GROWTH and the Obama "Proposal"

Unless there is a radical change by president Obama, the battle for 2012 is now shaping up with Obama on one side advocating for higher taxes, lower growth and more government control, and the GOP candidate on the other side calling for no tax increase, less government control and more economic growth. In short, I believe that Obama went a long way towards destroying his chances for re-election with yesterday's speech. Let's look at what happened.

First, Obama gave no real proposal in his speech. He threw out a lot of numbers to make it look like he was serious, but there were no details of where the "cuts" would come or how the taxes would rise. We do know that Obama wants to fix Medicare by giving a group of unelected administrators much more control over the program, indeed, the ability to act when Congress chooses not to. In short, Obama wants a death panel on steroids. This group would be able to decide that treatment for women with advanced breast cancer has to be stopped as uneconomical (just like a similar panel did in the UK). As Obama said in his famous line during the Obamacare debate, sometimes you have to just tell grandma to take the pain pill.

Obama did give a general description of how he wants taxes to rise: the bush rates are to expire for the wealthy and deductions are also to be eliminated. This may be Obama's shout out to his base, but he is now tied to it for the foreseeable future.

Second, it seems that Obama is being misled by his own rosy predictions of economic growth. Over the last six months, the number of jobs produced by the economy has been growing, and unemployment is down to only 8.8%. (Amazing to think that one can say "only 8.8%" and look at it as a positive.) Every projection from the White House has high economic growth rates of 4 or 5% moving forward. Such growth would probably allow the government to last for a few more years before the debt burden became intolerable, so Obama is kicking the can down the road and trying to score points by berating the GOP as evil men who hate the poor and the elderly and only work for their millionaire masters.

The truth is that the Obama proposal is highly anti-growth. Think of it this way: small business accounts for the majority of the growth and the mahority of new jobs in the country. The bulk of small businesses are taxed through the individual income tax of the owners. That means that those taxes that Obama wants to impose on the "rich" is really a tax on small business. Indeed, it is two tax increases on small businesses. Not only will the rates go up, but the deductions will also go down. So Obama has now raised the spectre of substantial tax increases on small businesses stating in the near future. The effect of the speech will be to scare away investment into small business. After all, would you make an investment if you knew that an additional ten or fifteen percent of the profit were going to be taken away in taxes? Some investments may proceed if the profits look truly solid, but others, the more marginal ones, will be scrubbed as too risky. So, all this means less investment, less job creation, less growth and lower government revenues.

Of course, in the last few days, there have been a number of revisions by economists to the growth expectations for the rest of the year. The most recent one now projects growth for the rest of 2011 at a rate of 1.7%. This is anemic growth to say the least, and it is far below the expectations of the White House. If it turns out to be correct (and who knows if it will), Obama's tax plans will be laughed at. Indeed, even if growth is better for the rest of the year, Obama's tax plans will remain a non-starter. My expectation is that the American people will choose economic growth over class warfare; it seems to me that obama may well have sealed his fate for 2012 with yesterday's speech.