OMG I Agree With Obama

Obama went into the White House with a lot of promise.  Running as a centrist when his entire career was spent on the far left wing, he rode a financial crisis into the office of President.  His opponent, John McCain had made the mistake of stating early in his campaign, “I don’t know a lot about economics.” .  Luckily for Obama, he had never made the same statement. However, after a year in office it is safe to conclude that Obama knows very little about economics, finance, or running a simple business.

The current solution to the economic malaise is to keep interest rates low, print money and engage in Keynesian stimulus.  Bernancke has had a hand in the policy, but on the fiscal side it’s the President’s baby.  We also have used government money to prop up failing manufacturing firms in the case of autos, and prop up failed banks in the case of Wall Street.  Now that Obama and his team have lost their third election in a row, they are switching their rhetoric and talking big about jobs.  Currently, unemployment sits at just over 10%, much higher than the promised target with the stimulus package the Democrats and Obama advocated for.  We are hearing talk of stimulus redux.  Economists Paul Krugman and Brad DeLong have written that it’s not big enough!

It has been proven many times that the economic multiplier effect of government spending is equal to 0.  That’s right zero, nada. Gary Becker and Kevin Murphy from the University of Chicago have written extensively on it.  Luis Zingales, John Cochrane and others have written extensively on the crisis.  Even Christine Roemer, a salt water economist, published a paper saying as much.  Yet they push on.

First off, let me say I disagree with the GM bailout, the bank bailout, and the stimulus.  I was also against the TALF, TARP and al the other shenanigans that Treasury Secretary Paulson played under Bush. It would have been painful in the short term to have these companies fail, but far better for American capitalism if they did fail.  From burnt fields grow new shoots.  Some in Congress had the intestinal fortitude to cast a very difficult vote against all these failed economic policies.

Now that the President is refocused, my guess is “jobs” will mean union and government jobs.  It’s too narrow a focus, and too small a group.  Plus, unions and governments are not as productive as regular Joe’s.  Just compare GM and their output versus any foreign car company that has built a plant on American soil.

Instead of a narrow focus, Obama ought to take a page from a different playbook.  Milton Friedman famously said, If you want more of something, make it cheaper.  Less of something, tax it. Make is cheap to employ people.  In a broad context, lower the costs to employ someone.  Lower the payroll tax, end health insurance regulations, and other employment regulations.  Lower the minimum wage.  Raising the minimum wage adversely effects women, minorities and inner city teens. Lower capital gains taxes-as a matter of fact, cut them to zero.  Taxing capital is a tax on production.  Lower corporate taxes to a flat tax of 15%.  Instead of having the highest taxes in the world, the US should have the lowest.  It will encourage companies to re-patriate here and hire American workers.  Lower the income tax rate from a progressive rate to a flat tax of 15-20%-no deductions for anything. It will make tax filing easier, make the opportunity cost of NOT filing taxes high, and really stimulate growth.

Economic research has proven beyond a shadow of a doubt that there is a large economic multiplier effect for every percentage point you drop tax rates.

The last thing they should do is end taxes on dividends.  Why?  Lots of cash now sits on US company balance sheets.  One reason is executives say that their shareholders don’t want to pay a tax on dividends.  End the tax.  This will compel companies to make a decision, invest or release cash to investors.  Many will release cash to investors and it will be re-invested in other things.  That is a better way to stimulate the economy-rather than a listless, monolithic, wasteful government picking winners and losers.

No one in Washington has the balls to implement tax cuts and cut the government influence on American business.

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    Jack
    2010/01/22 at 9:51am
    Sounds like the Euro$ option locals! As long as you have greed in the world this will continue. Government control will never be a good thing. Just like the devil, you give him an inch, and he will take a mile.
    November 12, 1999 president Clinton passed the Gramm, Leach, Bliley act which reprived the Glass Steagall act of 1933, which allowed banks and insurance copanies to sleep with each other. Never mind that our government forced banks to loan money to people who had no business in getting a loan! Have you ever heard of Acorn? Who by the way our current president was on the ground floor of organizing, their sole purpose was to get loans for people that were never going to pay them back. You mean I only make $20,000 a year and I can buy a $350,000 condo with no money down!! Where do I sign up. These are policies our government is responsible for not Wallstreet. When will people wake up and start owning their own mistakes and actions instead of seeing who they can blame for their lot in life. Give me a break, now that the president figured out he can’t get his health care scam jammed through he’s trying to create a legacy elsewhere.

  • admin

    Jack
    2010/01/22 at 9:51am
    Sounds like the Euro$ option locals! As long as you have greed in the world this will continue. Government control will never be a good thing. Just like the devil, you give him an inch, and he will take a mile.
    November 12, 1999 president Clinton passed the Gramm, Leach, Bliley act which reprived the Glass Steagall act of 1933, which allowed banks and insurance copanies to sleep with each other. Never mind that our government forced banks to loan money to people who had no business in getting a loan! Have you ever heard of Acorn? Who by the way our current president was on the ground floor of organizing, their sole purpose was to get loans for people that were never going to pay them back. You mean I only make $20,000 a year and I can buy a $350,000 condo with no money down!! Where do I sign up. These are policies our government is responsible for not Wallstreet. When will people wake up and start owning their own mistakes and actions instead of seeing who they can blame for their lot in life. Give me a break, now that the president figured out he can’t get his health care scam jammed through he’s trying to create a legacy elsewhere.

  • admin

    pdtheo

    2010/01/22 at 12:49pm
    Nice blog, Jeff- good reading-
    While I’m in complete agreement about leveling the field, I would add the following: That prop trading is merely taking advantage of the rules that exist today. The exchanges should NEVER let these off-exchange transactions to take place, but they have made their choice and have sided with the large I-banks. We can agree that banks’ prop desks are hurting a level, free market, but I can’t see what good prohibiting banks to have them will do. What is to stop this front-running to migrate to another venue. Hedge funds are trying right now to set up I-bank operations (Citadel). What’s to stop them from stepping right into this void? The rules have to be enforced by the exchanges, in my opinion.
    As for the President’s speech yesterday, I’d like to believe that he see this like we do, but I’m afraid that he just looked at what was profitable at the banks and decided to tax it.

  • admin

    pdtheo

    2010/01/22 at 12:49pm
    Nice blog, Jeff- good reading-
    While I’m in complete agreement about leveling the field, I would add the following: That prop trading is merely taking advantage of the rules that exist today. The exchanges should NEVER let these off-exchange transactions to take place, but they have made their choice and have sided with the large I-banks. We can agree that banks’ prop desks are hurting a level, free market, but I can’t see what good prohibiting banks to have them will do. What is to stop this front-running to migrate to another venue. Hedge funds are trying right now to set up I-bank operations (Citadel). What’s to stop them from stepping right into this void? The rules have to be enforced by the exchanges, in my opinion.
    As for the President’s speech yesterday, I’d like to believe that he see this like we do, but I’m afraid that he just looked at what was profitable at the banks and decided to tax it.