I'm Back - On the economy

How long is “a while?” Three days sounds about right to me. I decided to write down my thoughts on the economy after all with hopes all the undecided voters will read this blog and choose well. OK, I know there are only two or three people who ever read this blog and one undergraduate course in economics doesn't make me an economist. A little self-delusion seems appropriate for a political season. The election will be over in a few days, we will all return to our normal idiosyncrasies, and watch the results unfold over the next four years.

Obama is riding to victory on the red horse of the economy (nice, subtle apocalyptic imagery don’t you think?). I am baffled by the appeal of his shallow case. His principle argument is that McCain will continue the “failed economic policies of George Bush.” What I have not heard is what those terrible policies have been. I have heard frequent reference to “trickle-down” theories, but no reference to specific policies. What is promised is higher taxes on the wealthy and businesses and big tax cuts for the middle class. The argument seems to be that putting more money in the hands of the masses (95% of the population) will be good for the economy. To me that sounds a lot like an extension of Bush’s big tax cut program. Only, the money will be taken from the wealthy and businesses, sort of a Robin Hood or “reach-up-and-pull-it-down” theory. Oh, those new taxes are also going to pay for a trillion dollars in new programs.

Obama’s math is a little confusing. He insists the middle class, or 95% of Americans, will get a tax cut. He has stated it will not go to people who don’t work. But close to 40% of American households don’t pay any taxes and many of those do not work. Although he denies it, logic suggests he is grossly overstating the number who will get a break or much of the reach-up-and-pull-it-down money will go to them. I am not arguing against support for the poor; I am merely suggesting that in his speeches, Obama is not candid in what he is proposing.

My issues with the Obama plan are simple. First, he misrepresents the truth about our current economic situation. We are clearly in a crisis. But it was not George Bush who created the situation. The economy goes through cycles and globalization has increased the complexities and patterns of those cycles. But the two greatest contributors to the current situation are (1) the war on terror and (2) the mortgage crises which was caused by Democratic failures to oversee Fannie Mae and Freddie Mack. From all I can gather, it is the mortgage meltdown that triggered the crisis and it began with Fannie and Freddie. Congress is charged with overseeing these government backed agencies and it failed. It has been the Democrats who have most protected Freddie and Fannie against oversight.

Here are a few facts. In 1997, it was Bill Clinton who pushed through a relaxation of home loan requirements in order to increase home ownership by lower income households (a noble goal). Clinton appointed as executives at Fannie Mae persons from his administration. These actions set up a system that allowed people to purchase homes they could not afford. The number of loans increased significantly and the Clinton appointees began to get multimillion dollar bonuses. Among them was Franklin Raines who would receive 100 million dollars in bonuses through 2004. In 2003 President Bush proposed a new oversight committee but the Democrats derailed the plan. In 2004 an OMB investigation revealed massive fraud but Congress did nothing. From 1999 to 2005 Fannie Mae gave millions to politicians: the top five were all Democrats – Obama was the second highest recipient. Barney Frank was #4.

In 2005 John McCain sponsored The Federal Housing Enterprise Regulatory Reform Act stating, “If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.” The Reform Act was blocked by Democrats and never got out of committee. The scandal forced Franklin Raines to resign; he is now an advisor to the Obama Campaign.

Second, the underlying issue between McCain’s and Obama’s tax proposals is the role of the upper class and businesses in the economy. The conservative philosophy holds that they have an important role to play in stimulating the economy. They represent a creative economic energy that fuels the whole system. If over taxed they will lose incentive to build their personal wealth and that will hurt the economy as a whole.

Obama’s liberal tax plan is built on the underlying ideology that government has a responsibility to distribute wealth; take from the rich, give to the poor. We have long had a progressive tax system built on this philosophy. It requires people to pay a higher percentage of their income in taxes as their income increases. Few conservatives want to completely dismantle that model; they merely want to find the optimal lowest tax rates for all.

Third, taxing businesses is a two-edged sword. It is an easy tax because it is a hidden tax on people. Companies follow one or more of a set of options. They may absorb the tax by reducing the dividends they pay their stock holders (most of whom are middle class mutual fund investments for retirement) or they reduce investments into the future of the company, or they cut their labor costs (number of employees or pay scale). They may choose to pass part or all of the tax on to the public through higher prices. The irony is that this form of hidden tax favored by the Democrats is most often a regressive tax; the lower one’s income the higher the rate one pays. That is, lower income people who pay higher prices for everyday items are actually paying a much higher percentage of their income in indirect taxes through these purchases. For example, if the oil companies pass on higher taxes through higher prices at the pump the poor will feel the difference immediately and it will impact their standard of living. The wealthy will not even notice the change. Businesses, not politicians, get blamed for the increase.

In summary and conclusion, it will be a mistake to reverse the Bush tax cuts for those making over $250,000 and to increase taxes on businesses. Higher tax rates will slow economic recovery. It is going to be an even bigger mistake to elect Obama and a liberal congress. Congress needs to be held accountable for not overseeing Freddie and Fannie. Our nation as a whole needs to accept responsibility for excessive greed and getting into war in Iraq which has drained our economy of sustainable growth.

Well, I’ve revealed my economic ignorance. Feel free to join me.