November 5, 2008
As the fervor fades and the hoopla dies, the world will have to get used to a new word: Obamanomics.
It includes tax hikes for the rich, tax cuts for the poor and middle class, a renegotiation of NAFTA, greater union power, windfall taxes on oil and gas profits, higher taxes on capital gains and corporate dividends, and more comprehensive health care insurance.
It may deliver the greater income equality Americans apparently desire but also likely slower growth. Despite the vast tax hikes, it will cost a vast sum and U.S. federal finances, already ravaged by bailouts and recession, will slide deeper into the red.
It is not particularly market-friendly but that does not mean the markets will not like an Obama presidency. If Obama can give the United States back its confidence, restore its reputation and sense of optimism, markets will take the bait as they have done with Democratic presidents so often in the past.
If he can become a Clinton-style pragmatist, resists caving to every whim of a deeply left Congress, and does not meddle with the financial bailouts that seem to be gingerly gaining traction, markets may even run with his presidency. The year from hell for investors could then be nearing an end.
At its heart, Obamanomics is essentially about taking more money from the rich and giving it to the poor, plain old-fashioned “neighborliness” as Obama has described it or, as others have less charitably so: taking money from those who earn it and giving it to those that don’t.
Under his income tax plan, Mr. Obama says he will provide tax cuts for 95% of Americans. He will do this by repealing Bush tax cuts and bumping the top rates back to 36% from 33% and to 39.6% from 35%. Individuals earning over US$200,000 and families over US$250,000 will see sizable tax increases. This includes sole proprietors of businesses like lawyers, accountants or plumbers called Joe.
Since 38% of Americans currently do not pay federal income taxes, Obama will provide them with refundable tax credits. Under his plan, 48% of Americans will thus pay no income tax.
“For the people that don’t pay taxes, he is simply going to write them a cheque,” says Andy Busch, global foreign exchange strategist at BMO Capital Markets. “That is income redistribution at its worst and produces very little value.”
Other plans include raising taxes on capital gains and dividends to 20% from 15% for families earning more than US$250,000. He plans to leave the corporate tax rate at 35%, which in a world of rapidly falling rates, looks positively antibussiness. He will introduce windfall taxes on oil and gas companies but offer US$4-billion in credits to U.S. automakers to retool to greener cars.
Much has been made of Obama’s plan to renegotiate NAFTA, though no-one seems to believe he will actually make it more protectionist. On the push for greater union power however, there has been no softening of tone.
He was a co-sponsor with Joe Bidden of the Employee Free Choice Act. It would allow a union to be certified once a simple majority have signed union cards, eliminating the time-honoured secret ballot. The bill died last year but under an Obama presidency is sure to get resurrected.
Bottom line is the Obama plan is likely to be a drag on growth and it will cost money. The nonpartisan Tax Policy Center estimates Obama’s program would add US$3.5-trillion to U.S. debt over the next 10 years, including interest. His plans for health care – which may be delayed by financial necessity – would tack on another US$1.6-trillion.
That is on top of the US$2.3-trillion increase the Congressional Budget Office forecasts over the next decade due to recent stimulus measures and financial bailouts.
“It runs up a very large deficit,” says Roberton Williams, a principal researcher at the center. “In general, tax cuts that are not accompanied by spending cuts have a long-term negative on the economy.” It means taxes will have to be raised later – just as the draw-down from the Baby Boomers begin.
With the U.S. economy festering and job cuts mounting, it is likely Obama will have to hold back on many of his grand plans.
One hopes that once he is able to manoeuvre, he is more Clinton than Carter.
As economist Arthur Laffer recently pointed out in the Wall Street Journal, Clinton thoroughly reformed the welfare system, making job searches mandatory, pushed NAFTA through against union wishes, signed the largest capital gains tax cut in history and reduced spending as a share of GDP by three percentage points – more than the next best four presidents combined.
If Obama is also more practical than progressive and he manages to catch a break from a recuperating economy ‹-thanks to the dirty work performed by Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson – markets will breath a big sigh of relief.