By James Pethokoukis
December 20, 2011, 7:46 pm
The longer the Great Stagnation/Long Recession/New Normal
continues, the greater the risk that some profoundly terrible
ideas—spawned by economic desperation and political opportunism—will pop
up, gain a foothold, and start to spread. Indeed, the past twelve
months are evidence that the risk of a devastating policy error by
Washington is escalating.
Here are the worst economic ideas of 2011, in reverse order:
5. The “People’s Budget” from House Democrats. This
proposal from congressional “progressives” claims to balance the budget
by 2021. It does this by … wait for it … imposing massive tax hikes (on
income, corporate profits, and investments) and by cutting defense
spending by $2.3 trillion over a decade—and then shifting most of those
savings into government “investments” that would supposedly supercharge
the economy.
Please. Macroeconomic Advisers, one of the White House’s
favorite economics consultants, examined the plan and even they
concluded the following: “We find this estimated impact on long-term
growth to be implausibly high. … Nor does it even mention the potential
deleterious supply-side effects of raising marginal tax rates.” In other
words, the Dems assume all those tax hikes don’t hurt growth a smidgen.
Plus, the plan does nothing about the real debt drivers—entitlements.
4. The Brandeis inequality tax. Two liberal law professors cooked up this one (which
they named after jurist and progressive hero Louis Brandeis): Legally
cap income inequality. Here’s how it would work: “… we propose an
automatic extra tax on the income of the top 1 percent of earners—a tax
that would limit the after-tax incomes of this club to 36 times the
median household income.”
Please. Forget, for a moment, the tax-planning mess this
would create. And forget that Yale’s Ian Ayres and Berkeley’s Aaron
Smith would explicitly enshrine an ideology of class envy and wealth
distribution into the U.S. tax code. What problem would they be solving,
exactly? To the extent income inequality has risen—and
it is much less than wealth inequality, a better measure—you should
“blame” technology (for increasing rewards to education), globalization
(for creating a worldwide market for CEOs, athletes, and rock stars),
teachers unions (for dragging down the once world-class U.S. education
system), Hollywood (for contributing to harmful cultural pathologies),
and Big Government (for backstopping favored industries such as Wall
Street). Which of those does the Brandeis tax begin to fix? None.
3. Doubling U.S. income tax rates. It’s now the
liberal economic consensus that tax rates need to be returned to where
they were before the Reagan tax cuts—and possibly before the JFK tax
cuts, as well. As one liberal economist told the New York Times,
“The inequality problem is not going away and won’t until drastic
policy changes are made (as happened during the New Deal).” The
economist, Emmanuel Saez, has published research arguing the
top U.S. income tax rate should more than double to 80 percent. Saez
has also done research with Peter Diamond, a failed Obama nominee to the
Federal Reserve, that suggests the top income tax rate should go at
least to 70 percent. Other advocates include influential liberal
economists Paul Krugman and Brad DeLong.
Please. We are in an extended period of economic stagnation,
and these guys want to return tax rates—punishing wealth and job
creators in the process—to the level they were at during the last
extended period of economic stagnation, the 1970s? The only thing such a
policy blunder would create would be a hiring boom for tax attorneys.
Oh, and even more economic misery for America. Instead, the United
States needs to be lowering rates and removing economic distortions to
boost growth. Doing that might improve annual U.S. GDP growth half a percentage point or more.
2. The Osawatomie Speech (President Obama’s call to reject the past 30 years of economic policy). During his recent speech in Osawatomie, Kansas, Obama repeatedly pointed out
how the U.S. economy had gone off track over the “last few decades.” In
other words, America’s 30-year economic experiment in enhanced economic
freedom—lower tax rates, less regulation, freer trade—has been a
failure. Indeed, Obama says that although the “theory fits well on a
bumper sticker … it has never worked.”
Please. (First a fact check: The U.S. economy grew at an
average pace of 3.3 percent from 1983-2007, inflation—the scourge of the
1970s—was defeated, and the stock market rose by 1,400 percent. Median
middle-class incomes rose by roughly 50 percent.) What policies would
Obama prefer? Well, the liberal economic consensus wants a) higher
taxes, b) more income equality, c) more inflation to reduce debt, and d)
higher energy prices to reduce dependence on fossil fuels. Clearly,
Obama wants to return to some Golden Age that had all those
attributes—high taxes, high inflation, high energy prices and high
income equality. Again, hello 1970s.
1. The Occupy movement. An obsession over income
inequality runs through this entire list. And Occupy Wherever—so praised
and embraced by Elizabeth Warren, Obama, and the MSM—is a big reason
why. But what would the rabble—a mix of communists, union pros, the
mentally deranged, and a few truly heartbreaking stories—have us do?
Time travel so as to prevent the microchip revolution and reinstate
command-and-control economies in Asia? Sadly—and tellingly—the
protesters haven’t uttered a peep about teachers unions or Hollywood.
Just the banks.
Please. What we should be focusing on is a) the level of
income mobility in society, and b) the absolute income gains of the
broad middle. Income inequality zoomed in the late 1990s but since
incomes were rising broadly, no one much cared if the rich got richer
even faster. Everybody was winning. There was no Occupy Silicon Valley
back then, despite the fantastic northern California weather.
Occupy and its fellow travelers have no apparent interest in
advocating policies that would boost innovation and growth and incomes.
But I do. So here are 12 ideas for 2012, some of which I gleaned from
two of this year’s best economic policy books, Race Against the Machines and Launching the Innovation Renaissance:
1. Pay teachers more but get rid of tenure so the bottom five percent of teachers can be replaced by even average ones.
2. Encourage more high-skilled immigration.
3. Reduce regulatory barriers to new business creation.
4. Replace payroll taxes with more economically efficient ones.
5. Phase out and eliminate pricey and market-distorting subsidies like the mortgage interest deduction.
6. End Too Big To Fail.
7. Eliminate the tax code’s bias against investment.
8. Move toward market-friendly entitlement reform like Wyden-Ryan.
9. Create a patent system with the length of legal protection depending on the cost of innovation and imitation.
10. Establish more innovation prizes.
11. Have fewer kids in college getting liberal arts degrees, more in business-run worker training programs.
12. More investment in basic research, not in crony-capitalist, industrial policy schemes like Solyndra.
These would be great policies for Washington to implement in 2012. Please!
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