Tuesday, March 10, 2009

WSJ Editorial Defends Obama's Budget

Laura D'Andrea Tyson believes that Obama is showing true leadership in his handling of the economy and his coming budget:
If leadership is defined as recognizing a crisis, addressing its challenges, and setting new directions while remaining true to one's values, then Barack Obama is already demonstrating his strengths as a leader. He has inherited an economic crisis worse than any the nation has experienced since the Great Depression. Within fewer than 50 days in office he has signed a historic stimulus package to bolster demand and create 3.5 million jobs. Governors, business leaders and economists from both the left and the right have applauded the stimulus. Friday's distressing employment numbers indicate that much more may be needed.

Friday's distressing employment numbers indicate that employers aren't buying the stimulus. Tyson makes the point over and over again in the article that it's only the rich who will be impacted by Obama's plans. She forgets, however, that it's mostly the rich who create the largest number of jobs. The economy won't recover if there aren't more jobs. Cutting taxes on the middle class won't help those who aren't paying taxes because they're unemployed.

President Obama has also proposed a 10-year budget that is faithful to the progressive vision he articulated during his campaign. His budget includes significant investments in health care, energy, the environment and education, and a tax cut for the middle class. It also calls for higher taxes on the top 3% of income earners to finance his priorities and reduce the deficit. Not surprisingly, a budget plan this ambitious is triggering strong and well-organized opposition on numerous fronts.

Obama campaigned on a "sunny dat scenario" in which he would not be hampered by a poor economy. When pushed during debates he admitted that he wouldn't be able to do everything he wants to do if the economy remains poor. His budget doesn't seem to accept the reality that the economy is poor. Even Tyson gives passing mention to this limitation:
President Bush's tax cuts are scheduled to expire at the end of 2010. At that time, assuming the economy has entered a recovery, President Obama's budget will restore the top two marginal income tax rates to their 1990s levels of 36% and 39.6% for individuals earning more than $200,000 and couples earning more than $250,000. (emphasis added)

I think it assumes more than the economy entering a recovery. It assumes we've already recovered back to where we were--and then some. That is just not likely at this point, as much as I'd like to think it is.

Tyson continues in an effort to refute criticism but instead gives us more cause to worry:
These changes will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade. In addition, for these taxpayers the tax rate on capital gains will increase to 20%, the lowest rate in the 1990s and the rate President Bush proposed in 2001, and the tax rate on dividends will increase to 20%, a rate lower than the rate of the 1990s and nearly 40% lower than that proposed by President Bush in 2001.

By her definition I am not in the top 3% of taxpayers--not by a long shot. She, like Obama, seems to ignore the fact that it's not just the rich that own stocks. Raising the capital gains and dividend tax rates will impact me.

Besides, if these rates are actually lower than what they once were (which is largely irrelevant, mind you), then how does she figure that 3% of the taxpayers are going to finance all these vast amounts of spending? That 3% does not include the mega-rich, mind you. It's those who make more than $250,000. I'd like to see the math she uses to determine that these 3% are going to cover the $634 billion just to reform health care, let alone his other pet projects.

How about I do some math, then? Let's assume a generous definition of "taxpayer" as everyone in the US. With a population of about 350 million, that 3% represent about 10.5 million. By my calculations, just to finance health care reform, each of that 3% are going to need to pay out an additional $60,380. If that were the only thing Obama was asking this group to fund it might be possible. But it's not.

In addition, the president proposes to limit the deductions for dependents, charitable contributions and other expenses to 28%, the top rate for such deductions under Ronald Reagan. Some critics claim this is class warfare. But why should a family in a higher tax bracket get a bigger break on expenses than a middle-class family?

Huh? She either leaves out some information here or she just doesn't make sense. The only way a higher bracket family is getting a bigger break is because they are making more. By her logic they shouldn't be taxed more because they're already paying more taxes.

Now granted it shouldn't cost the more affluent family more to raise their children. But then it's this wealthier group that tends to give more to charity. This is not insignificant, yet Tyson blows right past it. By reducing the deduction on charitable giving the government will effectively reduce charitable giving. Who is going to make up the difference? Does the budget cover that shortfall? If so, it's essentially the government saying "Hey, we can give to charity better than you can, so let us be the middle-man". That doesn't make sense. Middle-men always get their cut, so the government would have to take in more taxes just to fund charities at the same level.

In addition, this discouragement of charity will somehow cover half of that $634 billion. Assuming for a moment the numbers add up (I doubt it), where's the other half coming from?
...with the other half coming from savings in health spending. These savings include competitive bidding in order to reduce Medicare payments to private insurance plans, increasing the Medicaid rebate for brand-name drugs, and strengthening Medicare pay-for-performance incentives for hospitals.

Okay, I'm really baffled here now. Someone please explain this to me. Competitive bidding I understand and can more or less accept (though we've all heard how well the government handles bidding processes, so why expect this will be somehow better). But increasing Medicaid rebates and strengthening performance incentives doesn't sound like a cost decrease to me--quite the opposite. I'm no expert on Medicaid, so I'm willing to learn if someone can teach me how this works.

Tyson dismisses the opposition to all this.
Those who stand to lose from these changes are already protesting. But like the 28% limit on deductions, these savings are fair and reasonable ways to finance the twin goals of achieving universal health-care coverage and moderating the growth of health-care spending.

Actually, most of the people protesting these days are middle-class Americans (see the Tea-Party Protests), so she's either out of touch or she's just trying to convince us she's still talking about that horrible 3% who should just pay up and shut up. In any case, she glosses over whose "twin goals" we're talking about. It's not necessarily the American people's goal. It's Obama's. And even if the majority do support these goals, I'll bet her dollars to donuts that there is a wide disparity on how they want these goals met.

Now let's look at Obama's plan for cutting carbon emissions.
Reducing the nation's dependence on foreign oil and cutting carbon emissions are also priorities, supported by overwhelming scientific evidence on the risks and costs of climate change. Economists agree that establishing a price for carbon emissions either through a carbon tax or a cap-and-trade system is essential to achieving these goals. The Obama administration has opted for the latter. The system will impose a limit on the amount of carbon that businesses are allowed to emit each year. Firms will be required to purchase permits from the federal government through an auction and will then be free to buy and sell them.

"...overwhelming scientific evidence on the risks and costs of climate change..." She's overreaching here. There's overwhelming evidence of climate change, but climate change is not synonymous with Global Warming. Climate changes, with or without man's help. That's why they gently changed the wording from "Global Warming" to "Climate Change". People think it's the same thing, but it's not.

Furthermore, there is very little scientific speculation, let alone evidence, of the cost of climate change. Greenland will tell you the costs are pretty darn good! They're experiencing an agricultural boom. Warmer weather is good for agriculture, so just where are the costs, exactly? Tyson is pulling a common media trick of reducing an entire debate into a single statement of certainty that glosses over reams of complexity and disagreement.

But let's assume for a moment that she's correct. The government wants to set up a market for carbon offsets. And the government wants to be right in the middle of it, getting their cut:
The Obama auction plan will also generate substantial government revenues, about 80% of which will be used for financing a refundable tax credit of up to $400 for individuals and up to $800 for families. The result will be tax cuts for 95% of working Americans. The remaining 20% of the auction revenue will be used to finance investments in energy efficiency, clean energy and smart-grid technologies.

Herein lies the fallacy in this approach. If the government is relying on this revenue to appease the peasants (why gives us rebates? Isn't this money needed to fund programs and avoid deficit spending?) and fund research, then they're not really interested in seeing this revenue stream dry up. In other words, they just want to profit from carbon emissions, not reduce them. Once this source of revenue is in place, what incentive will the government have to eliminate it by moving all companies to carbon-free production?

But let's assume this works. In the very next point Tyson contradicts herself--probably without even realizing it. She moves on to college tuition:
Others will oppose expanding the tax credit for college tuition to $2,500 a year and making it permanent and partially refundable; increasing the Pell Grant to $5,500 a year; and eliminating subsidies to banks participating in the student-loan program, cutting $50 billion from the 10-year deficit. But, again, the returns to higher education are substantial for both the individual and the overall economy. Too many American students are forced to forego these returns because they cannot afford a college education, with deleterious effects on the nation's competitiveness.

So if creating a shortage of something increases the cost of something (ie. carbon offsets), wouldn't creating a surplus of something else lower the cost of it? If we can double the number of college graduates, that doesn't automatically double the number of jobs for them. On the contrary, if the rate of graduates exceeds the rate of economic expansion we will end up with fewer jobs for more graduates. Salaries will decrease, and companies will be able to increase their highering standards. It's not inconceivable for freight companies requiring college degrees from their truck drivers.

If we increase the number of college graduates without the economy keeping pace we'll just end up creating an even wider divide between the poor and uneducated and the middle class. Meanwhile wages and salary across the board will fall. While this could reduce our interest in offshoring, we're just shifting the problem. We create problems for other countries while decreasing our own productivity. A college graduate glut is not in this country's best interest.

Tyson then moves on into further generalization:
The president's budget is progressive and ambitious. It will not, however, explode the size of government as some critics warn. If the economy recovers as projected, over the next decade taxes as a share of GDP at around 19% will be lower than they were during the second half of the 1990s, government spending as a share of GDP at around 22.5% will be about where it was under Reagan, and nondefense discretionary spending at around 3.6% of GDP will fall to its lowest level since that data was first collected in 1962.

"If the economy recovers..." That's a vague and big "if". How much will the economy recover to make her statements true? And that also assumes that, as the economy grows, the government doesn't grow with it. Does she honestly think that, of Obama gets what he wants now, that he's just going to sit on his hands for the next four to eight years and not do anything else? Is she suggesting that there would be no more to do? She seems like a liberal, so I have a hard time believing she thinks that this is all we need.

Finally she reaches her conclusion--and shoot herself squarely in the foot:
The real risk lies in the possibility that the economy's recovery starts later and is much weaker than the economic assumptions in the budget. In this case, by no means remote, President Obama will have to adjust his plans while remaining true to his values. In a very few days in office, he has already demonstrated that he has the leadership skills to rise to the challenge.

Okay, she gives lip-service to the possibility (which Obama himself seems to believe) that the recovery will be later and weaker. But she suggests that Obama will just adjust his plans to meet that reality. Based on what? He hasn't curtailed his plans to meet reality yet, even though he promised to. He's decided that all we need to do is run up the deficit he once abhorred rather than adopt the fiscal responsibility he once championed for government--and still champions for the general public.

He hasn't even shown he possesses the leadership skills to meet this challenge! He had a perfect opportunity to lead by example, and he blew it. He's essentially saying "America, you be more responsible, because I want get everything I want right now, on credit."

Ah, there's the key. She's got a personal stake in this plan. No wonder she thinks it's wonderful:
Ms. Tyson is ... a member of President Obama's Economic Recovery Advisory Board.

She might have mentioned that up front rather than literally burying it in a footnote. But then that would have influenced the reader to weigh her words more carefully, and we can't have that.

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