The Economic Policy Vacuum

Last week David Brooks had an article in the NYTimes "Calling Dr. Doom." He cautioned against the optimism of both parties and candidates' campaigns, citing the obvious vulnerabilities of both and the dearth of ideas to combat the numerous policy crises we face.

The economic proposals seem particularly hollow and shortsighted. Neither candidate has a strong conviction about how to break the downward spiral of declining house prices, rising inflation, increasing health care costs, a collapsing dollar, rising energy prices, stagnant incomes, increasing debt burdens and slackening world demand. The only real way out of this is not by some clever sleight of hand, but by getting people to work more productively, increase their savings and investment, and pay down their debt. Concomitant to this is a necessary price correction for bursting asset bubbles. In the immediate case, this means housing prices. (This was a mistake that needs correcting, sooner rather than later.)

So Obama wants to jiggle the tax code to redistribute the tax burden in ways that seem more "fair." He proposes to increase income, capital and Social Security taxes on income for the rich (over $250K) and reduce taxes on those making less than $50K. McCain wants to maintain the income tax cuts but reduce corporate taxes and raise exemptions for dependents.

This feels an awful lot like Nero fiddling while Rome burns.

How will the economy respond to increased taxes on production? We already know the answer to that one, so why is Obama proposing it. Obama's policy guidelines follow some subjective notion of "fairness." But if fairness is desired, why not eliminate taxes on savings and capital returns for those under a certain income threshold, say $75K? He wants to raise corporate taxes, but these just reduce shareholders returns and aggravate the divide between haves and have-nots by subsidizing corporate expenses. Better to eliminate the corporate tax completely and recapture those revenues after they are paid out to owners.

Obama's proposals seem to adhere to a postwar philosophy of rewarding labor incomes over capital incomes, but that resigns workers to participating economically solely as an input cost. International wage pressures make that look like a bleak proposition. Besides, that's not how a poor Obama achieved his new wealth. Senator Obama is an entrepreneur who markets his intellectual capital, so why not encourage such activities through tax reforms?

His spending proposals, on the other hand, portend an ever increasing tax bite to pay for them. By necessity this will fall on middle class incomes. His trade objections have been written off to campaign politics, but what message is he sending and what expectations is he creating?

McCain's proposals seem to fiddle at the margins without negatively impacting production, but they sound too timid. If the economy tanks, his proposals will be sorely inadequate to deal with the problem. His spending restraints would go a long way to decreasing the burden on earners, but it remains to be seen for an administration of either party to actually decrease the federal budget.

Both Obama and McCain seem to lack the boldness required to open up our economic system and make capitalism work for every citizen. Liberalism suggests that we can move the tax burden around to reward certain deserving groups over others, after the fact. But this most often results in reducing inequality by making us all poorer. It would be nice if this fallacy was admitted and we focused on rewarding certain economic behavior that adds to the public good and found ways to encourage that behavior across all groups--rich, poor and middle class.

Want fairness? Introduce a low flat income tax, a national consumption tax with a high threshold, and some form of wealth tax that might be folded into an inheritance tax with a reasonably high threshold. Let's reward productive activity, whether it's labor or capital productivity and grow ourselves out of these doldrums. Yes, we can.