take responsibility for the GOP being a financially ruinous party.  It is simply untrue that we have runaway spending.  It is simply untrue that the debt is crushing (it is almost back to the pre-2008 levels after a near depression).  It is simply untrue that the US does not innovate.  The world looks to America for the technological and social breakthroughs.  It is simply untrue that “American” taxes are “too high.”  That is utter crap.  What’s America when the top 1% for all intents and purposes pays no tax  anymore?  The New York Times for the past several weeks has been running long investigative articles, backed by peer-reviewed social science research, drawing attention to scale of regressivety of American fiscal (revenue as well as expenditure) policy.

The GOP is not just part of the “Washington syndrome.”  It is the purveyor of a fiction about the nature of the economy that profits from this narrative.  There is an alternative story.  It is this: the US is profoundly innovative and successful.  It is not beset by public debt (it is by private debt — but that’s a separate issue for the moment); it is not crippled by regulations of “Washington bureaucrats” and unions (just to take the example of education which you cite).  Blaming Washington recycles the problem by avoiding it.  The GOP has burnished this anti-Washington message for decades now — ironically, from within the beltway itself.  And the meta-narrative paralyzes by polarizing the very agent we need to be smart and responsive: the state.

So, what’s the problem?  The problem is that the benefits of private sector-driven innovation go to 30% of the population; 30% of the population is struggling to keep above water; 40% is backsliding, some very quickly. The problem is the absence of public goods that distribute the benefits more evenly.  The blame-Washington narrative endorses a view that divests from public goods rather than reframing the social pact for the 21st century.

That’s why America’s cities are in trouble.  That’s why the rich get richer (and contribute less).  That’s why we can be an innovative society while watching the bottom half struggle to keep up and depend on (public) infrastructures from schools to trains that would make a Third World country worry about its future.

Jeremy

This blog was prepared with the help of Alex Zisman.