Commentary: Regarding economics, Obama's views are incoherent

Long Island Business News, Jun 20, 2008 by Raymond Keating

Neither candidate for president is an economics whiz kid.

That's unfortunate, since the economy ranks as the top worry among the American people, according to recent polls. The country could use some authoritative, reliable economic leadership from the next Oval Office occupant.

But while the Republican presidential candidate, Sen. John McCain, R-Ariz., has been inconsistent on economics over the years, the Democratic nominee, Sen. Barack Obama, D-Ill., stands as a model of consistency in his short senate career and on the presidential campaign trail.

The bad news?

Obama is unswervingly wrong on important issues for entrepreneurs, investors, small businesses and the economy in general. Consistency is nice, except when the next possible U.S. president is consistently incorrect. Indeed, comb through Obama's campaign Web site and some of his recent declarations, and it's difficult to find any remnants of economic common sense. That's troubling.

Consider that Obama subscribes to the class warfare school of tax policy. He would allow the 2001 and 2003 tax relief measures to expire for upper income earners. (Under current law, they expire at the end of 2010.) That's envy, not smart economics. It's also anti- small business.

Allowing the top personal income tax rate to increase hits the bottom line of small business owners. After all, as sole proprietorships, partnerships and S-Corporations, for example, most businesses pay the personal income tax, rather than the corporate tax.

In an analysis released last month, the U.S. Treasury Department reported: "About 74 percent (about 585,000) of the 790,000 tax returns that will benefit this year from lowering the top tax rate from 39.6 percent to 35 percent are flow-through business owners. Nearly 325,000 of these taxpayers receive more than 30 percent of their income from flow-through businesses."

Let's be clear. When Obama talks about increasing taxes on upper- income earners, he is talking about higher taxes on entrepreneurs that drive innovation, growth and job creation forward.

By allowing the 2011 tax hike to take effect, Obama also would increase the individual capital gains tax rate from 15 percent to 20 percent. That's bad enough, but he has signaled a willingness to push it even higher - to 25 percent or 28 percent. Given that investing and entrepreneurship are high-risk, yet also highly important endeavors, reducing potential returns on such undertakings by jacking up capital gains taxes is just bad economics.

The Illinois senator's dependable economic incoherence extends to the regulatory arena as well. Almost all economists agree, for example, that a higher minimum wage hurts young, low-skilled workers by reducing their job opportunities and denying them valuable work experience. For good measure, small businesses have to find ways to deal with government-mandated increases in labor costs. Nonetheless, Obama wants to further increase the minimum wage, and index it for inflation.

Obama also advocates a radical energy agenda. He would impose a regulatory scheme on the economy meant to reduce carbon-dioxide emissions to 80 percent below 1990 levels by 2050; and mandate dramatic increases in how much of the nation's electricity and motor vehicle fuel come from renewable sources. For good measure, the Democratic nominee opposes opening up domestic areas, such as the Arctic National Wildlife Refuge, to energy development, and wants to raise taxes on oil companies.

Economics 101 makes clear that this massive government intrusion into energy markets will not be pretty. If you think energy costs are high now, the Obama energy plan seems specifically designed to push them even higher.

But international trade perhaps shows just how far outside the economic mainstream Obama is. The last protectionist U.S. president was Herbert Hoover, and the Smoot-Hawley tariff bill he signed into law helped usher in the Great Depression. Ever since, while suffering occasional setbacks here and there, every White House resident has basically been a free trader - or at least not an overt protectionist. But if we take his record and campaign proclamations seriously, this would change with a President Obama.

Obama voted against the Dominican Republic-Central America Free Trade Agreement; he opposes trade deals pending with Colombia, Panama and South Korea; and wants to renegotiate the North American Free Trade Agreement.

Protectionist leanings in the White House would reduce global opportunities for U.S. businesses, restrain economic and income growth, and lead to higher prices and fewer choices for consumers.

Barack Obama talks a lot about "change." Americans seem ready for change. But change has to make economic sense. Obama's change does not.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. He can be reached at rkeating@sbecouncil.org.