Friday, April 20, 2012

A Fairly Bad Recovery

A frequent rhetorical ploy of politicians is to find a quote or action by an icon of the opposing party that supports what they happen to be doing or advocating at the moment.

For example, Republicans have long reminded everyone that President Kennedy managed to revive the U.S. economy with a major tax cut. More recently, they have dug up quotes from Franklin Roosevelt opposing bargaining rights for government employees.

So it is no surprise that President Obama would have made use of a Ronald Reagan quote about how crazy it is for millionaires to pay less in taxes than bus drivers. Joked Obama, “If it will help convince folks in Congress to make the right choice, we could call it the ‘Reagan Rule’ instead of the ‘Buffett rule.'” Further, he asserted that “what Ronald Reagan was calling for then is the same thing that we’re calling for now, a return to basic fairness and responsibility, everybody doing their part.”

The difference between Obama quoting Reagan and the above cited instances of Republicans quoting Democrats is that the assertions about FDR and JFK fairly reflect what they said or did. Obama’s citation is misleading because, in that quote, Reagan was railing against tax loopholes and arguing for a simpler, flatter tax system. He almost certainly would oppose the Buffet rule as a further complicating layer to be imposed on top of an already overly complex tax system.

What annoys people like me about the Buffet rule is that 1) we have supposedly “solved” this problem before and 2) it plays on perceived ignorance or forgetfulness on the part of most voters as to why Congress lowered capital gains rates in the first place.

To be clear, I have no particular animosity toward the Buffet rule and it would not bother me one bit if it were enacted. Its proponents are correct when they say that the wealthy can certainly to pay more in taxes than they do now. And any amount of money that reduces the deficit, no matter how small, is a net positive. And the amount involved here is, indeed, relatively small—as the president himself acknowledges. He says that it is merely “a first step.” The problem is that, nearly three and a half years into Obama’s administration and with a recovery that is so weak that most people polled think they’re still in a recession, it’s a bit late in the game for a mild and mostly symbolic first step.

And let’s be clear, there is a down side to the debate over the Buffet rule. The more time and attention we spend talking about it is less time spent working on the real problem: a major imbalance between government revenues and government spending. By providing yet one more distraction and lack of positive action, Obama can fairly be said to be making the problem worse.

Besides, as I alluded above, we have “solved” this problem before. When lawmakers got upset about millionaires getting away with low or no taxes in the 1980s, they set up the Alternative Minimum Tax. And what happened? Over time, because the AMT was not indexed to inflation, more and more lower income taxpayers fell into its net, while the super-wealthy still managed to find legal ways to minimize the percentage of taxes they paid.

And let’s remember why the tax rate on capital gains was set low in the first place. It’s because, when cap gains income is taxed lower than regular income, it provides an incentive for the wealthy to invest in companies, thereby creating more jobs. This is a very well documented fact, which was cited by then ABC news anchor Charles Gibson in a question to a presidential candidate in 2008, i.e. raising capital gains rates historically results lower government revenues.

The candidate was Barack Obama. His response? He said he would favor raising the rate anyway “for purposes of fairness.”

The president’s recent reference to Reagan was not his first. He raised some eyebrows, by speaking admiringly of the Gipper during the 2008 campaign. He had good reason to want to emulate Reagan, at least in certain ways. Reagan was a successful two-term president who came into office amid an economic situation not unlike that which existed at Obama’s inauguration. He won re-election in a landslide because of a roaring recovery that was well under way by the end of his first term. There was every reason, based on historical precedent, to expect the same thing to happen for Obama. As a rule, the deeper the recession, the steeper the subsequent recovery.

But Obama’s recovery has been barely perceptible to most. Is that because of really bad luck? Or is it a testimony to how badly the Bush administration screwed things up? Or could it have something to do with the policies of president who has said in public and on the record that he would rather have things be “fairer” than to encourage economic investment?

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