Saturday, June 21, 2008

Americans Gallavanting towards Economic Suicide

I'm not sure anyone would be surprised where my political sensibilities tend. However, in this, I'm beginning to recognize there is a significant number of people who will end up voting for Obama because he is black (of course, not to do so is apparently racist) not having a clue what the man stands for - and further, that Congress will remain solidly Democratic. To be fair, Karl Rove has pointed out in the WSJ that even Republican nominee John McCain is no friend of markets: "Messrs. Obama and McCain both reveal a disturbing animus toward free markets and success."

So what does this mean? As Lawrence Lindsey points out in the WSJ, Obama wants to apply Social Security taxes on income above 250K USD. Here's the effect:

The economics of what Sen. Obama is proposing should be at least as troubling. A high-income entrepreneur would see his or her federal marginal tax rate rise to 53% from 37.7% under Sen. Obama's tax plan. He proposes a 4.6 percentage point hike in the personal income tax rate, a loss of some itemized deductions, and a 12.4 percentage point hike in the Social Security payroll tax. This would take a successful entrepreneur's effective marginal tax rate higher than what it was under Jimmy Carter or Richard Nixon, when the maximum tax on an entrepreneur was 50%.
I tend to think that it won't be the successful entrepreneurs who will bear the brunt of it, but rather high value sales people, consultants, managers and bankers. An entrepreneur can, after all, just issue dividends. The Economist's blog points out that the very unfunded nature of Social Security was a flawed idea to begin with.

Just as well for those who fund Obama like George Soros and Warren Buffett who has complained that income taxes on those like himself are too low, but that's easy for him to say given that higher income taxes wouldn't affect him one bit (h/t Greg Mankiw) and that both are betting against the value of the US dollar. Through Obama, Soros may finally have found a way to ensure at least one of his dire predictions come true. OK so let's say that you think that 'fat cats' should fry and pay higher taxes, but what about everyone else? Keep in mind that the US continues to flirt with a recession. The Bush tax cuts are set to expire January 1, 2011. You might think that's plenty of time but bear in mind that markets anticipate and are forward looking. But even so, what might tax rates look like after they expire (h/t Greg Mankiw)?

As Robert Mundell, Nobel Prize winning economist, one of the architects of the Euro (not to mention the chair of the economics department at the University of Waterloo in the 1970s) points out, "the big issue economically . . . is what's going to happen to taxes". An issue Mr. Mundell believes is even bigger than the weak dollar and subprime debacle. Noted in the WSJ:
Democratic nominee Barack Obama regularly professes disdain for the Bush tax cuts, suggesting that those growth-spurring measures may be scrapped. "If that happens," Mr. Mundell predicts, "the U.S. will go into a big recession, a nosedive."
Politicians seem to forget that prosperity depends on the innovation and risk appetite of entrepreneurs. The idea of providing negative incentives for doing so certainly seems counterproductive.

Consider energy policy. Some members of Congress want to nationalize oil to reduce oil prices while preventing oil companies from exploring and extracting oil in the US. What is probably more troubling is that those same members of don't consider these views to be absurdly embarassing. Other than the bizarre incentives that it creates (like the lack of investments in maintaining oil infrastructure in Iran and Venezuela) as Investor's Business Daily points out: "The fact is, the world's oil crisis is due almost entirely to government intervention in working markets at all levels. As we've noted before, roughly 93% of the world's oil reserves are controlled, directly or indirectly, by governments. It is they who have screwed it up."

The issue that will affect us and our clients the most of course, is trade. Obama wants to "opt out" of NAFTA and has recently made a number of comments hostile to any and all trade agreements as Instapundit points out highlighting a Republican ad that points to Obama's reversals from his previous more favorable views on the issue. In this, trade with China is vulnerable despite the belief that the benefits of trade is near universal amongst economists of all political stripes.

Ask those who will vote for Obama, 'why?' and too many believe that it will either not make a difference, and that somehow Obama will heal the nation and relations with other countries around the world. Reality check: so long as the US remains the world's only superpower, they will continue to be hated for this very reason. Given how Obama has run his campaign to date, I can't help but think that they will be disappointed - the extent to which will only be a question of degrees. As I've pointed out to others, I think that Republicans deserve to lose because of their recent repugnant stances on earmarks and free markets. One solace I have is that progress is rarely linear - sometimes a step back is required to move forward again.

Intrade currently gives 64.2% odds for Obama. My sincere hope - and one that is neither without precedent or reason, is that if Obama becomes the next US President, he will abandon his supposed convictions in favor of pragmatism (Winds of Change and Austin Bay both point his positions on Iraq and US security have been quietly changing, h/t Instapundit).

update (08.06.23): Mary Anastasia O'Grady from the WSJ compares proposed economic policy on key US issues to Argentina's in article titled "From Breadbasket to Basket Case". Instapundit points to others who note "It is weird how so many who claim to like Obama hope he is lying." One can only hope.

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