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Reality Check
A watershed event occurred this week with a response by Obama to Joe the Plumber's (Samuel J. Wurzelbacher), question in Toledo, Ohio about how he was going to buy a business. Obama answered 'spread the wealth' meaning income redistribution, which lies at the heart of Obama's tax plan.
Yesterday, I posed a question on this issue to Joe Keating, Chief Investment Officer of RBC Bank, and the invited speaker at a Tiger Bay Club luncheon here in Pensacola, Florida. Keating is the economics commentator for RBC Bank, US subsidiary of one of Canada's major banking institutions, the Royal Bank Of Canada (RBC). He frequently appears as an economics and financial commentator on CNBC and Bloomberg News. The question was about Obama's tax plan. I suggested that Obama's tax plan amounted to a giant welfare transfer scheme; i.e., middle to upper income taxpayers having their marginal effective tax rates raised while the preponderance of non taxpayers received a check. The non partisan Center for Tax Policy Of the Urban Institute and Brookings Institute, not exactly right wing, said 'yes' in their analysis and estimated the cost at over $350 billion during Obama's first term. Moreover, the proportion of non-taxpayers under Obama's plan would rise from approximately 38% to over 48%. Keating of RBC Capital told the Tiger Bay Club audience in response to my question that 'yes', Obama's tax plan is destructive vis a vis something we need in this apparent recession - incentives for job creation by small businesses like Joe the Plumber's.
McCain's new ads airing this weekend have criticized Obama's highly revelatory response to Joe the plumber's question hinting that it is "socialist."
The other reality is that with the bow wave of baby boomers retiring and selling their principal assets, their homes, and flipping their 401-K's, they would be better off with McCain's capital gains tax proposal. He proposes to cut in half the capital gains tax from the current 15% marginal effective tax rate. Instead Obama has suggested increasing capital gains taxes substantially above current levels. We know what that impact is like having paid more than 20% including both Federal capital gains and State 'conveyance' taxes when we sold our principal residence in 2007.
Political analyst Dick Morris, who spoke at the annual Tiger Bay Club dinner last month in Pensacola, cited the Clinton White House experience when the capital gains tax rates dropped from 28 to 20% in the 1990's. They got an unexpected bow wave of over $200 billion in additional revenues that reduced the federal deficit to break even in less than the seven years Originally forecast.
So while conservative talk show host Michael Smerconish in Philadelphia and the normally Republican Chicago Tribune endorse Obama for his facile and glib remarks, the Wall Street Journal raised the daunting prospect of what a "trifecta" composed of Democratic super majorities in the House and Senate coupled with an Obama win in the Presidential race for the White House would do on a variety of fronts, among them, fiscal policy, the environment and free speech. Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi wouldn't tolerate moderates like Sen. Joe Lieberman or former Tennessee Democratic Congressman, Harold Ford, Jr. now head Of the Democratic Leadership Council.
Another irony is that the Philly talk show host Smerconish might find himself off the air given the possible resurrection of the FCC 'fairness' doctrine' that Pelosi and other Democratic Congressional leaders have broadly hinted might return.. This provided equal time for crazies to plague us on the airwaves for decades until overturned by the FCC.
I tend to reflect on the economic numbers of what might happen, if Obama is elected. The fiscal policies that he has proposed, analyzed by nominally Democratic policy think tanks in Washington, DC don't work in terms of getting us out of this financial debacle. A debacle caused by a number of factors:
the 'moral hazard' from the subprime mortgage crisis caused in large part by the Clinton era push for low income home ownership; AAA guarantees of toxic mortgage backed securities by bond insurers; Freddie Mac and Fannie Mae buying subprime mortgages to pump up incentive compensation for their CEOs and CFOs engaged in fraudulent accounting practices; predatory mortgage originators banking on ever upward spiraling housing prices; greedy Wall Street investment firms who securitized and took positions in the unmarketable high risk tranches; the US and international banking communities who bought these highly rated toxic mortgage backed securities desperately seeking positive yield spreads to produce margins; and, the plummeting drop in housing prices.
As Keating of RBC Bank reminded his Pensacola Tiger Bay audience yesterday the housing and construction sectors of our economy have the biggest economic multiplier effects to create demands for durable goods and services and millions of additional jobs.
Yesterday, the government reported the largest drop in building permits and housing starts since the end of WWII. Sounds bad, right? Not really. This is positive news because you have to clear out the surplus in housing before any recovery. This is an indication that housing prices haven't bottomed yet. A further drop in housing prices in 2009 from the peak of the housing bubble could prolong a recession, perhaps as bad as the one in 1981-1982. That was when we had towering double digit interest rates ordered up by then Federal Reserve Chairman Paul Volker to stifle inflation. Now, we have the direct opposite, downward spiraling interest rates and the prospect of deflation in commodity prices such as oil and gas - a silver lining of sorts.
We must have a fiscal policy that makes sense. Ironically, Obama's tax plan amounts to 'Hooverism' (President Herbert Hoover, whose misguided economic policies worsened the Great Depression in the early 1930's) that could deepen rather than limit the recession. Obama's proposals will not restart the economic and housing cycle to cover off the loss of more than a million jobs.
All these late campaign stirrings are good for the electorate to ponder concerning who is likely to protect the country's economic future when they enter the polling booth on November 4th. The results of this reality check could make a difference in the poll that counts on Election Day.
Credit this reality check to Joe the Plumber's question and Obama's response in Toledo.
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