The Obamaconomy

The White House has been talking about the economy of America and how things have gotten better, or are about to get better, or aren't as bad as they could be, sprinkled with a dash of "Bush's fault" for zing.

But most of what counts as economic recovery to people in the real world hasn't happened.

There was a new home sales bump recently (though construction and existing home sales are flat). But a quarter isn't a recovery any more than hiring thousands of census workers (some more than once and many more than was needed) counts as employment growth. The census is over now and all of those temporary government workers are gone; 9.5 percent unemployment is about the norm nation wide (Obama said it would not get above 8 percent).

Industrial production has been hemming and hawing, as has the stock market. None of this is great news, nor does any of it point to a recovery, slow, stalled, or otherwise. I wish the economy was booming!

Extending unemployment benefits is being touted as good for the economy. But it isn't. Taking money from working people and giving it to non-working people simply -- what's the term I'm looking -- redistributes money. I've known people who, once laid-off, ride the unemployment wagon to the end of the benefits. Increase the length of benefits, and they simply stay out of work longer. It's not uncommon. In fact, it's human nature: "I paid into it, I might as well get mine (small business owners who go out of business are not eligible for unemployment benefits, despite paying into the system for years).

Meanwhile, how do we (meaning the elected) pay for all the "freebies" they're using to buy votes, like the votes of those getting extended unemployment? There's the usual talk of having "business pay their fair share of taxes." Anyone who says that raising taxes or fees on a business helps the economy has no idea how the economy works. Fear not! I'll explain it.

Here it is in simple terms. A business takes in money and doles out money. If the money being doled out is greater than the money coming in, the business dies.

Obama Motors Concept Car, The Socialist 3000

Standard Features:
• powerful 1-stroke engine
• 0-60 eventually
• seats two adults (optional)
• easy to park (heck, easy to carry)
• only three wheels, so no spare necessary
• your purse doubles as the trunk
• your sleeve doubles as a wiper
• your singing doubles as a radio
• your screams double as a horn

If a business has to pay more for employees, supplies, utilities, and yes, taxes, it will have to make choices. One, it can raise prices. If it raises prices, two things can happen: the product is so good that customers just pay the higher price or if the product is good, but others companies make something comparable, there's the chance of losing customers, market share, and possibly, the company itself.

The company can also choose to eat the increased costs because it knows the market won't tolerate a price increase. This means the company makes less than it did while paying out more to produce the same thing. Making less means there isn't as much cash for expansion, new equipment, new hires, new training, new products, new services, new anything.

Another option is for the company to cut corners. It can make a cheaper product or put less product in the box. Most customers don't like it when the quality of a favorite product isn't what it used to be.

When a company can't compete under the above conditions, it dies. It's that simple -- unless it has friends in high places like certain banks, energy companies, car manufacturers, etc. These firms can be gleefully unsuccessful for years and still be bailed out by the American tax payer.

(art by Ralph Barton)

Should the Bush Tax Cuts Expire?
No one talked about the Bush tax cuts as well as Steven Moore in his article, "Careful Whom You Soak," originally printed in National Review, 24 November 2003 and repeated below.

PRESIDENT BUSH'S tax cuts have been lambasted by the Left as a policy that 'helps Joe Millionaire more than Joe Lunch Bucket.' What they don't realize is that, without the Joe Millionaires in our society, Joe Lunch Bucket might be in the unemployment line.

Data collected by the Tax Foundation, a non-partisan research organization, indicate that, among Americans who are subject to the highest income-tax rate, two out of three are sole proprietors of businesses. President Bush's cuts have made it less expensive for them to raise capital for new plants and equipment and to hire new workers. The Left may ridicule 'trickle down economics,' but new research further supports what we already knew: Lower taxes on the rich help the entire economy, while higher taxes on the rich often trickle down onto the backs of the middle class and the poor.

The first piece of new evidence comes from economist Charles Kadlec of J. & W. Seligman & Co., a New York investment firm. Kadlec's calculations, based on Treasury Department tax data, indicate that, after income-tax rates on the rich were raised under George H. W. Bush and Bill Clinton, something very strange occurred: After-tax incomes of the rich continued to rise, but the incomes of the middle class shrank. Why did that happen?

Kadlec explains the riddle by comparing taxes to tariffs. 'Income taxes are not really levied on a person any more than a tariff is levied on a company,' he says. 'Rather, income taxes are levied on income-producing activities.

Just as the foreign company that pays a tariff passes that levy on to consumers by raising the price, business owners in America faced with higher taxes will also attempt to pass on the cost to someone else -- either the workers in the form of lower wages, or the consumers in the form of higher prices.' That is to say, some portion of the taxes on business income and investment income that are aimed at the rich is actually borne by workers and consumers, who are typically not rich.

The empirical data fit Kadlec's theory like a surgeon's glove. In 1993, the year that Clinton's big tax hike took effect, the before-tax incomes of the top 5 percent of American earners rose by about 20 percent -- almost precisely the amount needed to offset their increased tax burdens. Middle-class workers were left shouldering this burden, and their income fell.

A second piece of evidence comes from David Hartman, chairman of the Lone Star Foundation, a conservative public-policy group in Texas. In a recent study published by the Institute for Policy Innovation, Hartman looked at the relationship between tax rates on the rich and the income share of the middle class over three decades: the '70s, the '80s, and the '90s. He found that raising taxes on the rich is futile as an income redistribution strategy.

In the 1990s, as income taxes on the wealthy increased, the middle-class share of total income fell almost every year. President George W. Bush's tax cut trimmed the top income-tax rate from 39 percent to 35 percent, and it also lowered taxes on capital gains and dividends. The 1980s are probably the closest historical parallel, even though Bush's cuts are smaller than Reagan's. In the 1980s, the rich did get richer. But every income group saw income gains, and the real incomes of the middle class rose between 10 percent and 15 percent. Even more stunning, roughly one in nine Americans who started the 1980s classified as 'poor' ended the decade classified as 'rich.'

A well-designed tax system lets poor people get rich. But the perverse goal of many would-be income redistributors in Washington and, alas, most Democratic presidential candidates -- most notably Howard Dean --is to create a tax system that makes rich people poorer. If they succeed in their soak-the-rich scheme, don't be surprised if the middle class gets wet.

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