Obama’s Economic Policy

Saturday, September 6, 2008 | 3 comments

Here are some comments from Forbes readers on my last column. My response is below. Please feel free to chime in.

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The rich keep getting richer, the poor keep getting poorer, and the middle class keeps getting smaller. Trickle down economics no longer works. Borrowing money from other countries just puts out economy in deeper trouble. It’s time for change and four more years of the same is not going to fix what is broke.

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How do you explain the fact that entrepreneurial activity was at an all time high in the 90’s even at the 39% income tax rate for the rich ? Do we have any evidence that the rich have used the savings from the lower 35% tax rate to invest in the US instead of in China or India ?

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Excellent article. The two geniuses who posted ahead of me are typical of the deep thinkers of the moonbeam generation that is agog over Obama.

The only thing more muddled than Mr. aar’s economics is his grammar. And the other fellow seems to think the government owns everything we earn and we must provide “evidence” in order to keep it.

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The bottomline is that taxes need to be increased to take care of the deficit! In any case, by running such huge deficits, the taxes have “effectively been increased” because future generations will have to repay the monies borrowed from China and other countries. Taxing Angel investors more will not deter their entrepreneurial spirit.

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Fixit, You are not too familiar with real bottom lines obviously. Tax revenues go up when tax rates go down. No amount of tax revenue can cover the expenses of this government, which spends like there is no tomorrow.

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Those who have enough money to invest in new business will still do very well while paying higher taxes. This is just another line of rhetoric used to scare people. How many new businesses were created during the 90’s? I don’t have the actual figures but I recall it was a time of phenomenal growth. Obama has proposed that taxes on the very wealthiest citizens should return to the rates they paid in the 90’s. They will survive and the entire country will thrive.

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Sramana, please explain what kind of job(s) are created by a 30 mil blog? Some of us work in a field where we create wealth through the 3 M’s and do not sit and type. If tax cuts result in a huge pool of capital sloshing around looking for sub-prime loans to invest in how does that create jobs? Sure a hydro power company will create some jobs for guys who need to buy a pick up truck, but isn’t that more dependent on energy policy?

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As to the “90’s” and better economics, as any business person or economist knows is that Clinton did not have anything to do with the period of growth. The problem with US economics is that it goes through depressions or recessions about every 20 to 30 years.

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The problem is not Obama, who is preaching some responsibility, but that the Democratic Party is no longer relevant in today’s Global Economy and changes in the US economics. For taxing the rich failed many decades ago, for it did not cause greater production among the poor only greater demands. Statistically, the middle class is disappearing because its populace Set is getting old and dying out, and due to its having children at low levels that it could afford. This class is being replaced by a mass population growth among the poor and lower economic middle class that has increasing demands and impossible burdens in health, schools, services, etc. That this latter class does not show any willingness or ability to change as long as there are the “rich” or someone else to exploit. Look at the economic crises California is having trying to support programs that no longer have the tax income to support.

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Let’s start with a major FACT that appears to be unknown to most; bubba clinton didn’t have trickle down, he had Robin Hood - take from the successful and give to the do-nothings.

Additionally; when bubba left office, he left President Bush with an economy that was growing at 0.4%! Yes 0.4%; far worse than today!!! And his tax revenues were decreasing rapidly which meant the deficit was growing rapidly! Government spending was ever increasing.

Today, we heard so much about the deficit being the highest amount ever - true!!! HOWEVER, what they don’t tell you, and is the true sign of whether the Country is in a “dire” situation, is that the % of the deficit to the GNP is the LOWEST it’s ever been - a sign that we can cover our debts both domestic and foreign.

And if anyone follows the stock market, as Senator McCain has stated, but because he couldn’t remember how many houses he and his wife own - remember she inherited the largest Bud Distributorship in Arizona along with property from her family - the fundamentals of the economy ARE in good shape.

What escapes barry is the fact that our economy no longer covers just from the Atlantic to the Pacific, from Canada to Mexico - but it’s GLOBAL, and will continue to be for many generations; thus domestic investment will naturally see a reduction; but no where near the reduction if barry taxes to expand government! So, he can look locally all he wants; he can play Robin Hood and punish people for being successful; he can talk all the emotional points that get followers (not supporters) who will follow him into the sea like a bunch of mindless lemmings; the facts are what they are - you tax those who took risks with their mortgage money, their college fund for their kids, their retirement, and invested in a business and made it a success and you will hear the sound of zippers closing the wallet and the investment pool will be greatly diminished - hurting small business, the engine that drives the economy.

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Also, the theory that investment comes only from the rich is far from reality. Investment comes from everyone - the small investment dollars from the millions of everyday employees - via their 401K plan or their brokerage accounts. When disposable incomes shrink, investments from those sources thin out as well.

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You have it wrong. Obama has suggested raising taxes 1% more than Clinton had them. If I remember correctly, the late 90’s were very good in the world of investment returns.

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Lots of comments to respond to. I’ll try to address some of the key points:

In 1962, John F. Kennedy said, “It is a paradoxical truth that tax rates are too high today and tax revenues are too low, and the soundest way to raise revenues in the long run is to cut the rates now. The purpose of cutting taxes now is not to incur a budget deficit but to achieve the more prosperous, expanding economy which can bring a budget surplus. In 1963, in his annual message to Congress, President Kennedy said, “In today’s economy, fiscal prudence and responsibility call for tax reduction. [R]educing taxes is the best way open to us to increase revenues.”

How does that happen? I believe that the overall pie grows if more entrepreneurship takes place.

The Clinton years overlapped, by chance, with the greatest technological innovation of the century: the Internet. Clinton’s policies had nothing to do with that prosperity or entrepreneurial prmiscuity. And, that bubble crashed in 2000, so George Bush inherited the bust economy. He also, by chance, had to deal with 9/11.

This IS just the reality of the economic/political cycle.

So, the question is, is Obama going to chance upon another bubble cycle? Unlikely. The US is going through an innovation crisis, and to address that, the only answer is a much higher degree of entrepreneurship with dramatically higher risk profiles.

The last 8 years also coincided (unfortunately for America and George Bush) with the biggest uptake on the globalization theme in form of India’s rise as a services / white collar outsourcing/offshoring nation. China had already started the blue collar / manufacturing outsourcing / offshoring phenomenon earlier.

So now, Obama wants to turn the tide on this. How? I submit, there is no way to stop off-shoring if the economics make sense. The only thing that an US president can count on is that those countries - India, China - will go through their own pains. [Read my The Coming Death of Indian Outsourcing article.] But the timeline for that is still at least 8 years away.

What does that mean for the US? Even if Obama rules for 2 terms, offshoring and globalization will remains factors. In the short term the US loses because of globalization.

In the long term, however, in a world that has a more balanced power structure, international trade will continue to offer opportunities for products and services to be sold elsewhere. And products and services will have legitimate economic rationale to be produced / performed on US soil because the cost structure will even out.

Anyway, as for those who are asking the question how many jobs does a “blog” create (and looking down upon people who “write” for a living) … the blogs/little companies I have mentioned have each created anywhere between 10-35 jobs. There are many other forms of small entrepreneurship - have you heard of eBay Power Sellers? So do the math, a million small businesses, each creating 5 jobs, 10 jobs, 35 jobs … that’s a lot of jobs.

As for green jobs, I think both the Democrats and the Republicans have rightly identified this sector as a viable alternative to manufacturing jobs that have been shipped abroad. HydroGreen is an example of such a company. And yes, it is a function of the Energy Policy, which, I think, will be in favor of aggressive domestic generation regardless of whether the Democrats or the Republicans win the White House.

As for Angels investing regardless … that’s not true, again because of simple mathematics. A lot of Angel investing is done by people who are affluent, very affluent, but not necessarily Warren Buffet. These are the people who get hurt by the taxation. They are the lower end of the wealthy bracket. Entrepreneurs typically have maximum access to these people, not the very wealthiest. That’s why, the tax policy matters so much. A first-time entrepreneur, I can assure you, does not have access to Bill Gates. He has access to his uncle, a doctor who makes $400,000 a year, and can invest $100,000 in his nephew’s unproven idea and audacious hope.

In the end, I fundamentally believe Obama is wrong in pushing a socialist, protectionist rhetoric. At the same time, I also believe that he is a through and through intellectual - a refreshing change in politics after Bush - and my hope is that Obama will not turn America into Europe, while, ironically, Europe, India, China - are all trying to become more like America. My hope is that he would listen, learn, try to understand. My hope is that on his reading list would feature a book called Atlas Shrugged, by an author called Ayn Rand, who clearly explained what kind of a society “entitlement” creates.

Those who take risks, those who build entrepreneurial ventures, deserve to be rich. A lot of risk-averse people count on these risk-takers to create their jobs. Government taking the fruits of their success away is the most fundamentally flawed philosophy ever. Equality does not exist. It should not exist. Because it is contrary to human nature.

Barack, please spend some time studying, not just preaching. In the end, I don’t understand you. Are you, then, just another of those politicians trying to further your own career? I had thought better. I am shaking my head.

How can you NOT understand something so simple?