by Burt on January 27, 2012
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Last night’s Republican debate before the Florida primary is the last debate for awhile. That is worth a sigh of relief from the Republicans because President Obama has gained about five percent in his approval rating since these debates began. Two explanations help clarify this Republican problem.
First, the Republicans have attacked each other more vigorously and more effectively than they have attacked President Obama. Some of this is understandable in a competitive race. And some of that criticism is well founded and is useful to air out before the general election. But much of it is repetitive, and it is encouraged by most of the reporters who have been framing the debates.
And that leads to the second point. The reporters, who often favor President Obama, have been more anxious to frame questions that force the candidates to criticize each other, or to answer tough questions that will divide voters. Immigration is an example–when Republicans strongly say they want a secure border, it potentially alienates Hispanic voters, whom the Republicans must attract in November.
In last night’s debate, two days after the president’s controversial State of the Union message, Wolf Blitzer of CNN asked no questions about President Obama’s boast that his presidency was going well. No questions about the wild claim that CEOs like Warren Buffett pay less in taxes, or at least have lower rates, than their secretaries (the top 10% of wage earners pay 70% of all income taxes); no question about dividing, not uniting, Americans over class warfare; no question about the president’s devotion to green energy (even though is has been an expensive failure–and a corrupt one as the Solyndra bankrupcy suggests). At one point in the debate last night, when Governor Romney answered a foreign policy question by criticizing President Obama, Blitzer interrupted to say, “What about Congressman Paul?” The questions were not designed for the four candidates to present their criticisms of the president, but rather their criticisms of each other. Speaker Gingrich and Senator Santorum wisely refused to continue the attacks at one point and asked to turn the debate on substantive issues. They received vigorous and extended applause from the audience. But soon the attacks on each other began again.
Whose fault is all this? Answer: The Republicans. They, and their leadership, allowed a lengthy series of debates to be conducted on their candidates by mostly hostile reporters–who then changed the focus from the increase in unemployment, the record increase in the national debt, the collapse of housing prices, the skyrocketing price of gas (in part because President Obama opposes offshore drilling, drilling in ANWAR, and building the Keystone XL pipeline). If the Republican leadership is willing to schedule and frame debates that put their candidates at a disadvantage they have only themselves to blame if voters are increasingly deciding they prefer President Obama.
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by Burt on January 25, 2012
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Not so good. How do we know? Because President Obama, in his State of the Union message, failed to ask President Reagan’s famous election question, “Are you better off now than you were four years ago?” Or, in President Obama’s case, “Are you better off now than you were three years ago when I became president?”
When President Obama took office, unemployment was 7.6%; now it is 8.5%. In January 2009, the U.S. had a $10.6 trillion national debt; now we have $15.2 trillion–almost a 50% increase. Housing values have tanked and the price of gas at the pump has nearly doubled. In other words, the Community Reinvestment Act has failed; the stimulus package failed; Solyndra, the solar panel company, failed–and maybe the president should have grabbed the chance to get the Keystone XL pipeline and create jobs and lower energy costs.
President Obama wanted his listeners last night to focus on his promises, not his results. And his promises center around his vision that Americans need bigger government, and that more of it should be paid for by rich people. The president outlined programs for more federal intervention in manufacturing, job training, bank lending, education, clean energy, and much more. And he explicitly asked the top two percent of wealth earners to foot the bill for most of the new spending.
The president was friendly in tone, but his constant assumption was that more government control means better lives for almost all Americans. But such an approach has not worked so far. And what about his case for redistributing the wealth? True, rich people can afford to pay more, but they also tend to take their cash elsewhere if governments want too much of it. Already we have a corporate income tax higher than almost all other industrial countries; and our income tax is at the upper end as well. But more than this, the president, or his friends, need to address the fairness issue head on. If the top one percent of wealth earners pays more than 35% of all income taxes, and if the bottom 45% of wealth earners pays virtually no income tax, why is it “fair” to tax the rich even more and leave almost half of Americans paying zero?
by Burt on January 23, 2012
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The city of Detroit is a case study in how high taxes can help to trigger a city’s decline. Detroit has had many problems, but at the top of the list: taxes the city has imposed on income, property, and utilities. Those taxes are three times higher than the average for the rest of Michigan, according to Stephen Henderson of the Detroit Free Press. Shopkeepers and homeowners have thus chosen to flee the high cost of doing business in Detroit. From 1950 to 1980, Detroit lost 34% of its people; from 1980 to 2010 Detroit lost 40% more. Each wave of fleeing citizens means fewer people are left to support schools, businesses, and urban services. Economist Gary Wolfram, my Hillsdale College colleague, estimates that 40% of Detroit adults are functional illiterates–people abandoned by the public school unions but too poor to leave town.
Not all big cities have followed Detroit’s path. Some started in that direction, and then altered their strategy. For example, New York, Boston, and San Francisco–like Detroit–all lost population from 1950 to 1980. But those three cities became part of a tax revolt that capped or limited tax hikes in their states. Prop 13 in California, for example, capped property taxes at 1%, which, according to scholars Steve Hanke and Stephen Walters, “slashed San Francisco’s [tax] rate by almost two-thirds.” What was the result? Between 1980 and 2010, San Francisco grew 19%, Boston grew 10%, and New York 16%. As Hanke and Walters note, “tax caps not only improve the immediate cash flow on investments in real property but–perhaps more important–secure it against further expropriations.” People stay and invest when they know the rules and are allowed to make some money.
The lesson for the U.S. today is clear. If we overtax and overregulate, we create an unstable climate to invest, which cuts the chances people have to make money. Thus, people with money leave and invest elsewhere. All of this decline plays out over several decades. Therefore the U.S. can increase taxes, debt, and regulations and be like Detroit–and like New York, Boston, and San Francisco from 1950 to 1980–or the U.S. can cut its corporate tax (which is currently the second highest in the industrialized world) and its high income tax and, above all, cut its reckless spending and be more like New York, Boston, and San Francisco after 1980, when they capped taxes and encouraged investment. The choice is ours. Our future will depend on our decisions.
by Burt on January 19, 2012
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Taxes are back in the news. This time with howls that rich people like Governor Romney, Speaker Gingrich, and many others pay too little in taxes. Let’s make some key points.
First, the Founders expected taxes to be light in the free society they set up. Free Americans would start businesses and plant crops, and that would employ most people. For a safety net, they set up charities and voluntary organizations to meet critical needs. For the tax system, Alexander Hamilton recommended small taxes on imports and on luxury items such as whiskey. Americans would, in effect, choose their own tax rate by the purchases they chose to make. You could cut your tax payments by cutting your alcohol consumption, for example.
Second, the Founders did not approve of the income tax because it shifted power away from consumers and toward politicians–who would make the decisions on what groups should pay what tax rates. In the last 100 years, politicians have embraced the progressive income tax because it allows them to levy a high tax a small number of rich people and redistribute that money to a much larger group of voters. That strategy violates the Founders’ ideal of equal protection of the law to all citizens.
Third, the practical results of using a highly progressive tax have been much worse for the American economy than using smaller rates. When the top income tax rate first went over 50% in the 1917-1921 period, unemployment jumped to 12% by 1921. Then when the rates were cut, unemployment dropped to 2.4% by 1923. Under FDR rates went up again. By the end of World War II, FDR had enacted income and corporate taxes that reached 90%. Only when those taxes were slashed after the war was over did recovery begin. Likewise, the U.S. was in sharp recession during the Carter presidency, but when income taxes were cut under President Reagan, businesses expanded–computers, fax machines, new phones, walkman radios, and many other inventions flourished and improved lives all over the world.
Fourth, those people who attack the current capital gains tax of 15% need to be reminded that when it was much higher in the 1970s under President Carter that fewer Americans made the investments that have enriched our lives so greatly today. As Steve Moore and Art Laffer remind us in The End of Prosperity, “The poorest 20 percent of Americans experienced a 6 percent gain in real income in the 1980s after suffering a 5 percent decline in the 1970s.” The poor, as well as the rich, gain when taxes are low and freedom is high.
by Burt on January 17, 2012
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In FDR’s economic bill of rights, crafted in 1944, he argued that all Americans have a right to a job. Back in 1944, many were shocked at such a statement because if a person has a “right” to a job, employers have an obligation to hire that person. Jobs, in the view of the nation’s Founders, were earned by persuading employers you had the talent and qualifications to add value.
In the last 68 years, FDR’s view has increasingly prevailed. We see this with the outrage expressed last week at Mitt Romney for firing people at Bain Capital. As a venture capital company, Bain Capital bought distressed companies and tried to reorganize them to make them profitable. Sometimes the company needed more cash; sometimes the labor costs were too high and men had to be laid off; sometimes parts of the business had to be sent overseas. But in the end, according to the Wall Street Journal, Bain Capital’s 77 deals resulted in a return of $2.5 billion on $1.1 billion invested. Bain’s top performing corporations—Staples and Sports Authority, for example—became big successes and created tens of thousands of new jobs.
Whenever Bain Capital closed a company down, it transferred the assets where they could be most profitably used. Thus, if Romney’s company for making look-a-like dolls failed, which it did, the capital left over was taken elsewhere and used to make profits and jobs in another industry. You don’t start or buy a company to run it into the ground; if necessary you close the plant and put the assets into productive use elsewhere.
Americans have understood this capitalist process for years, and it’s odd that in a time when we need to encourage risk and innovation that some would be critical of Romney for doing what needed to be done to run a profitable enterprise. Put another way, Romney at Bain Capital was so successful that he made three times as much money as President Obama lost with taxpayer dollars invested in Solyndra. Solyndra made solar panels and sold them at a loss. Romney would have shut such a company down, but President Obama kept it alive for years. Let’s put aside Solyndra’s giving contributions to Obama and the Democrats. The larger point is that the business was a bad risk. When Romney was investing with his own money, he fired people who ran companies like Solyndra. When President Obama was using other people’s money, he kept Solyndra alive and hoped for the best. Which of these two men is most likely to make the moves necessary to pull the U.S. out of its economic slump?
This is not an endorsement of Romney for president. His record is one of looking to government to resolve healthcare in Massachusetts. He also seems eager to use tariffs more than cuts in corporate tax rates to deal with foreign competition. Furthermore, he recommends targeted tax cuts, which are far less effective historically than the across the board cuts under Presidents Reagan and Coolidge. Yet, his understanding of business will give him a great advantage over opponents, especially when it comes to leading the U.S. back to a strong economy.
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[Burt and Anita are looking forward to speaking for the CATO Institute today at noon. Please visit CATO.org for more information. Also, they will be lecturing at a Book Forum for Hillsdale College's Kirby Center in Washington, DC., tonight at 6 pm; please RSVP at KirbyRSVP@hillsdale.edu. There is no charge for either event.]
