What is Obamanomics? Having just won the presidential election, perhaps it is timely to take a closer look at what Obama’s proposed economic program during the campaign really amounted to. Formulated in his early campaign, Obama’s first economic program reflected the world before the banking panic and the economy’s accelerating descent into epic recession. His second program, to be revealed in 2009, may resemble something more akin to a national austerity program.
The ten aspects of Obamanomics 1 include: taxes, jobs & infrastructure, wages, health care, social security and pensions, education, trade, unions, energy, and financial crisis and bailouts.
TAXES: Early in his campaign the emphasis was on making the wealthy pay their fair share, whose taxes had been repeatedly cut under Reagan, Clinton, and Bush. Obama at first called for the outright repeal of Bush’s first term tax cuts that yielded almost $4 trillion in capital gains, dividends, inheritance, and other tax reductions for the wealthiest households and corporations. But the demand for the wealthy to pay their fair share softened as the campaign neared its end.
Capital gains tax rates, now at 15 percent under Bush, were initially slated to increase to 25 percent, then reduced to 20 percent. (The same applied for the tax on dividends.) That’s a minimal 5 percent increase. The Obama campaign bragged the 20 percent was still nearly 40 percent less than its level under Ronald Reagan and represented the lowest level in all but 5 of the 92 years in which capital gains and dividend taxes were collected.
This tinkering with raising the capital gains-dividends tax rates was more than offset with capital gains tax cuts elsewhere. For example, Obamanomics 1 adds a proposal to eliminate capital gains altogether from investing in start-up companies and small businesses. No definition of what constitutes a small business or a start-up was provided, however. If U.S. government official commerce data is employed for defining small business, it means that investing in companies of 500 employees or less would be exempt from capital gains. That’s an immense number of businesses and the net result would be a very large reduction in the capital gains revenue received by the government.
In addition, capital gains would be eliminated for investing in all start-up companies. But what constitutes start up? The date from which a company files incorporation papers? From when it records its first sale? And for how long would the start up apply: one year, ten years? Would a subsidiary of a multinational company qualify for start up? Or what about a subsidiary with less than 500 employees? Depending on how these parameters are defined, it could mean a very large net reduction in capital gains tax revenues overall, not an increase.
Under Obamanomics 1 the corporate income tax would also be cut. This cut applies to companies investing in jobs in the U.S. Presumably the tax cut would not be granted until job creation was proven, but there appears to be no such hard test or proof of actual job creation or even reference to such a link in Obama’s plan. The amount of this tax cut is apparently linked, however, to the repeal of loopholes in the foreign profits tax. Closing loopholes associated with the foreign profits tax is a positive development. The U.S. economy loses hundreds of billions of dollars a year from the loopholes associated with the foreign profits tax. But how to ensure that the corporate income tax cut would equal the greater tax revenues from closing foreign profits loopholes is a difficult calculation. It’s more likely that corporate taxes would first be cut, major tax revenues reduced, and retrieval of lost tax revenues from firms doing business offshore would be pursued subsequently, with the hope of making up the difference.
In addition to the above, all companies and corporations would enjoy a permanent extension of the research and development tax credit; and all small businesses receive additionally a new health care tax credit equivalent to 50 percent of all premiums for health insurance they might pay, as part of his health insurance reform proposal. The health care tax credit in effect reimburses employers for their half of premiums paid, while the employee apparently receives no similar reimbursement. Or at least this is what the proposal appears to imply.
The above array of actual tax cuts for businesses would undoubtedly amount to a very large net business tax cut in general. How big, no one knows for certain and the Obama campaign did not actually provide an estimate. Presumably some of the net loss in revenues due to business tax cuts would be offset by raising personal income tax rates and estate taxes on wealthy individuals.
In one of Obama’s oft-repeated tax references on the campaign stump, the top marginal personal income tax rates for the wealthiest 1 percent of tax paying households would be raised to 39.6 percent and 36.0 percent. That’s on top of 1.1 million households with incomes averaging $1.6 million a year. Estimates by the Wall Street Journal put the average tax increase for this wealthiest 1 percent at only $19,000. That’s $19k on incomes of more than $1.6 million a year. It amounts to a total net additional tax revenue a year of $20.9 billion—a miniscule sum given the huge gains in income this group has enjoyed over the past several decades and, in particular, since Bush took office in 2001. This wealthiest 1 percent, for example, increased its share of total taxable income in the U.S. from 8 percent annually in 1979 to 20.5 percent in 2006. The $19k tax increase under Obama amounts to less than one fifth of the annual tax cuts this group enjoyed as a result of Bush’s 2001 and 2003 tax cut bills alone.
Nor do Obama’s projected changes to the estate or inheritance tax produce additional revenue in any significant amount. Under Bush, the estate tax was cut until it was in effect levied on only 0.3 percent of all estates. Additional exemptions allowed no tax paid on the first $7 million of a couple’s estate. Obama’s program proposes to freeze the rate after exemptions at the 45 percent level. It all amounts to virtually no change at all. His program brags, however, that it exempts 84 percent of all estates that were once eligible to pay inheritance tax in 2000 from now doing so. Obama’s program in terms of inheritance tax is Bush’s program.
One would be hard pressed to interpret Obama’s proposals for taxes for the rich and business as a repeal of the Bush tax cuts. They are merely tinkering with raising rates on personal incomes of wealthy individuals on the one hand in order to reduce rates for businesses on the other.
Obama’s tax program does introduce a number of tax cuts for middle class families and below-median income workers to a lesser extent. These include:
- A $500 Make Work Pay tax credit that most workers with earned income (wages and salaries) will receive
- A $500 mortgage credit
- A $4,000 college tuition tax credit
- A $1,000 expansion of the child care credit
- Improvements in the Earned Income Tax Credit that affects minimum wage workers
- A $500 savers credit for families with annual income of less than $75k a year
- And an elimination of taxes for seniors making less than $50,000 a year, which averages about $1,400 a year for about 7 million eligible retirees on Social Security
The revenue losses from these provisions would be made up by closing oil and gas tax loopholes, making CEOs pay more of a fair share of taxes, and from addressing the offshore tax haven sheltering problem that has assumed immense dimensions in recent years. Some estimates place the amount of sheltered offshore income between $6 and $11 trillion. But the Obama tax program does not specify how exactly taxes would be raised from these above three measures.
JOBS & INFRASTRUCTURE: Obamanomics 1 addresses more than a half dozen measures for job creation.
However, the number of jobs associated with the proposals are exaggerated. Moreover, several key measures suffer from the ideology of tax trickle down—that is, in order to create jobs more concessions must be made to business.
A particular exaggerated measure is the proposal for a $50 billion stimulus to jumpstart the economy. It is claimed that 1 million jobs will be created from the $50 billion: $25 billion is relief to the states to create a state growth fund to prevent state and local governments from cutting projects that will cut jobs. A second $25 billion is targeted for infrastructure projects like roads, ports, bridges, etc. While a positive proposal in the right direction, to create the number of jobs identified, this jumpstart the economy concept would require $100 billion for each of its two parts—i.e., $100 billion for infrastructure and $100 billion for the states.
Another major proposal is to invest in a clean energy economy in the amount of $150 billion. But the $150 billion is distributed over 10 years, so the annual impact is a tepid $15 billion. A much greater initial infusion of public investment is necessary to generate a significant number of jobs, and five million by any account is grossly overestimated. This $15 billion a year will have very little cumulative impact.
A third area with significant promise for job creation, but which is once again underfunded in Obama’s proposals, is the idea of creating a National Infrastructure Reinvestment Bank, specifically targeting federal transportation investment. But it funds at only $6 billion a year for 10 years. Obama’s claim that it will create two million new jobs is once again a gross exaggeration at that rate of funding.
The above infrastructure and other job creation efforts would apparently be funded by reducing government spending, specifically by ending the wars in Iraq and Afghanistan and by cutting out wasteful government spending. However, based on contradictory campaign rhetoric it is doubtful the war spending will decline in the near term, in particular with regard to Afghanistan.
Two additional measures are welcome trends but will also have little immediate effect in terms of job creation. One is to end tax breaks for companies that send jobs overseas. In a rapidly declining global economy, that job offshoring is likely to abate significantly in any event. A second measure proposed is to provide tax credits for increasing or maintaining full-time jobs in the U.S. and keeping their headquarters in the U.S. But once again, providing tax credits without explicit prior job creation is a waste of taxpayer money. Tax incentives to keep headquarters in the U.S. may be less effective than tax penalties (or tariffs) for moving headquarters from the U.S.
Remaining job creation proposals are largely window-dressing. One includes creating a network of so-called public-private business incubators, another to increase funding for the manufacturing extension partnership, and a third to increase the production tax credit for renewable energy production. All vaguely worded, it is unlikely they will result in much job creation effect.
WAGES: With wages having stagnated or fallen for 110 million nonsupervisory production and service workers over the last quarter century, another area that requires a national strategy and program is to raise incomes.
On a positive note, Obamanomics 1 proposes to raise the minimum wage to $9.50 and thereafter index it to inflation. But that increase would not take effect until 2010-11. Despite the recent minimum wage hike in 2007, the buying power of the federal minimum wage is still around 30 percent less compared to where it was three decades ago. The $9.50 level needs to occur immediately, not three years hence. But the indexation idea is a positive move long overdue.
UNIONS: Today the percentage of the unionized workforce is less than 12 percent.
Much of organized labor’s demise can be directly attributed to government policies and aggressive corporate measures, not least of which has been the prevention of fair union elections. To his credit, Obama has proposed to rectify the strategic imbalance for labor by supporting passage of the Employee Free Choice Act and by banning the permanent replacement of striking workers in labor disputes. Other reforms of the National Labor Relations Board are also proposed.
FREE TRADE: Trade policies from Bush senior to Bill Clinton to George W. Bush have had devastating effects.
More than three million jobs have been lost to China and millions more to NAFTA, CAFTA, and other bilateral free trade agreements. The Obama economic program proposes a token addressing of these issues. None of its proposed measures will do much about job loss due to free trade. Instead, they propose renegotiating the most onerous conditions with regard to environmental and labor standards effects. The only substantive measure is to improve the pittance of assistance to date for displaced U.S. workers in the existing system of trade adjustment assistance.
ENERGY: Part of Obama’s energy program proposals was noted above, investing $150 billion in a clean energy economy over the course of the next 10 years.
Obamanomics 1 would significantly target industries that create alternative fuels. Other proposals include creating programs of job training for clean tech industries, but also include incentives and handouts to the auto companies, in effect getting the taxpayer to foot the bill for the companies’ conversion to hybrid and plug-in electric autos. Companies that bled consumers for years—with “gas-guzzling” SUVs and by shifting hundreds of thousands of U.S. auto jobs offshore in the process—are now asking for bailouts. They were granted $25 billion in September, which Obama voted for. They are now asking for more handouts. The Obama program targets them for more rewards, proposing to go easy on requiring future gas mileage improvements, which only average 24 mpg—less than that required by China. Auto companies will, according to the proposals, have until 2022 to increase this. Another Obama proposal is to shift 25 percent of electricity generation to renewable energy sources by 2025 and to extend the production tax credit noted above. Conspicuously absent from any of the proposals is a windfall profits tax on the oil and energy companies to help pay for it all. Having secured the largest profits of any corporations in the history of the world for the last three years running, the oil and energy companies are not asked to contribute financially to the solution of the numerous problems they, more than any other institutions, have created.
EDUCATION: Obamanomics 1 proposes to fully fund the No Child Left Behind (NCLB) Act, to promote charter schools, and to raise tax credits for college tuition to $4,000.
Many believe, however, that NCLB should be scrapped and education reform started from scratch. NCLB is not a friend to millions of teachers, requiring them to produce more and more bureaucratic make work that does not enhance learning, but forces teachers and students alike to study to the government test instead of expand real learning. The Obama program also totally ignores the tragedy of student loan funding. The current financial crisis is devastating the student loan market and raising costs dramatically for students and their families. The financial middle men have been reaping super profits from the arrangements of the past several decades. Not only are students required to pay top market rates for many loans, but the government pays a subsidy to the lenders to do so (costing the taxpayer an additional premium), and then the lenders resell the loans at a profit on top of it all.
SOCIAL SECURITY AND PENSIONS: Retirement in America is a time bomb about to explode.
More than 75 million have no employer-provided retirement whatsoever. The average balance in 401k plans is a mere $18k total. Personal savings rates have been negative for years. More than 100,000 defined benefit pensions have been dismantled since the 1980s and 77 million baby boomers are due to exit the workforce over the next several years. Pension funds are in an increasingly desperate state due to the financial crisis. A major restructuring of the entire retirement system is necessary, and without delay.
However, that does not exist in Obama’s economic program. What does exist are minor, piecemeal adjustments around the fringes. Obamanomics 1 proposes to allow seniors who earn less than $50k a year not to have to pay income taxes on those earnings. In a small move in the right direction, it calls for a 2-4 percent increase in payroll taxes for those earning incomes in excess of $250k, but it is not scheduled to take effect for another 10 years. That is roughly the period during which the Social Security system will continue to generate another $1 trillion surplus. Instead of addressing the problem before the surplus dissipates, the proposal is to delay. A simple uncapping of the payroll tax—requiring all to pay the current 12.4 percent regardless of income level, would resolve all Social Security funding issues for another century. To its credit, Obamanomics 1 explicitly and unequivocally rejects the idea of any privatization of Social Security.
On the other hand, a major problem with Social Security is totally unmentioned. That is the annual diversion of the accumulated $2.3 trillion surplus in the Social Security Trust Fund since the 1980s, to the U.S. general budget fund where it has been spent for the past two decades. Government IOUs in the trust fund are all that remain. Despite laws not to withdraw those funds, Congress and presidents have annually suspended the laws and withdrawn the Social Security surplus. The restoration of the surplus should be part of any program for saving Social Security in the remainder of this century. Complicit in this grand theft of workers’ payroll tax contributions for 25 years, both Republicans and Democrats alike continue to avoid rectifying the problem. Treasury bonds should be sold to restore the $2.3 trillion and proposals for reforming Social Security developed on that restored base thereafter.
Obama’s program proposes to require mandatory automatic enrollment in 401k-like IRA plans. The shift from defined benefit pensions to 401ks-IRAs is largely responsible for the debacle in retirement earnings today. But instead of developing a new, more secure alternative to 401ks and derivative plans, the proposal is to strengthen the old broken arrangement by requiring mandatory enrollments. Obama’s measure to address the disappearing personal savings rate is to provide a $500 savings for families earning less than $75k.
HEALTH CARE REFORM: Obama’s proposals concerning health care financing and reform are perhaps the most well known of his general economic program.
With more than 49 million uninsured, with the highest cost of health care financing in the industrial world, with double-digit cost increases every year for nearly a decade, it is no accident that health care is among the most important of the economic elements of the Obama program. The U.S. spends more than $2.3 trillion of its entire $14 trillion-plus annual budget on health care alone—more than any other industrial economy by far. Moreover, more than a trillion of that $2.3 trillion goes to pay for non-health care providers—primarily health insurance, drug companies, and for-profit hospitals. Those three institutions are, furthermore, the central forces behind the double-digit annual price increases in the industry. No fundamental change in health care in the U.S., no change in affordability, no reduction in the annual total health care spending is possible without directly confronting those three institutions.
But, as in other areas of his economic program, Obamanomics 1 nibbles around the edges of the problem in its proposals. If this were 15 years ago, Obama’s health care proposals might have had some real effect. But it’s not. It is the late stage in the health care crisis, and more fundamental structural reforms are needed. Like Bill Clinton’s managed health care and Bush’s consumer driven health care plans, Obama’s plan does not address the fundamental source of the crisis.
The first difficulty is that the Obama health plan will cost $50-$65 billion, to be paid for by the tax hikes on those earning above $250k a year. It is not clear, however, whether those tax hikes, as minimal as they are, will cover the $65 billion. First, the increase in capital gains produces only a net $20.9 billion. The increase in the top tax rate to 39.6 percent predicts no dollar amount in revenues. In any event, those two tax increases must pay for the various job creation, infrastructure-energy programs, and for the various tax credits for the middle class. That leaves the proposal to raise the payroll tax 2-4 percent for the above $250k group as the primary means to pay for the entire plan. It is hard to see how that proposal alone will raise $65 billion a year.
Apart from the numbers, the Obama health program creates a national insurance exchange where employers can obtain health insurance or access the same insurance that members of Congress have. Large employers not providing health care would have to contribute a payment for the coverage or pay a fine. Small businesses would receive a credit to cover half the cost of the premiums. Catastrophic costs would be covered by the government in some fashion, in exchange for employers lowering premium costs charged to their employees. Thus it appears the program is designed first and foremost for the 49 million uninsured and other employer-consumers who might want to join, secondarily for others with some kind of existing coverage. Insurance would be available to all, despite pre-existing conditions. Those who currently have employer coverage and want to keep it need not participate. But their costs would also fall by $2,500 a year.
Elsewhere on the health-care front, the government under the Obama plan closes the doughnut hole gap in drug benefits, negotiates with the drug companies to bring down costs, opens up consumers right to purchase drugs in Canada or elsewhere, and forces the expansion of generic drug use despite company opposition. Concerning Medicare, there is no solution for providing Medicare funding in the long-term program. The current problem of private plans sucking on Medicare funding would be terminated. Health care for the poor via Medicaid and for children via the SCHIP programs are expanded as well under the Obama plan.
Together the Obama proposals constitute a hodge-podge of minor measures attacking the health care problem from various directions, none major enough to have a significant impact. Many of the proposals and measures are positive steps forward, but relatively small ones. None address head on the central problem of insurance companies continuing to squeeze a trillion dollars a year for essentially pushing paper around and not delivering any real health care services. The other major problem with the Obama health care initiatives is that it is not at all clear that the financing is sufficient to cover the cost of the proposals.
FINANCIAL CRISIS, FORECLOSURES & BAILOUTS: The most disappointing element of Obamanomics 1 is its proposals to deal with the deepening financial crisis.
There are expected to be 5 million foreclosures over the next 18 months, and the apparent bottomless pit of bailout funding for banks, insurance companies, and other financial intermediaries that will eventually have to be paid by the taxpayer.
There is no explanation of how the bailout fund, the Troubled Asset Relief Program (TARP)—the cost for which rises beyond the initial $700 billion week by week—will impact the other spending proposals in Obama’s economic program. The cumulative bailouts to date, including TARP, Fannie Mae/Freddie Mac, AIG, and other commitments now total over $1.1 trillion. U.S. federal budget deficits, before the bailouts, were estimated in the next two years at around $500 billion each year. Another major fiscal stimulus package will soon follow.
There is also talk of several hundred billion worth of incentives to mortgage lenders to entice them to renegotiate the terms of their loans to homeowners. The FDIC will likely need several hundred billion more to cover depositors at smaller-regional banks set to fail in coming months. The $1.1 trillion could easily rise to $1.5 trillion or more. With all this bailout spending, what will be left for spending on health care, education, energy development, jobs? What tax cuts will be possible? The budget deficit may easily exceed $800 billion to $1 trillion (and some estimate even more) next year. How can it all be paid for with the tepid tax increases on the wealthy and corporations proposed now in the program?
Then there’s the matter of the re-regulation of banks and the finance sector whose reckless investing precipitated the financial crisis. The finance industry gave $22.5 million to Obama’s campaign. Individuals in the industry gave $9.9 million (in both cases significantly more than they contributed to McCain), according to the campaign financing watchdog Center for Responsible Politics. Obama has proposed to bring hedge funds and investment banks under the financial regulatory umbrella. But the industry is clearly lobbying hard to minimize the regulation that’s coming. Obama’s key economic advisors—Robert Rubin of Citigroup, ex-Treasury Secretary Larry Summers, and ex-federal reserve chairperson Paul Volcker—have been meeting regularly with representatives of the finance industry, the Financial Securities Roundtable, and the Mortgage Bankers Association, trying to buy influence and minimize the coming impact. And let’s not forget that among Obama’s early big financial backers were some of the largest hedge funds. He owes them.
Thus far in the Obama program there isn’t anything that might be called an economic program for containing the financial crisis, for bailing out homeowners instead of banks, or for imposing meaningful regulation on the banks to prevent the crisis from repeating itself a few years down the road. All that exists are some general calls that taxpayers somehow be paid back if the bailouts succeed, a 90-day moratorium on foreclosures, that some limits should be placed on executive pay, and a bipartisan board should oversee the bailout fund disbursements. None of which addresses the root cause of the financial crisis—i.e., the flood of delinquencies, defaults, and foreclosures driving down housing prices in turn, and causing constant losses and write downs at banks and financial institutions.
Budget deficits in 2009 and beyond will almost certainly approach $1 trillion or more—unless the government succeeds in hiding the true amounts off budget which has been a growing tendency. Despite the more than $1 trillion in bailout money set aside for the banks, the latter have not yet started loaning to businesses and homeowners at reasonable rates. Credit markets are tight and some are virtually shut down. The crisis in the financial system is rapidly spilling over to the non-financial sector. The contraction and crash in credit, called the Banking Panic of 2008, is squeezing business and consumer alike. There is no fundamental end in sight to the current financial crisis. It can, and will, erupt again in coming months.
In the meantime the real economy is contracting just as fast. Consumer spending and consumer confidence virtually fell off a cliff in October, descending to levels never before recorded. All nonfinancial economic indicators are in freefall. Housing prices continue to collapse, and despite wild swings in the stock markets, equity prices are also plummeting along a long-term trend line. 401k plans for workers and consumers are evaporating in value. Credit card terms and credit are drying up. Companies are announcing mass layoffs, double and triple the rates and levels compared to a year ago.
In this environment it is extremely unlikely that the Obama economic program described above will be the economic agenda in 2009. As cautionary as it is, Obamanomics 1 will prove to have been a political campaign vehicle. The real Obama economics program is yet to come, driven by the course of events in the real economy and not political expediency. Should the current economic conditions continue to deteriorate at their current pace, which is quite likely, a classic austerity program could become Obamanomics 2.
Instead of defining hope and change in concrete terms next January 20 in terms of health care, education, retirement security, jobs, and the like, what we may well get is, “Let’s all tighten our belts to get through this crisis.” Let’s hope the change doesn’t hurt too much for too long.
Jack Rasmus is the author of the forthcoming book, Epic Recession and Global Financial Crisis.