Those who do not read history are doomed to repeat it. And those who repeat failed policies of the past are doomed to failure themselves, and the definition of insanity is trying the same thing over and over again and expecting a different result. We can apply all of these proverbs to what the Washington Post reports as the next phase of Deadbeatonomics, in which Obama will try the old populist “soak the rich” policies in order to close a deficit that he himself exploded in the past two weeks:
President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.
In addition to tackling a deficit swollen by the $787 billion stimulus package and other efforts to ease the nation’s economic crisis, the budget blueprint will press aggressively for progress on the domestic agenda Obama outlined during the presidential campaign. This would include key changes to environmental policies and a major expansion of health coverage that he hopes to enact later this year.
A summary of Obama’s budget request for the fiscal year that begins in October will be delivered to Congress on Thursday, with the complete, multi-hundred-page document to follow in April. But Obama plans to unveil his goals for scaling back record deficits and rebuilding the nation’s costly and inefficient health care system tomorrow, when he addresses lawmakers and budget experts at a White House summit on restoring “fiscal responsibility” to Washington.
Yesterday in his weekly radio and Internet address, Obama said he is determined to “get exploding deficits under control” and said his budget request is “sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don’t, and restoring fiscal discipline.”
Take a look at the second paragraph again. Obama wants to jack up taxes to cut the deficit, but still wants “a major expansion of health coverage” — even with the entitlement meltdown rapidly approaching. If Obama cares about deficits so much, he should reduce spending, especially as he demands more from Americans’ paychecks to fix the budget hole.
Raising taxes in a recession is about the surest way to ensure its continuance. We’ve seen this over and over again in American history, including the Great Depression. With the budget deficits where they are, permanent tax cuts are almost certainly political suicide, but better to do nothing than to take capital out of the market. Yet that is exactly what Obama proposes, albeit perhaps a bit milder than some may have expected. The top marginal rate will increase from 35% to 39.6% for earners over $250K, and capital gains taxes will go from 15% to 20%, lower than the 28% Obama suggested in the debates last spring.
However, the capital-gains tax is crucial to the economy. Bush lowered it in the midst of the last recession and economic upheaval after 9/11 to prompt investors to put their money at risk. Raising the tax on investment gains will ensure that we see less investment at the moment we need more of it. Jobs get created by investors taking risks, and if the reward on risk taking becomes low enough, they’ll sink their money into safer havens instead of building job-creating businesses.
Obama wants to cut spending from 26% of GDP to 22%, which is a worthy goal, but it should be lower than that. However, he plans to make those cuts primarily in defense, and specifically in Iraq and Afghanistan. The former has settled down to where massive outlays should no longer be necessary and where costs should get budgeted normally, rather than as riders. But Obama insisted that he would fight the war in Afghanistan more robustly than the Bush administration, claiming that we had taken our eyes off the ball there. How does cutting the budget for that front in the war on terror make our effort more robust? We’re not going to win that war on the cheap, as we discovered after the Clinton efforts to do just that.
Basically, we’re going to get a replay of failed liberal economic policies in the next two years — nothing we haven’t seen before, but nothing that worked before, either. It’s the kind of populist nonsense on which Obama got elected, but still far milder than some of the lunatic economic policies we saw during the 1970s. When these taxes go up, expect the economy to slow even more and Obama to miss his targets for revenue, as he and his team have apparently never heard of dynamic tax analysis. When that happens, the GOP will be poised to win back control of the House in 2010.