Needed: A New Economic Paradigm not “Obama’s Class Warfare and Destruction of Capital Plans”

An Editorial Board opinion from an “irate TBP member”

Obama’s jobs plan and deficit reduction plan are dangerous, high risk social experiments that will result in government’s continued destruction of capital, which capital is needed to expand the economy and put people back to work. Given the current extreme national debt and out of control government spending, Obama’s war on capitalism needs to end. Cut spending to a level that can be managed, including debt service. Increase revenues not be raising taxes and destroying capital, but by expanding the economy, creating capital, and increasing revenue. 

Deficit spending has long been a tool of government, but never to the extreme Obama has expanded it. While the current fiscal mess has been building for many years across a lot of administrations in Congress and the White House, finger pointing is a waste of time and resources. The harsh reality is that China’s economy is projected to surpass ours in about five years, at which point it will be virtually impossible to finance an economy based on deficit spending. Five years does not leave much time to get our budget under control. Destruction of capital is not the answer. America needs a new economic paradigm. 

Obama’s destructive plans are based on fomenting “class warfare” which Obama admitted on Thursday, September 22, 2011:  “[if asking rich people] to pay the same tax rate as a plumber or a teacher is class warfare, then you know what? I, I, I, I, I’m, I’m a warrior for the middle class.” I almost tossed my cookies when I heard that one. Obama seemed to choke on his words as well. This is a blatantly misleading statement. 

There are two basic income taxes: ordinary income, where everyone pays a graduated rate increasing as income increases – their “fair share” (the rich already pay a higher percentage); and capital gains, a taxpayer incentive to invest (put capital at risk in exchange for favorable tax treatment) where everyone pays the same, lower amount. When the two are averaged, the combined rate will depend on the total mix of ordinary income compared to capital gains. Wealthy people tend to have a higher percentage of capital gains versus ordinary income (because their higher income leaves more to invest), which skews the average downward. In extreme cases, the average tax rate for an ultra wealthy person can be lower than the average rate for “normal” taxpayers. Should this averaging anomaly justify penalizing success and creating a disincentive to invest? America was built on individuals and free markets determining the growth markets, not the government (can you say ‘Solyndra’?). Is Buffett asking to have his capital gains rate raised? Obama’s plans are not any kind of math we learned in school, his protestations notwithstanding. 

Obama clearly lacks understanding of two very basic economic principles. 1.  The private sector creates jobs, not the government; 2. The private sector creates capital through the provision of goods and services while government takes capital from the private sector and redirects it by spending, cutting taxes, and/or giving it to foreign governments. 

The model for redirecting capital by spending or cutting taxes, also known as “stimulus,” is really the same for both sides of the aisle and no longer works. The common name is “trickle down – both parties push stimulus at the top of the economy hoping the benefits “trickle down” to us “little people.” The Left wants to use “stimulus” (private sector capital) for government-funded projects, which typically means contracts to big union-supported businesses to repair/build roads, bridges and schools. The theory, of course, is that new projects equal new/better jobs, which, in turn, would allow people to buy more goods and services, and more tax revenue.

Coincidentally, unions tend to vote democratic. The Right, conversely, tries to stimulate by plowing private sector capital back into the economy through tax breaks hoping “job creators” will create more jobs, so more people will have more money in their pockets, which would allow them to buy more goods and services, and produce more tax revenue. Coincidentally, “job creators” tend to vote Republican. If the Republican view will cripple America, then so will Obama’s and the Democrats’, as they are functionally the same. Why this political pingpong match no longer works will be the subject of a separate article. For now, the short answer is that the economy has evolved and growth must sprout from the ground up, not the top down. 

How does the Obama plan destroy capital? The U.S is underwater with debt which means Obama and Congress must understand and accept that the traditional market principals applied in good times are not necessarily what one does in our current fiscal position. The government just approved borrowing an additional $2.4T, which money will be taken in over the next 15 (plus or minus) months. The government plans to pay it off over the next 120 months by cutting spending! Here is the real math: the government is currently spending roughly $200B more than it takes in every month (which is why it needed $2.4T to cover the next several months).

Fifteen months from now, unless our spending is reduced by $200B per month, the government will be unable to pay its bills and will have to borrow more money as it will have exhausted the most recent $2.4T of new debt. Obama doesn’t want to cut spending by that much. Instead, he wants the wealthy to pay more in taxes. Obama will try to cut only $100B per month and cover the shortfall by new taxes on the “rich” and hidden taxes and fees on the rest of us. The money taken in taxes and fees, of course, can only come from private sector capital. The money, however, will not be redirected back into the U.S. economy, but paid to creditors, most of them foreign governments. That capital, therefore, is destroyed as to the U.S. economy because it is no longer available. By pulling $100B per month out of the economy, the government will not be stimulating the economy (regardless of which stimulus approach is used), but depressing the economy. 

Obama’s tactic of class warfare to get reelected is despicable and transparent (ironically, probably the most transparent aspect of his confused presidency). Regardless, couching his attack on success and wealth as “fairness,” his new code word for “redistribution of wealth,” is a good election year sound bite, but a fiscal disaster if enacted. 

The solution is obvious to most Americans, as is the reality that reigning in the government’s out of control spending will be hard. For some reason this is lost on politicians who seem more interested in self service rather than public service. Cut spending to a level that can be managed, including debt service. Increase revenues not be raising taxes and destroying capital, but by expanding the economy, creating capital, and increasing revenue. Government needs to get out of the way.

The Bold Pursuit is pleased to introduce a new feature, TBP Editorial Board. The Editorial Board will publish our members’ opinions on current political and economic issues. The Editorial Board is a feature in development, so please email us with your ideas and suggestions for TBP EB (the email submission form is in the lower left-hand column. ~ Clio)

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