Obama's ignorance of basic economics

Peter Ferrara:

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The marker Obama himself laid down for judging his economic policies is whether they would serve “to create strong, sustained growth…pay down our long-term debt…[and] generate good, middle class jobs….” Last week, we discussed how his economic policies would consistently produce the opposite of those results, just as they have in his Presidency so far. But his speech contained many more fallacies that further illuminate his perverse economic thinking. 

Lowering marginal tax rates, not just cutting taxes, expands the incentives for increased production, and consequently increases productive activities, such as saving, investment, expanding businesses, starting businesses, job creation, entrepreneurship, and work. That expands production and increases GDP, which means economic recovery, growth and prosperity. Even under Keynesian economic thinking, tax rate cuts promote economic recovery and growth by increasing demand for goods and services, which would in theory increase supply, GDP and growth.

But in his Cleveland speech, Obama argued that it was the Bush tax rate cuts that caused the recession somehow.  He said, “We were told that huge tax cuts – especially for the wealthiest Americans – would lead to faster job growth….So how did this economic theory work out?”So let’s review how it did work out.  Bush cut the top income tax rate by 11.6%, from 39.6% to 35%, and the second highest rate by about 8%, from 36% to 33%.  But he cut the lower rates by higher percentages, including slashing the bottom rate by 33%, from 15% to 10%.  Then in 2003, he cut the tax rates on capital, reducing the capital gains tax rate by 25% from 20% to 15%, and the tax rate on corporate dividends to 15% as well. 

These tax rate cuts first quickly ended the 2001 recession, despite the contractionary economic impacts of 9/11, and the economy continued to grow for another 73 months.  After the rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs over the next 4 years and the unemployment rate fell from over 6% to 4.4%.  Real economic growth over the next 3 years doubled from the average for the prior 3 years, to 3.5%. 

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But there is no economic theory under which tax rate cuts could cause recession.  America cannot afford a President who is this confused and deluded.  (Emphasis added.)

Obama said in Cleveland, “Over the last three years, I’ve cut taxes for the typical working family by $3,600.  I’ve cut taxes for small businesses 18 times.”  But Obama’s “tax cuts” have almost all involved tax credits and other loopholes, not reductions in rates, which he is increasing at an historic pace, as discussed last week.  It is reductions in rates that promote economic growth and prosperity, because it is the marginal tax rate, or the rate on the next dollar of income, that determines whether the producer is going to undertake the activity to produce that income.  Tax credits are really no different than welfare checks, particularly the refundable tax credits Obama has favored, which pay the beneficiary the full amount of the credit regardless of tax liability.  But welfare does not promote economic growth and prosperity,Nancy Pelosi to the contrary notwithstanding....Rather than tax cuts and deregulation causing the financial crisis, it was more nearly the opposite, as I have explained in another column. It was Bill Clinton’s overregulation that forced financial institutions to abandon traditional mortgage lending standards, in the name of homeownership for minorities and the poor.  Once those standards were demolished for lower incomes, they could not be maintained for higher income speculators.  The government’s sponsored enterprises Fannie Mae and Freddie Mac, with effective government guarantees, were able to pump trillions into the subprime housing bubble, and spread trillions in toxic mortgage securities based on non-traditional subprime mortgages throughout the global financial community.  See, Paul Sperry, The Great American Bank Robbery: The Unauthorized Report About What Really Caused the Financial Crisis; Gretchen Morgenson, Reckless Endangerment ; Peter Ferrara, America’s Ticking Bankruptcy Bomb....

There is more.

Ferrara is spot on.  About the only thing Obama has accomplished as President is that liberal economic theory does not work.   I think liberals hate tax cuts because they would rather exercise more control over how money is spent.  Again Obama has demonstrated how poorly liberals managed to do that with their failed investments in alternative energy and batteries for eclectic cars that the markets have rejected.

Democrat housing policy caused the bubble and recession and they have done nothing to solve that problem, but they have increased regulations on those who were most hurt by the Democrat housing policies in one of the most massive cover ups in history.