Obama vs. Economics 101

Armstrong Williams
Tuesday, October 14, 2008

Every four years or so, American voters go to the polls to choose political leaders who enact public policies that shape and direct our nation’s economy. Yet, the vast majority of Americans lack an analytical framework required to adequately evaluate the true impact that these policy decisions will have. While Americans may understand how much money they will get up front from tax relief or government assistance, the broader impact of the policies come from the way they influence certain types of economic behavior in the future.

These secondary effects will have a much more fundamental impact on jobs, income and wealth creation than the immediate impact of the policies promised by politicians. To clarify things, perhaps we should look at a few of these proposed policies from the prospective of a student in Economics 101.

Taxing the Rich is a Free Ride for Middle Class Taxpayers

Senator Obama has promised voters that the government can raise money for social programs by increasing taxes on the rich. He defines rich as anyone making over $250,000 per year. While a person earning that amount does make more than 95 percent of other income earners, taxing them disproportionately might not necessarily create a larger government pot. Consider, for example, that most of the people in the top income class own businesses and derive their income from the sale of goods and services at a profit. If the Government decides to tax their profits at a higher rate, they will earn less income, and there will be less incentive for them to g o into business.

Creating disincentives for business means that fewer businesses will hire employees, making jobs scarcer and reducing income among those who are able to find work. Fewer people working means people will spend less money, resulting in a decrease in taxes collected on the consumption of goods and services. Furthermore, people who earn less will save less, meaning less money available to financial institutions to fund middle-class investments like home purchases and business investments in capital used to expand companies and create more jobs.

Trade Restrictions to Keep Jobs in America

Renegotiating Nafta and other trade treaties or giving tax breaks to businesses that do not “ship” jobs abroad may appear to keep jobs in the US. However trade restrictions do not occur in a vacuum. Our trading partners respond/retaliate when we raise or lower trade restrictions. When our in trading partners impose additional trade barriers to US imports, this reduces US exports. This results in lost US jobs. Trade restrictions also increase the price consumers pay for goods made in the US that could have been imported at a lower price from our trading partners abroad. There is universally accepted concept in economics called comparative advantage, which says that every country can produce some goods relatively more efficiently than others and that both sides benefit from free trade. Free trade therefore is a “win-win” for all trading partners. It is supported empirically and historically. I hope we do not have to relearn the lessons of the damage created by trade barriers imposed during the Great Depression.

Government Created Jobs Will Put America Back To Work

When politicians tell voters that the government will create jobs through infrastructure programs they do not realize that these programs may crowd out jobs in the private sector. The money for these infrastructure projects has to come from somewhere to pay for those government jobs. When the government raises taxes to pay for “new” government-sponsored jobs it takes that money from private businesses or consumers, thus reducing jobs in the private sector. Thus, usually, government spending does not result in a net increase in total jobs in the economy. Maintaining and upgrading our decaying infrastructure is important as an investment in our economy. It should not be a jobs creation program but an investment program.

As most of us know, the government is not noted for its efficient use of taxpayer money. Compare the US Post Office to Federal Express and UPS. Look at the $500 toilet seats purchased by the Pentagon and the infamous Alaskan bridge to nowhere. Construction projects usually cost more than in the private sector because of pork barrel requirements such as living wage requirements, union requirements, complex bidding procedures and the latest lobbyists’ pet requirement. Under the best of circumstances, the government does not spend money as efficiently as the private sector or consumers. Consequently, it is generally more efficient to let consumers and private businesses spend their hard earned money where they see fit rather than have the government spend it for them.

Universal Health Care Should Be a Government Responsibility

No matter what kind of health care program we have, so called “universal coverage” won’t really happen. Universal coverage actually means in practice that the government rations health care. Under this system, those who need it most often can’t get enough of it, and those who need it least get too much.

Currently, health care constitutes 15 percent of our GDP, and its’ growth outpaces income. Other developed economies with so-called universal health coverage spend far less. Health care costs amount to about 10 percent of GDP in Canada and Germany, and 8 percent in the UK. What is it that these countries consistently do that we don’t? Simply put, they r ation health care. They do not call it rationing; but patients experience long waiting times in order to receive certain medical treatments, and some are declared ineligible for certain medical procedures.

That may not sound attractive but we all face this reality in one way or another. That means your 80 year old father with a heart condition will not receive life saving bypass surgery in the UK unless he can pay the full cost out of pocket. He would receive it in the US under most insurance plans currently in place. This begs the question of whether having marginal health insurance for everyone is worth signing over to the government the right to say who lives and who dies. In other words who gets to play God almighty with an individual's life or death crisis?

Furthermore, and perhaps more compellingly, creating a “single-payer” system such as a government-administered health care system may create, in effect, a regulated monopoly, much like, for example, the old AT&T telephone monopoly. Under the old AT&T system, the government permitted AT&T to maintain their monopoly control over the telephone system. Anyone over thirty-five can remember a time when it took almost a month to get phone service installed, and long distance calls cost a fortune. Now that the monopoly system has been dismantled, long distance phone calls are practically free, and your phone gets turned on the minute you purchase the service. What a difference competition made in terms of fostering innovation and consumer choice. Without competition in the telecommunications industry, we would not have the single greatest driver of global wealth in the world today – the Internet.

These are only an example of the possible results of some of the policies that have been proposed by Senator Obama viewed through the lens of economics. Of course, you will find economists who disagree with this analysis, and you may even consider the results of these policies as described to be a positive. But just the same, it’s important to consider the lasting effects of the choice you’re making before checking the ballot box next month.

Conclusion

These are some of the policies that have been proposed by Obama. The economic analysis of these policies does not mean that they are bad. It shows that these policies have economic impacts beyond the first order conditions. For example, higher taxes on the rich may reduce overall income, tax revenue and jobs but may also reduce the income gap between the rich and the poor. If you believe that the benefit of the reduction of the income gap outweighs the other consequences, then you may be in favor of that policy. That weighing of income inequality has been made by a number of societies during our life time –Soviet Union, China, Eastern Europe and Cuba. These societies, with the exception of Cuba, decided in the end, that the cost of income equality did not outweigh the benefits of a capitalist economy.