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Obama's Problem Is Ideology

September 23, 2010

By Diana Furchtgott-Roth

The problem with the administration’s approach to economic policy is highlighted, unwittingly, by the White House’s tack in finding a replacement for Larry Summers, who will leave by year-end as director of the National Economic Council. He will return to Harvard, where he has been on leave.

The Obama team let it be understood that, ideally, they would like to replace Mr. Summers with someone, preferably a woman, from the business community-an appointment that they hope might dispel the impression that this administration is anti-business, which it believes it is not.

Instead of tapping someone for the sake of appearances, the president would be wiser to seek a business executive who can steer administration policy and the country away from the ongoing economic morass. Both women and men would be grateful.

Mr. Summers’ resignation, the third by a senior administration economic policy adviser in recent weeks, was the day after that the National Bureau of Economic Research reported that the longest post-war recession ended in June, 2009, 18 months after it began.

The news media had no difficulty finding ordinary Americans who expressed doubt-who said, essentially, that it feels like the country is mired in recession even if, technically, the total output of goods and services began growing again in the summer of 2009.

That perception, supported by an unemployment rate of 9.6%, is the Democrats’ biggest liability going into the congressional elections in November, the reason some candidates have been distancing themselves from Mr. Obama.

Memo to the President: Your policies are anti-business, and changing personnel isn’t going to have any effect unless policies change.

In his speeches, Mr. Obama has repeatedly called for raising taxes on joint filers with $250,000 or more of gross income and singles making more than $200,000 -although in the fine print of his budget his tax hikes would affect joint filers with more than $209,000 of taxable income and singles with more than $172,000, potentially ensnaring households at lower levels of gross income than he advertises.

In addition, the president has supported more mandates on employers, most notably an annual $2,000 per worker levy on firms that do not offer the right kind of health insurance, to take effect in 2014. That’s anti-business.

In contrast, today Representative John Boehner, the House Republican leader, will unveil the new House Republican governing agenda. It will include cutting non-security discretionary spending to 2008 levels, repealing the new health care law, and making all current tax rates permanent, to reduce uncertainty for businesses.

In addition, the Republican agenda proposes reforming the congressional budget process to make it easier to cut spending. Current rules are rigged to make it easy to spend money unnecessarily, and not so easy to cut spending. New proposed rules include a mandatory three-day online review period for all bills, and changes to rules to make it easier for Members of Congress to get a vote on amendments that would cut spending.

Mr. Obama’s anti-growth agenda is the main reason why unemployment is stubbornly high, job growth has been weak, and the percentage of Americans who report they are working or looking for a job has declined to 1985 levels.

The president repeatedly states that only people making over $200,000 would pay more in taxes if Congress raises rates as he proposes. This assumes, however, that the government can tax the most productive people in the economy, those with the highest incomes, without negative consequences for the others-that the actions of the top income groups don’t affect the well-being of people making less.

This is clearly incorrect. Top income filers purchase goods and services. They own or manage businesses that employ other Americans. They have capital investments that fund businesses that create jobs.

Their tax revenues pay substantial shares of federal and state tax revenue that is distributed down the income chain through government benefits, such as food stamps and Medicaid. In 2007, the latest year available, the top one percent of tax filers earned 23% of adjusted gross income and paid 40% of federal income taxes.

Treasury data show that 48% of small business income on individual returns accrues to unincorporated businesses making over $250,000 per year. If these businesses’ taxes rise, some will close or curtail expansion plans, thus shrinking their payrolls.

Or, consider capital income. Macroeconomist Allen Sinai, president of Decision Economics, has calculated that raising capital gains tax rates from the present level of 15% would hurt the economy and job creation. As taxes rise, top earners choose to sell fewer capital assets, lowering taxes that accrue to Uncle Sam.

As Christina Romer was leaving as chair of the Obama Council of Economic Advisers, she and her husband, David Romer, published an article in the scholarly American Economic Review showing that tax increases harm economic growth. After Peter Orszag left last month as Budget director, he advised that current tax rates should be extended for two years.

Always honest, Mr. Summers as chief economist of the World Bank wrote that developing countries could benefit from lower environmental standards that would attract industry. As president of Harvard, he said that differences between men and women might be one explanation for the smaller numbers of female math and science professors. It will be interesting to see whether he also comes down against tax increases after he leaves the White House.

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