Is Obama Delaying the Recovery?

Fri, 01 May 2009 05:00:03 +0000 – By Peter FerraraDirector, Entitlement and Budget Policy, Institute for Policy Innovation

By now, the current recession is officially the longest since World War II. The National Bureau of Economic Research dates the recession as starting some time during December 2007. The longest recession since World War II was 16 months, with the average being 10 months. By today, the current recession has clearly lasted more than 16 months.

Those sobering facts raise the question, are President Obama's economic policies promoting recovery, or delaying it? Why is this the longest recession since World War II? That is a period of almost 65 years! Would other economic policies better promote economic growth?

These questions are pertinent now not only because of the calendar, but because the logic behind Obamanomics is dubious at best. Based on the stimulus package and Obama's budget, he is essentially arguing that the way to promote economic growth is through higher welfare spending, massively increased federal spending, and record deficits and debt. Obama defended precisely this approach before an enclave of Congressional Democrats earlier this year, laughingly asking, "What do you think a stimulus is?"

But will such policies really advance economic growth? Borrowing a trillion dollars out of the economy through the stimulus package to put a trillion dollars of federal spending back in does not add anything to the economy on net. Most importantly, it does nothing to change the basic incentives that govern the economy. Indeed, nothing anywhere in Obama's entire economic package increases incentives for economic growth.

Reducing tax ratesprovides such incentives because it allows producers to keep a higher percentage of what they produce. If a tax rate is reduced from 50% to 25%, what they taxpayer keeps out of his own production rises by one third from 50% to 75%. That provides increased incentives for saving, investment, starting new businesses, expanding businesses, creating jobs, entrepreneurship, and work. This is what Reagan did in comprehensive fashion, producing a 25 year economic boom.

Even Obama's tax cut for 95% of Americans is not pro-growth. It is just a $400 per worker tax credit, less than $8 per week, which is economically the same as sending each worker a $400 check. Going forward you still face the exact same economic incentives as before. And borrowing $400 from someone else to give you $400 does not add anything to the economy on net.

Moreover, Obama has proposed a massive new tax through his cap-and-trade anti-global warming plan, imposing probably close to $2 trillion in increased costs on the U.S. economy. Consumers will pay for this through increased costs for electricity, gasoline, home heating oil, food, and any product that uses energy. That will more than offset Obama's $400 tax credit, resulting in an effective net tax increase for 100% of Americans. This added burden will ultimately chase remaining manufacturing out of the country.

Ending next year, Obama's tax rate increases will become effective. Top individual income tax rates will increase 20%, tax rates on capital gains and dividends will each rise 33%, and the death tax rate will be permanently restored at 45%. These prospective tax rate increases will soon start depressing the economy, because incentives will be worsened.

Newt Gingrich has proposed a far more promising, 12 point, alternative economic recovery planthat should receive more attention. Gingrich recognizes that America suffers from the second highest corporate tax rate in the industrialized world, close to 40% counting federal and state levies. The EU has reduced their average corporate tax rate from 38% to 24%. Germany and Canada have reduced their corporate tax rate to 19%, with Canada's going to 15%. India and China have lower corporate tax rates as well. This leaves American companies at an enormous competitive disadvantage.

Gingrich would lower the 35% federal corporate tax rate to the 12.5% rate adopted by Ireland 20 years ago, which raised that long poor country from the second lowest per capita income in the EU to the second highest. Our own Treasury Dept. calculates that Ireland raises more corporate tax revenue as a percent of GDP with this 12.5% rate than we do with our 35% federal rate.

Gingrich would also reduce the 25% income tax rate paid by middle class families to 15%, which would create an effective 15% flat tax for 90% of Americans. He would abolish the capital gains tax, which involves double taxation of savings and investment, reduce spending to balance the budget, as he led Congress to do in the 1990s, and open production of more oil, natural gas, nuclear power, and alternative energy sources, providing a reliable, low cost energy supply to power the American economy. This is a prescription for another economic boom.

Peter Ferrara is Director of Entitlement and Budget Policy for the Institute for Policy Innovation.