Obamanomics

The NY Times Magazine has an 8 page article on Obama’s economic policy. It’s required reading for anyone who claims that Obama is long on rhetoric and short on specifics.

Some highlights for people who don’t like to read detailed policy specifics or don’t like registering to read free articles:

For the first time on record, an economic expansion seems to have ended without family income having risen substantially. Most families are still making less, after accounting for inflation, than they were in 2000.

As anyone who has spent time with Obama knows, he likes experts, and his choice of advisers stems in part from his interest in empirical research. (James Heckman, a Nobel laureate who critiqued the campaign’s education plan at Goolsbee’s request, said, “I’ve never worked with a campaign that was more interested in what the research shows.”) By surrounding himself with economists, however, Obama was also making a decision with ideological consequences. Far more than many other policy advisers, economists believe in the power of markets.

“The market is the best mechanism ever invented for efficiently allocating resources to maximize production,” Obama told me. “And I also think that there is a connection between the freedom of the marketplace and freedom more generally.” But, he continued, “there are certain things the market doesn’t automatically do.”

When Reagan was elected, in 1980, tax rates on top incomes were so high that even liberal economists now say the economy was suffering. There simply wasn’t enough of an incentive for rich people to start new companies or expand existing ones, because so much of their profits would have gone to the federal government. Someone making the equivalent of $5 million in 1980 — in inflation-adjusted terms — would have paid a combined federal tax rate of almost 60 percent, according to research by Emmanuel Saez and Thomas Piketty, two academic economists. (These calculations cover not only income taxes but also payroll taxes, capital-gains taxes and others.) Reagan, by the end of his second term, had cut this rate to about 35 percent. Clinton raised it above 40 percent, but the current President Bush has reduced it to 34 percent. So over the same period that the rich have been getting much richer before taxes, their tax rates have also been falling far faster than the rates of any other income group.

The Tax Policy Center, a research group run by the Brookings Institution and the Urban Institute, has done the most detailed analysis of the Obama and McCain tax plans, and it has published a series of fascinating tables. For the bottom 80 percent of the population — those households making $118,000 or less — McCain’s various tax cuts would mean a net savings of about $200 a year on average. Obama’s proposals would bring $900 a year in savings. So for most people, Obama is the tax cutter in this campaign.

If there is a theme to the Obama tax philosophy, it’s that the tax code is not quite as progressive as you think it is. Most of the public discussion about taxes tends to focus on the income tax, which taxes the affluent at a considerably higher rate than anyone else. But the income tax doesn’t take the biggest bite out of most families’ annual tax bill. The payroll tax does.

McCain, by continuing the basic thrust of Bush’s tax policies and adding a few new wrinkles, would cut taxes for the top 0.1 percent of earners — those making an average of $9.1 million — by another $190,000 a year, on top of the Bush reductions. Obama would raise taxes on this top 0.1 percent by an average of $800,000 a year…[snip]…The bulk of Obama’s tax increases on the wealthy — about $500,000 of that $800,000 — would simply take away Bush’s tax cuts. The remaining $300,000 wouldn’t nearly reverse their pretax income gains in recent years. Since the mid-1990s, their inflation-adjusted pretax income has roughly doubled…[snip]…As ambitious as Obama’s proposals might be, they would still leave the gap between the rich and everyone else far wider than it was 15 or 30 years ago. It just wouldn’t be quite as wide as it is now.

The second criticism is that Obama’s tax increases would send an already-weak economy into a tailspin. The problem with this argument is that it’s been made before, fairly recently, and it proved to be spectacularly wrong. When Bill Clinton raised taxes on upper-income families in 1993, his supply-side critics insisted that he would ruin the economy. As we now know, Clinton presided over the longest economic expansion on record, the fastest income growth most workers had experienced in a generation and the disappearance of the federal-budget deficit. His successor, Bush, then did exactly what the supply-siders wanted, cutting upper-income tax rates, and the results were much worse.

Since the dawn of the Age of Reagan, the idea that government spending can be a good thing for the economy has been out of favor, even among Democrats. But it’s now making something of a comeback, particularly within Obama’s camp. His agenda calls for about $50 billion in new annual spending on various investments, including infrastructure, alternative energy and scientific research.

So I asked Obama whether he thought he had been able to tell an effective story about the economy during this campaign. Specifically, I wondered, did he think he had a message that compared with Reagan’s simple call for less government and lower taxes.

He paused for a few seconds and then said this:

“I think I can tell a pretty simple story. Ronald Reagan ushered in an era that reasserted the marketplace and freedom. He made people aware of the cost involved of government regulation or at least a command-and-control-style regulation regime. Bill Clinton to some extent continued that pattern, although he may have smoothed out the edges of it. And George Bush took Ronald Reagan’s insight and ran it over a cliff. And so I think the simple way of telling the story is that when Bill Clinton said the era of big government is over, he wasn’t arguing for an era of no government. So what we need to bring about is the end of the era of unresponsive and inefficient government and short-term thinking in government, so that the government is laying the groundwork, the framework, the foundation for the market to operate effectively and for every single individual to be able to be connected with that market and to succeed in that market. And it’s now a global marketplace.

“Now, that’s the story. Now, telling it elegantly — ‘low taxes, smaller government’ — the way the Republicans have, I think is more of a challenge.”

I clearly cherry-picked the good bits and you’ll have to read the article yourself for the more critical bits. But, if you enjoyed the McCain piece that I linked to a couple of months ago, you’ll enjoy this one too.

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Ragged Clown

Based in San Jose, California

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