Thursday, November 4, 2010

- How Obama Can Fix It All (But Won't)

Here is a great example of why a doctrinaire bureaucracy loving 'big labor' liberal like Obama has no business in the Whitehouse. Current monetary policy is providing him an opportunity to fix the bulk of what’s wrong with the US economy with the stroke of a pen, but he’ll never do it because it would violate his idealistic (and economically illiterate) view of how the world works.

If Obama wants to create jobs all he has to do is eliminate the corporate income tax… all of it… forever. If he then chooses the worst case spending scenario and makes no cuts to spending at all, then assuming my math is right, he’ll need to borrow an additional 250 billion dollars or so to patch the hole that creates in the federal budget for the coming year . But in an environment where the Federal Reserve is buying 100% of all currently issued Treasury bonds, this is a trifle. The bond market won’t even notice. It can be managed by simply extending the Fed’s current policy by an additional 2 months.

And when the US corporate tax rate goes to zero, instead of having US companies trying to figure a way to move to China, you will instead have Chinese and other foreign companies trying to move here. The hiring boom that would come from a tax code change like that would be unprecedented in history. It would solve many of our current economic problems in a heartbeat.

The corporate tax is a sham anyway because the corporations never really pay it. It's either passed on to consumers in the form of higher prices, or employees in the form of lower wages. That means that if it's eliminated, much of the savings will be passed on to consumers in the form of lower prices, but the rest will take the form of rapid investment and expansion. The resultant "Obama Boom" would make the "Reagan Boom" seem like small potatoes.

As for the repatriated jobs, it was always a fallacy that we need to pay wages equivalent to what workers make in China in order to see hiring here. Since we are the end market, the elimination of the corporate tax will let businesses redo the math. They will be in a position to offer a wage premium for hiring in the US which amount of the difference in shipping costs at the very least. In reality it would be even more since managing American workers is so much easier than managing workers in China. That might mean that the lowest paying jobs will remain overseas, but the better a job pays, the more likely it will be worthwhile to move back to the US.

Those jobs might not pay what the unions would like, but when you’ve been on unemployment for 2 years I think you’re probably willing to be a little flexible. After all, there was never any such thing as a job that American’s wont do, only a price they wouldn’t do it for. That price has fallen in the last 2 years – at least for the 10% of Americans whose unemployment is about to run out and can’t pay their bills. And in a booming economy all wages will begin to rise again instead of fall.

It would work...but regrettably, it will never happen. Obama will never do it because it would weaken unions. And the unions are what Obama is all about. He’s taken his every domestic policy cue in the last 2 years from former SEIU chief Andy Stern. And Obama isn’t going to go against the unions just to reduce unemployment and cause the US economy to boom. It's just not worth it to him or to them.

And that's a real shame because a Republican president would never be able to get a change like that past the left wing media. They’d call it ‘corporate welfare’ and complain that ‘evil corporations’ were getting a benefit they don’t deserve while evil Republicans force poor people to eat their children to survive.

But if there is a sector of America willing to give Obama a pass it's the media. He'd be able to insulate himself from criticisms like that long enough for the effects of the policy to be felt. Then the booming economy would solve so many our budget, entitlement and employment problems that he be hailed as a hero for thinking outside the box. It's a shame he won't do it.

It’s just one more reason to lament the economic illiteracy of the political left.


If you came here from Esquire then you might also be interested in this response to that confusing bit of criticism.


Anonymous said...

Many of a President's signature accomplishments often originate as priorities of the opposition:

Nixon 'opening' China

Carter's initiation of the military buildup starting in 78-79

Bush I: Americans with Disabilities Act

Clinton: NAFTA, Welfare Reform, and balanced budget (this last appears 7 times in the 1992 Republican platform, zero in the Dem platform of that year)

Bush II: Medicare Prescription Drugs, No Child Left Behind (Ted Kennedy authored most of this bill)

The congressional members of an opposing party are eager to achieve any part of their agenda, which cannot be done except by an unlikely two-thirds majority over a presidential veto. Thus, should a President champion one of their priorities, their universal support is nearly guaranteed. Assuming either party will at any time compose between 40% and 60% of the body of each house of congress, a President then needs the support of only 1/6th or less of his own party to provide the margin of passage in congress.

Alas, Obama is an idealogue and an economic illiterate.

Gridlock it is, then. Which is fine by me.

Hell_Is_Like_Newark said...

How about us who have LLC's, S Corps, LLP, etc.?

One thing that would help a person like me (two employees, LLC) would be to replace depreciation with simple expensing. If I have a loss, let me carry it over up to 20 years.

This would allow people like me (very limited resources) to make capital investments. It would also greatly simplify my taxes

Vishnu said...

Rachel Maddow did a piece on msnbc, where she observed that Microsoft and GE (owns MSNBC) paid 0 taxes, so how much do republicans want to cut it further?

She could easily have walked upstairs to GE accounting department and asked them how they paid 0? But that explanation does not fit in her narrative.

Microsoft pays 0, by a technique called transfer pricing, moving their profits to Ireland/Cayman like locations. And then Microsoft, with >30 billion in their international treasury, issued debt recently at the low interest rates peddled by Bernake. Why? to pay dividends in US, without paying taxes by repatriating the money. When they need capital investment made, where will they make it? Anywhere but US, because bringing the capital back here will cost them 35% of it.

Now Obama and his economic team (with a bunch of ivy league degrees) want to create jobs here, but cant see how to bring this capital back? I find that hard to believe. I suspect that they know and they dont acknowledge this just because it does not fit their narrative, just like MSNBC.

Tom said...

John Derbyshire was kind enough to link this post on NRO. And since I'm not set up to comment there, I thought I'd explain myself a little more clearly here:

First of all, the guy who is citing all the other presidents who didn't eliminate the corporate income tax is simply missing the point, maybe even intentionally. Either way though, he doesn't warrant any further mention. But the guy who said that tax policy is fiscal, obviously I agree. But the point I was making was that the real opportunity to change things is actually created by the current monetary policy.

Everyone who takes these questions seriously knows that the corporate income tax distorts economic activity, but the reason that's always cited for keeping it in place is the big question of where the government will get the quarter of a trillion dollars it's being asked to do without while the elimination of the distortion works its way through the economy. Well under current monetary policy that becomes an irrelevancy. Just temporarily pile it on the debt. Since the Fed is buying the debt anyway, another 250 billion won't matter in the short term and will have basically no market effect at all.

Now in theory we would still have to pay that debt down later (which is where the congress has always dropped the ball in the past). But a roaring economy forgives a lot of sins. IT will be easier I think to ask Americans to deal with higher taxes or less services or whatever when we’re back to full employment.

Anonymous said...

Why would cutting corp. tax weaken unions? AFAICT, union strength starts primarily with union jobs, so anything that would bring manufacturing/etc. jobs to the US would increase the number of potential union members.

Tom said...

Well my first thought was that we probably wouldn't get manufacturing companies pouring back into states with strong pro-union labor laws. No one will be setting up shop in Berkeley California or upstate New York.

Instead the influx will be in states like Texas and Alabama; Places where the unions don't have the legislature all bought and paid for. And union membership in the private sector has been falling for years. Without unionized civil service unions would already be on their last legs.

To be fair though - you may be right in the end.

Ronnie Schreiber said...

Cutting corporate taxes will not weaken unions. Only 9% of the private sector belongs to unions. The American labor movement now dances to the tune of public employees and ignores the interests of private sector unions. The head of the AFL-CIO said that his union's primary objective is protecting the interests of public employees.

For years I've been advocating that Michigan should eliminate all taxes and fees on businesses. Make Michigan the Cayman Islands of American business.

But class warriors will never let this happen.

Anonymous said...

I don't think that liberals are "economically ignorant" per se. They just have beliefs that border on the rellgious and are more interested on the means to an end rather than the end themselves. Imagine walking into your local church on Sunday and announcing that you have found salvation and you have proof of that salvation, but it doesn't include Jesus. How many of the folks sitting in those pews would be interested? I doubt many would.

Rick Bomstein said...

Actually liberals are economically ignorant - they believe things that are simply not true. Most importantly, they generally do not understand the impact of incentives on human behavior, and are thus continually surprised when higher taxes stunt growth (without leading to more gov't. revenue), price controls lead to shortages, wage floors create unemployment, etc.

Someone recently said Obama has a touching faith in capitalism - he believes it works no matter what you throw at it. That seems a perfect description of the current liberal mindset.

Tom said...

I concur 100% Rick... Well said. (And thanks for saying it... )

Tom said...

One last comment for the folks leaving their comments at NRO. I'm a hedge fund portfolio manager with an economist's academic training. I know that you need legislation to change a tax rate, I even know that such legislation has to originate in the house. What I didn't know was that the phrase "the stroke of a pen" is DC policy wonk shorthand for an executive order.

Call me scholastically chastized and thoroughly repentant.

Now maybe that liberal over there can give up on his childish word mincing.
You aren't convincing anyone kid.

Michael James said...

Obama is is not economically illiterate. He understands economics just fine. But you and I are in the economic economy, and he is in the political economy. The political economy works differently, where the union wishes rule. So you are on the right track with your thinking, just understand its a different economy we are talking about.

Anonymous said...

Tom -

I'm 'the guy who is citing all the other presidents' - sorry not to clarify:

Point is:

Obama could EASILY pass this GOP Priority which would become a lasting, signature accomplishment, much as past Presidents have adopted opposition priorities as part of their own legacy.

It's often easier to pass an opposition priority than one's own.

And criticism is more muted, due to party loyalty on your side.

Tom said...

Unless I'm mistaken, you were citing past presidents in a comment on this blog. (The first comment above I think...) I found that comment insightful, relevant, and full of important historical information that really helps put this in perspective. In my opinion it was just great, first rate thinking...thanks for making it.

I meant to criticize someone who left a silly comment over at NRO about how since Reagan, Clinton, and neither Bush eliminated corporate taxes then they were 'bad people' too.

Jack said...

What a jewel this blog is. I had followed the NRO link to see what was what--and lo and behold, truth is being spoken in my former state of residence. I heard little of there in the public sphere, save fleetingly. In short: suh-WEET.

My apology for posting a comment that does not refer to the specific entry, but I saw no way to comment generally on the blog. -J

ArloRAy said...

Here's some words. The spin about small business being the spark to knew economic recovery. I wonder. I have worked for small white business owners who can't keep anyone working for them except for people who don't speak english.

Battle of the fittist. If some of you small business owners who have swamped the indestry with cheap obligated non english speaking peaple go out of business. What is the loss. BAD BUSINESS. If bad behavior has been rewarded. Shouldn't bad business be able to fail.

Eventually the larger corporations pick up the business by default and the dow jones has a fake leveling out.

So to be honest I'm torn between siding with a bit of your economic squable.

Anonymous said...

Echoing jack above - Tom it would be great if you had some feedback mechanism other than comments for long-time followers - perhaps set up an email to take in communications... if it ends up being all useless spam, well, kill it - but it might be worth a try.

Long-time readers might be able to send you links of interest, etc...

Tom said...

Fair enough. I've put something on my profile.