This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published May 3, 2012 on Forbes.com.
In his weekly radio address on April 14, President Obama displayed his lifelong commitment to an ideological extremism of pure theory unhinged from reality. That failure of leadership is why America is in a scary downward slide that will not stop until fundamental change is made at the top.
The weekly radio address was on Obama’s so-called Buffett Rule, which would double the top tax rates on investment income such as capital gains and dividends. The most revealing statement was this: “Now, this is not just about fairness. This is also about growth. It’s about being able to make the investments we need to strengthen our economy and create jobs. And it’s about whether we as a country are willing to pay for those investments.”
So this is Obama’s growth model. Double the top tax rates on investment income, to get the money to increase government spending (in case you haven’t noticed, “investments” is the Orwellian term Obama uses to refer to government spending), which is what really drives economic growth in Obama’s mind.
If you raise taxes on something you get less of it. That’s a fundamental principal of economic logic. That is why when the government wanted to discourage smoking, it sharply raised taxes on cigarettes.
Similarly, when you raise taxes, especially tax rates, on investment income, you will get less capital investment creating the investment income to tax. But capital investment is the lifeblood of capitalism. Capital investment, financing factories, stores, and other businesses, is what creates jobs. Capital investment, financing tools such as computerized steam shovels instead of hand shovels or bare hands for digging, is what makes Americans the most productive, and therefore, the most highly paid, workers enjoying the highest standard of living in the world.
Capital investment is what increases the demand for labor, which is what bids up wages. Capital investment increases the productivity of labor, which produces the cash to pay workers higher wages. When workers are more productive, businesses want to hire more of them, bidding up wages further.
Some government spending contributes to economic growth. Education creates human capital, which also makes workers more productive. But America already spends more on education than any other country in the world, and has for a long time.
Some government spending on infrastructure contributes to economic growth. Roads, highways, bridges, airports, seaports, enable businesses and their goods and services to get around. It promotes domestic and international trade, which maximizes economic growth and prosperity. While America still has some infrastructure needs, especially in maintenance, it already has the most developed infrastructure in the world.
Moreover, America already spends a lot on infrastructure, and has for a long time. Federal, state and local gas taxes are primarily devoted to infrastructure, and quadrennial federal highway bills devote hundreds of billions to infrastructure spending.
But if more government spending were the key to economic growth, America would be the most prosperous ever right now, because we have enjoyed an all time record spending spree under President Obama. The first thing President Reagan did coming into office was to push through a federal spending cut of about 5% in his notorious 1981 budget cuts, much vilified by the Left. That was one of four explicit components of Reagan’s economic recovery plan, which produced an historic, generation long, 25 year economic boom from 1982 to 2007.
The first thing President Obama did upon coming into office was to increase federal spending by nearly a trillion dollars for his so-called stimulus, much of it to be devoted to infrastructure spending we were told. The result was the worst economic recovery since the Great Depression, with the economy still flat on its back 3½ years later. The first 11 quarters of the Obama recovery averaged real growth of 2.4%, “slower growth than in every modern expansion, and about half the growth rate of all recoveries since World War II,” the Wall Street Journal commented in last weekend’s edition. The first 11 quarters of the Reagan recovery averaged real growth of 6.1%, almost 3 times as much.
Moreover, the Congressional Budget Office, the Joint Tax Committee, and his own Treasury have already told President Obama that his Buffett Rule will not produce any significant revenue increase, about 0.1% of what Obama’s own budget proposes to spend next year, and over the next 10 years, and about 0.3% of Obama’s deficit this year.
But that didn’t stop Obama from telling the American people in his weekly radio address on April 14 that we need the Buffett Rule because, “we live in the real world, with real choices and real consequences. Right now, we’ve got significant deficits to close. We’ve got serious investments to make to keep our economy growing.”
Obama apparently calculates that the average American hearing his radio address won’t know anything about what CBO, Joint Tax, or Treasury say about it. What he miscalculates is that a majority have already tuned him out, because they have learned by experience that they can’t trust what he says.
Moreover, the truth is that raising the top tax rates further on investment income will only lose revenue, rather than giving him more money to spend to increase economic growth (haha). In the last 40 years, every time the capital gains tax rate has been increased, capital gains revenues have declined. And when President Bush slashed the tax rate on dividends in 2003, dividends paid soared, increasing rather than reducing the resulting revenues. The CBO, Joint Tax, and Treasury missed those effects in their estimates every time.
Indeed, if the Buffett Rule tax rate increases are piled on top of all the tax rate increases on investment income already enacted into current law for next year, when the Obamacare taxes go into effect and the Bush tax cuts expire, the result will be renewed, double dip, recession. That will produce a massive decline in revenues.
The bottom line is that raising tax rates on investment income to finance increased government spending could not be a more confused, upside down policy to promote economic growth. It reflects only Obama’s extreme, neo-Marxist ideology, which is fundamentally offended by investment income flowing to “the rich.” That is what he means when he talks about fairness, though the Buffett Rule doesn’t improve fairness either. But that ideology is all he really cares about, not economic growth.
In sharp contrast, presumptive GOP nominee Mitt Romney in his remarks April 24 in New Hampshire displayed a keen fundamental grasp of how America’s capitalist economy works, saying,
“I have a very different vision of America, and of our future. It is an America driven by freedom, where free people, pursuing happiness in their own unique ways, create free enterprises that employ more and more Americans. Because there are so many enterprises that are succeeding, the competition for hard-working, educated and skilled employees is intense, and so wages and salaries rise.”
This is how America’s capitalist system has worked for 300 years to create the richest, most prosperous nation in the history of the Earth. That is why for those 300 years, working people have been coming to America from the world over, from every land, city, and town, every religion, every race, every creed, every nook and cranny around the world. They are not neo-Marxist philosophers, like the President. They are real
people pursuing happiness in the real world, and voting for capitalism with their feet.
That is why Romney could so confidently say, reflecting this long history of the America we love, “I see an America with a growing middle class, with rising standards of living. I see children even more successful than their parents – some successful even beyond their wildest dreams – and others congratulating them for their achievement, not attacking them for it.”
But that is not what E.J. Dionne, columnist for the Washington Post, sees, or understands. In his column of April 26, “Romney Thinks Magic Is What Economy Needs,” Dionne derided Romney’s April 24 speech as “magical capitalism.” He responded to the passage quoted above by writing, “Just like that, all will be well – as if we never needed the trust-busting of the Progressive Era, the social legislation of the New Deal, the health programs of the Great Society, and the coordinated action of the world’s governments in 2008 and 2009 to keep the Great Recession from becoming something far worse. This is Romney’s true radicalism.”
But Romney never said anything like that. Dionne offers a false alternative, and like President Obama he thinks a majority of Americans can be so easily fooled. Dionne’s rhetoric is like deriding Romney’s proposed 20% across the board cut in federal income tax rates for everyone as calling for abolishing federal income taxes altogether.
Dionne, however, is right about one thing. Capitalism and its economic growth and prosperity are like magic, a magic America lived through in the last century. In the last century, 1900 to 2000, Stephen Moore and Julian L. Simon note in their underappreciated work, It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years, real per capita GDP in America grew by nearly 7 times, meaning the American standard of living grew by that much as well. The authors explain,
“It is hard for us to imagine, for example, that in 1900 less than one in five homes had running water, flush toilets, a vacuum cleaner, or gas or electric heat. As of 1950 fewer than 20 percent of homes had air conditioning, a dishwasher, or a microwave oven. Today between 80 and 100 percent of American homes have all of these modern conveniences.”
Indeed, in 1900 only 2% of homes enjoyed electricity. As Cox and Alm note further in their insightful Myths of Rich and Poor, “Homes aren’t just larger. They’re also much more likely to be equipped with central air conditioning, decks and patios, swimming pools, hot tubs, ceiling fans, and built in kitchen appliances. Fewer than half of the homes built in 1970 had two or more bathrooms; by 1997, 9 out of 10 did.” This is all the result of magical, booming, capitalist economic growth and prosperity.
Such magical economic growth has produced dramatic improvements in personal health as well. Throughout most of human history, a typical lifespan was 25 to 30 years, as Moore and Simon report. But “from the mid-18th century to today, life spans in the advanced countries jumped from less than 30 years to about 75 years.” Average life expectancy in the U.S. has grown by more than 50% since 1900. Infant mortality declined from 1 in 10 back then to 1 in 150 today. Children under 15 are at least 10 times less likely to die, as one in four did during the 19th century, with their death rate reduced by 95%. The maternal death rate from pregnancy and childbirth was also 100 times greater back then than today.
Also greatly contributing to the well-being of working people, the middle class, and the poor in America has been the dramatically declining cost of food resulting from economic growth and soaring productivity in agriculture. As Moore and Simon report, “Americans devoted almost 50 percent of their incomes to putting food on the table in the early 1900s compared with 10 percent in the late 1900s.” While most of human history has involved a struggle against starvation, today in America the battle is against obesity, even more so among the poor. Moore and Simon quote Robert Rector of the Heritage Foundation, “The average consumption of protein, minerals, and vitamins is virtually the same for poor and middle income children, and in most cases is well above recommended norms for all children. Most poor children today are in fact overnourished.” That cited data comes from the U.S. Census Bureau. As a result, poor children in America today “grow up to be about 1 inch taller and 10 pounds heavier than the GIs who stormed the beaches of Normandy in World War II.” But Obama has already managed to reverse this long term trend, producing sharply rising food prices accelerating throughout his term.
Moreover, it is economic growth that has provided the resources enabling us to dramatically reduce pollution and improve the environment, without trashing our standard of living. Moore and Simon write that at the beginning of the last century,
“Industrial cities typically were enveloped in clouds of black soot and smoke. At this stage of the industrial revolution, factories belched poisons into the air–and this was proudly regarded as a sign of prosperity and progress. Streets were smelly and garbage-filled before the era of modern sewage systems and plumbing.”
This is why the most important priority today by far is restoring traditional, robust, American economic growth and prosperity, which will produce even more dramatic leaps in this century, and provide the resources to solve every problem. More important than where we are today is where we are headed. Today we are 20% below the long term trendline of American economic growth and falling farther and farther behind. That is why even illegal immigrants are now leaving America and returning to their homelands. The economic boom that is within this economy and straining to break out will return America to that long term trendline of economic growth and prosperity.
Romney understands how to do that. Obama doesn’t, and doesn’t believe in it. He believes with all of his heart that it’s unfair. Ditto that for Dionne, an ideological soulmate of Obama’s. Dionne was a big time prep school Marxist back in his Harvard days, just like Obama was. But like all those prep school Marxists we knew in college, he grew up to pose as just another liberal Democrat, like Obama did to infiltrate the system. That is why Obama, and Dionne, do so truly represent the heart and soul of today’s Democrat Party, and that heart and soul is Che.
If that is not what you want for your family, your children, and your country, that is why you should not be contributing to or voting for them.