The Economic Ignorance of Barack Obama

Defining Ideas ^ | April 8, 2013 | Richard Epstein

One story has dominated the economic news this past weekend. The story is that job creation has slowed to a “trickle,” in the words of a Wall Street Journal headline. Only 88,000 new jobs were created in the month of March. That feeble rate was accompanied by the “good” news that the jobless rate, which only counts those actively seeking work as unemployed, had dropped from 7.7 to 7.6 percent.
The real news was that the decline in the unemployment rate was explained by the separation of nearly half a million people from the workforce, so that labor-force participation shrunk from about 67.3 percent in early 2000 to about 63.3 percent today. A crude first approximation of the real unemployment rate would add back at least 4 lost percentage points. A more accurate estimation of the actual unemployment rate would account for those individuals who were out of the market by 2000 in part because of the impediments to market performance that were already in place.
With these weak numbers, the political discussion has continued to focus on job creation and economic growth: How should these goals be accomplished? On “All Things Considered,” I heard E.J. Dionne advise that the Federal Reserve should keep its foot on the accelerator, by opening the cash spigot and keeping interest rates at their historic lows. At the same time, the rest of the government should put worries about the deficit aside—or so the argument goes—by increasing public expenditures funded in part through higher taxes on the top one percent. David Brooks rightly disparaged that prescription, but still was unable to identify that “big structural change” he hoped would turn the economy around.
Obama’s Misshapen Tax Policy
President Obama had, of course, no doubts on what should be done. In his view, we should double down on the same policies that he has championed since coming into office. His new proposed budget modestly chips away at the cost-of-living increases in Social Security spending, which has drawn fierce resistance from his party’s incorrigible left wing.
But his preferred long-term changes all cut in the opposite direction. The President has renewed his call for capping the charitable deduction at 28 percent—a dreadful idea—even as he tries to steepen the level of progressivity of the income tax. In addition, the President unveiled a proposal to slash the amount of money that individuals can keep in their tax-deferred retirement accounts to $3 million per person. Putting aside the transitional problems that dog this proposal, the simple point is that additional taxation is likely to further retard the creation of jobs and wealth, by shrinking the size of the largest pool of private investment funds in the United States.
Handing Out Political Favors
That isn’t all. The tax system’s high progressivity drives endless political efforts by well-heeled interest groups to exempt themselves from this bold new order. Businesses that are chafing under their heavy tax burden are directing their attention to the people in Congress who pull the levers of power. High on that list is Montana’s Max Baucus (D), the longtime head of the Senate Finance Committee, which has a lot to say on both the revenue and spending side of the budget. The New York Times reports that some 28 of his former Congressional aides are now registered tax lobbyists, as are many former staffers of such influential operatives as Senators Charles Grassley (R-IA) and Charles Schumer (D-NY).
But have no fear, says Sean Neary, a spokesman for Senator Baucus. Neary assures a wary public that Mr. Baucus often “rejects” proposals from his well-connected supplicants, and that all of his decisions “are based on the merits.”
Just what merits decide which set of special benefits should be granted and which denied? Neary is never at a loss for words. “Every vote has to answer one question for him and that is: How is it impacting Montanans?” It is harder to know where the greater corruption lies: Is it in Baucus’ explicit decision to put the welfare of the tiny number of Montanans ahead of that of the other 99 percent of this nation’s citizens? Or does it lie in the delusive confidence that so benighted a senator can figure out just which of the endless special deals is worthy of his support?
Baucus has it all backwards. The essence of a sound tax policy is to make it unremunerative for tax lobbyists to skulk around Washington to obtain preserve special tax benefits for hiring veterans. But as the tax policy becomes more progressive, the more it starts to resemble Swiss cheese, which incentivizes lobbying for still other loopholes.
The next generation of special carve-outs and exceptions will be of short duration, just like the rate structure itself. The tax cliff of January 2013 was no cliff at all. It was just one of the large array of tax hills, valleys, and detours, all of which reduce or postpone investments from businesses that don’t have the foggiest idea of what the tax picture will look like once a deal surfaces. The concealed costs of the current tax uncertainty are very large. The only antidote is to flatten the rates and broaden the base, which is antithetical to the Obama mantra of “redistribution first.”