Saturday, September 27, 2008

Obamanomics Part II

I didn't watch the debate last night and I neglected to record it, but from what I've read, Obama spent a lot of time criticizing Bush's economic policies. Obama said "We have to recognize that this is a final verdict on eight years of failed economic policies promoted by George Bush, supported by Senator McCain." I was unaware that President Bush's economic policies had failed. Taking a look back at the last 8 years, I'm trying to find the high unemployment rates and high inflation that one would associate with failed economic policies and I can't find them. Unemployment has been 4-6% throughout the last 8 years, numbers within the range of what economists consider "full employment." Yes, we have a financial crisis and are currently experiencing slow growth (not a recession), but overall, the economy over the last 8 years has been strong. This is impressive, considering the recession Bush inherited, 9/11 and the Iraq War. I will fault President Bush for his spending but Obama would spend far more.

Obama blames the financial mess on Bush for corporate tax breaks and insufficient regulation. Just how did corporate tax breaks lead to the sub-prime meltdown? And what's wrong with corporate tax breaks? It's not like fat cat CEOs pay the corporate taxes, they are passed down to us through higher prices and lower salaries. Low taxes on corporations stimulates growth. Higher taxes does the opposite. Bush and McCain pushed for more regulation on Fannie Mae and Freddie Mac and but were opposed by Democrats. Obama, who received the second most campaign contributions from Fannie and Freddie in the Senate, did nothing to help.

Bush's tax cuts, which lowered everyone's taxes, are somehow portrayed as being bad for the middle class. In fact, even though their tax rates are lower, more of the tax burden has been shifted to the rich. After the tax cut, the top 20% went from paying 81% to paying 85% of taxes, The bottom 40% went from 0% to -4% (they now receive a net subsidy).

Obama's economic policies of protectionism, higher taxes on income and capital gains, anti-business labor-union rules, and massive entitlements are already on full display Europe. Obama's proposed taxes on the rich would be the second highest in the developed world, higher than Denmark and Sweden. These economic policies have already failed under Carter and in Europe and they are sure to fail again, but at least we would be more "equal" in our misery.


Kyle Hommes said...

I guess it all comes down to what one's definition of a good economy is. Correct me if I am wrong, but it seems like the Republican definition involves what is good for businesses, which they assert is analogous with what is best for all Americans. An economic policy referred to as Trickle-Down Economics. It increases the supply and therefore grows the economy, if the increased supply causes companies to increase wages, provide more jobs, and support their employees. Otherwise, the increased supply just becomes increased economic productivity, which raises stock prices (good for shareholders) but does not necessarily equate to a better situation for workers. The power is with the corporation in this scenario.

Obama and other Democrats talk about what is best for "Main Street" or the average American worker, that does not own a business, and maintain that is equivalent to what is best for businesses. This is called Bottom-Up Economics, and involves increasing demand by lowering taxes, regulating companies, and providing other benefits (free health care) for working Americans, who will then be able to put more money into the economy causing economic growth. The power in this strategy lies with the consumer.

I do not know and claim to know much about economics or the theories that guide it, but after the supposed "crash" this past week or so, I don't know if I trust corporations to drive our economy in the right direction, so I wouldn't mind having an economic strategy that is more consumer driven. It may hurt companies, but if it helps the average American, I think it is worth it.

We hear a lot of talk that companies need to be given space so that they can grow and give more jobs to Americans, and to some extent I think that is true, but I also think it has made many people are scared of corporate America because of that. Thinking that if we do anything to limit them, they will cut our jobs. The bottom line is that they depend on consumers, and we have just as much right to drive the economy. If companies don't like it, tough, they have to appeal to their customers. I would like to see that instead of us trying to appeal to businesses through corporate tax cuts and deregulation in hopes that they do what is in our best interest.

As far as the question of what is a good economy, I think it is one that helps the most people benefit, and with the increase in the income gap and income inequality that has grown exponentially ever since Reagan ushered in Trickle-Down Economics, I don't think that system brings about good economies, and the numbers prove it.

Kyle Hommes said...

That should be:

Jon Vander Plas said...

Allow me to tweak your description of supply side vs. Keynesian economics. Supply siders focus on what's best for productivity, not necessarily what's best for business. The main idea is that people respond to incentives. Take away incentives (especially for the most productive members of the economy) and you hurt productivity. And yes, increased economic productivity creates jobs and raises wages. All of the good things we enjoy in this country are not created by magic, they are the result of our second to none economy.

Keynesians focus on increasing demand for goods and services. When the economy slows, this is done artificially through government spending, financed by running a deficit.

So it's not really a corporations vs. little guy thing. It's a free market vs. government run economy thing. Free markets work - if the government stays out of the way and people are given incentives to be productive, our economy will grow. Markets are rational, governments are not. Corporations are trying to grow their businesses, politicians are trying to get reelected. Fannie and Freddie are great examples of what happens when well meaning politicians interfere with the market: Democrats wanted "affordable housing" for their constituents, so they encouraged reckless lending and now we have a huge mess on our hands.

I don't think the numbers prove your point. Only one president has embraced supply side economics and the economy made great strides during the Reagan years. Presidents have very different economic policies and they have to work with Congress on deciding these policies. For example, although they are both Democrats, Carter and Clinton had very different economic policies. Clinton cut capital gains taxes and promoted free trade. Clinton was a centrist Democrat, Obama's policies are much closer to what we saw during the Carter years.

Kyle Hommes said...

As far as the economic theory, I am sure that you have a much better understanding than I do, I am just trying to wrap my head around it. I disagree that the Democrats urged "reckless lending," though. I think they encouraged non-profitable lending, and that was the problem, so financial institutions tacked on penalties and higher interest rates to punish consumers for high credit ratings. Yes, there is some risk to lending to those with high credit ratings, but adding more costs to the mortgage just increases the probability that the mortgage will fail. So, they did encourage risky lending, but if the mortgage companies had not tried to punish these people, and decide to make a little less money on the loans, perhaps more people would have been able to pay them off. That's how I see it anyway. I mean, yeah, the Democrats pushed the mortgage companies into it, but I think it would have worked better if the companies would have handled the loans better.

Anyway, I am wondering what is okay to give up, if anything, for sake of being non-competitive? That is the real problem I have with fiscal conservatives. They seem to want to hold on so tightly to a competitive market that they are willing to make sacrifices to other aspects of the country. Is it okay to have sub-quality infrastructure for the sake of competition, what about less than ideal wages or relaxed ethical standards? Or, is it okay to allow more pollution or get rid of overtime pay? Most people would say No to those, but essentially, we allow them when we ship industries to foreign countries like China. I guess my point is that as a country we have limited our competitiveness in the past and allowed business to go to other countries for the sake of child labor laws and minimum wages. What is so bad about adding more rights for Americans at the expense of competitiveness? We have done it before. I'm just afraid that if we don't start changing our mindset and guarantee certain things like education and health care, we are not going to be able to do it in 50 years when India and China are more competitive than we are. I guess it just seems like we are betting a lot on our economy staying on top, and what if it doesn't. What do we do then? At some point other countries that are willing to let their citizens live in squalor are going to be more competitive than we are, and I think we need a plan for how we deal with that. For me it means relying more on the government and less on the economy. I could be wrong, but that is how I see it.

Jon Vander Plas said...

I'm afraid you're engaging in some wishful thinking on the Fannie/Freddie situation. The Democrats encouraged reckless lending by guaranteeing loans to people that couldn't pay them back. There is a lot of risk in loaning hundreds of thousands to people that have demonstrated an inability to pay people back. If someone defaults on a loan, especially if the home has fallen significantly in value (like if the housing market crashes in that area, or if the owner trashes it and rips out all the cabinets before they leave) the banks lose A LOT of money. That's why the rate must be higher. The fact is, these people should have been renting instead and the banks gave them a better deal than they deserved, otherwise the banks wouldn't be losing their shirts on these loans. Everyone would have been better off with these poor credit risks renting instead of buying. Do you realize the extent of this problem that the Democrats created? Everyone freaked out over Enron, but this is Enron many, many times over.

I think creating a safe work environment, having good infrastructure, and controlling pollution (considering cost/benefit) are perfectly reasonable expectations. But the real world is the real world, even when we wish otherwise. Increasing levels of socialization in medicine, education, and wage control hurt our economy and everyone suffers from the lack of growth. Raising the minimum wage is a trade off - you get higher unemployment along with it. Entitlements cost money. Both the people who pay for them and the people who get them for free have less incentive to work.

I think you're worried that the average worker is getting left behind, but a growing economy is constantly creating new opportunities. We don't want to be a manufacturing country - there's no money in it. We're losing manufacturing jobs, but gaining higher paying jobs in other areas.

Kyle Hommes said...

I guess my point was that we draw an imaginary line of what will help or hurt the economy based upon, perceived necessities. 40 years ago the idea of environmental regulation would have looked a lot worse than it looks now because we have more information now. It has become cost effective to be environmentally effective. I think the same thing could happen in other sectors, such as health care.

Also, I just don't see giving Democrats all of the blame. It is the corporation's job to manage risk is these loans, that they actively sought out. I admit that the Democrats were wrong to push banks into this, but it is not like the banks fought the process or tried to minimize their risks. Nor did the Republicans in charge (of the presidency and congress until '06) do an adequate job of regulating. The blame needs to be shared, not given to the Democrats.

I just fail to believe that incentive to work is really that important. Nor do I think that incentives take away the desire to work. Also, I don't buy that adding entitlements is going to hurt the economy. If the health care system somehow became socialized, which I don't think will ever happen, citizens will save money and be able to put that money into the economy, and money in the health system will be put into another industry, growing a different sector of the economy.

Plus, I don't think the economy is really what matters. Look at the UN human development index. The US is 12th this year behind a bunch of countries that have socialized medicine and education. You can say that the economy is what really matters, but I want a higher standard of living.

Yes, I am worried about the average worker, or maybe more accurately the less than average worker because they are getting left behind. Income inequality has been growing ever since Reagan, and skyrocketed again in the past 8 years. The "average" worker is making less than they were a few years ago and is spending more, while productivity in the market has been rising. I am sure that a strong economy does mean more jobs, but I don't think tax cuts and incentive for corporations is the only way to a strong economy, nor do I think it is benefiting the average American. Not having to pay for healthcare would benefit all Americans, and free higher education would put more skilled workers in the economy.

Finally, I don't get this whole, the real world is the real world talk. Republicans say that when it comes to the economy, but then they want to prohibit abortion and ban same sex marriage. Shouldn't we just let the real world be the real world there too, I mean that is what we need to do with the economy, so why not those issues. If it is necessary to have morals and ethics when it comes to unborn babies and the sanctity of marriage, why isn't it necessary when it comes to the economy. Then the motto is "no entitlements", let humans be selfish, and every person for himself or herself. That seems to me like a double standard.