Monday, November 03, 2008

About The U.S. Presidential Election

Tomorrow, as you all know, there will be a presidential (and congressional) election in the United States. Barack Obama looks most likely to win considering his consistent lead in the polls, but as polls aren't always completely reliable a victory for John McCain certainly can't be ruled out. What definitely can be ruled out however, is a win for any of the "third party" candidates: Bob Barr (Libertarian Party), Chuck Baldwin (Constitution Party), Ralph Nader(Independent, previously Green Party) and Cynthia McKinney (Green Party). For them it will be a success to reach just 1% of the vote.

I am not an American citizen and so I cannot vote in the election. But as many of my American readers have asked me what I think about Obama's and McCain's economic plans and since in the current globalized world economy, economic policy in the biggest economy, the United States, affects even those of us who aren't Americans, I will still provide an analysis of the economic plans of the candidates.

Even though none of the "third party" candidates have any chance of becoming president, I'll still briefly discuss them, as many Americans for understandable reasons cannot bring themselves to vote for either Obama or McCain. Nader and McKinney did oppose the Wall Street bailout on egalitarian grounds and they support reducing military spending. But being socialist environmentalists their economic plans can still simply be summarized as awful. Chuck Baldwin is good on monetary policy and advocates abolishing the Fed and of course also opposed the bailout. He also favors abolishing the income tax. He is however absolutely awful on trade policy, as this page on his campaign web site makes clear. Bob Barr seems to have the best policy overall, being similar to Baldwin except he doesn't advocate the kind of ultra-protectionist policies that Baldwin favor.

McCain's economic plan looks mostly good. He advocates significant corporate income- and capital gains tax rate cuts, as well as increase the deductibility of capital expenditure (which in effect amounts to a tax cut) and abolish the Alternative Minimum Tax. He wants a one year freeze on non-military, non-veterans spending and advocates various other spending cuts. Given that he has frequently criticized Bush and his fellow congressional Republicans for lack of spending restraint, it would seem that he has some credibility on this issue. However, it should be mentioned that the National Taxpayer's Union claims that he has also proposed various spending increases, and of course, if he starts a war somewhere (perhaps not likely, but certainly possible) then military spending will increase.

What also sounds good about McCain is that he advocates reduced trade barriers and allowing increased drilling for oil as well as allowing more clean coal and nuclear power, all of which will provide a much needed relief in the price of oil and energy. He also proposes lifting the tariffs on foreign ethanol. I do however dislike the widespread use of "tax credits" to benefit various "renewable" energy sources.

McCain's suggestion that the government should start directly take over mortgages from mortgage lenders is certainly a foolish idea and so a negative for him. But then again, that's what the U.S. government directly or through the Fed is actually already doing, so it wouldn't really represent a change for the worse.

Obama's plan
is far worse across the line. One thing that looks good is that capital gains taxes for new and small businesses will be eliminated. But even that might not be as good as it first looks since the restriction to new and small business seem to imply that they will be phased out with time and size of business, meaning that they could create negative incentives that prevent small businesses from growing and encourage existing businesses to be closed down.

Perverse or negative incentives are of course also a key problem with his highly touted "middle class tax cut for 95% of working families". As this tax cut comes in the form of a $1000 tax credit which is phased out with rising income, this tax cut will actually increase the marginal rate of taxation. And that is very bad for economic efficiency and growth. See more on this issue here. Another problem with this "tax cut" is that it goes to many people who don't pay any tax, making it a welfare scheme more than a tax cut.

And while he strangely doesn't mention it on his campaign web sites, he advocates significant increases in the top income tax rate as well as the taxation of capital gains and dividends, something which is also very bad.

He further argues for countless spending increases on health care, "renewable energy", job training, corporate subsidies and hand-outs to state and local governments and so on. The National Taxpayer's Union claims that these spending increases add up to $300 billion annually. While he has sometime promised to "end programmes that don't work", he has usually been vague about what that' supposed to mean. The few times he has mentioned anything specific, it has relied on the idea that cutting out private suppliers will save money, something which is not always but usually a fallacy, as Robert Murphy points out here. And while he has pledged to withdraw gradually from Iraq, those savings will go to other military spending projects. In short, we would see a massive expansion of spending under Obama, even if you disregard the welfare hand-out character of many of his "tax cuts".

On trade, he refrains from the kind of explicit protectionism that Chuck Baldwin pushes. But the protectionist message is very clear as he advocates forcing poorer countries to adopt "stricter labor and environmentalist standards". Also, he says he wants to end "tax breaks to companies that shift jobs overseas". In preparing this post, I tried to find out what that means. Has Congress passed a "Tax breaks for companies that shift jobs overseas Act"? No, of course not. I am still not completely sure as to what, if any, tax code this refers to, but I think he means the provisions in the U.S. corporate tax code that is designed to prevent double taxation of profits by foreign subsidiaries of U.S. multinational companies. This kind of practice exist almost everywhere as it otherwise would put a country's multinational companies at a great disadvantage, having to first pay corporate tax in the country it operates in, and then in the country where it is headquartered. This practice means first of all that foreign profits aren't taxed until it is repatriated to the country where the company is headquartered and secondly that a company can deduct taxes it has paid offshore so as to avoid double taxation. If that is what he means by "tax breaks that shift jobs overseas", then doing away with that would greatly damage American multinational corporations, and so also lower stock prices. This together with a proposed "tax credits" for companies that increase domestic operations relative to foreign might perhaps increase the willingness of American companies to move foreign production to America, but the main effect would be to simply damage the competitiveness of these companies as they are forced to choose production alternatives which are less competitive. And as they in effect amount to tariffs on products produced outside America by American companies, they will damage the global economy as a whole and the rest of the world.

Furthermore, on labor issues, Obama wants to pass various laws to raise minimum wages and strengthen unions, which will raise unemployment. On energy issues, he and Joe Biden opposes increased oil drilling, coal production and nuclear power and instead favor massive government subsidies into "renewable energy sources". He also endorses the extreme environmentalist goal of reducing carbon dioxide emissions by 80% by 2050 through the use of government controls.

In short, while McCain's plan is far from perfect, it is significantly better than Obama's.

Another thing that has to be taken into consideration is the fact that the president is after all not all powerful. The president's power is checked by that of the Congress. And congress is likely to see a significantly enlarged Democratic majority. What does that mean for the relative attractiveness of McCain versus Obama.

Well, that means that if McCain is elected, he will, being a Republican, find it very difficult to enact his policies. And that applies both for his good policies and his bad policies. Similarly, with McCain as president, most of the ideas of the Democratic congressional majority will be blocked. This means that if McCain is elected, we won't see much change in U.S. governmental policies.

If Obama is elected on the other hand, then we will indeed as Obama keeps saying, see change. The problem is that it won't be positive change, it will be negative change. With the U.S. in a deep cyclical downturn and with both the White House and Congress controlled by the Democrats, we are likely to see a massive expansion of government power. America will likely see a negative transformation in statist direction, perhaps similar in significance to the transformation we saw after Franklin D. Roosevelt was elected. The Obama policies of higher marginal tax rates across the board, higher government spending, increased regulation and protectionism will seriously damage a already weak U.S. economy, something which will of course also hurt the rest of the world economy.

The above mentioned facts are of course something which my American readers should take into account before voting.

10 Comments:

Blogger E. Floyd said...

Thanks for your thoughtful opinion about the US presidential election. I agree that the gov't will expand similar to what was seen under FDR if Obama wins. And that this will have a negative impact on the US economy.

11:42 PM  
Anonymous InfoWarrior said...

Outstanding analysis. The fact that you know more about American politics than most Americans is shameful for America, and perhaps the real reason why America is sinking and bringing the rest of the world with it.

i voted early and voted baldwin, as his anti-fed policies are a sure fire way to get my vote. baldwin is also endorsed by US congressman and former presidential candidate ron paul, who is the true dream candidate for austrian economists everywhere (paul is a gold standard guy and mises disciple, a regular contributor to lewrockwell.com as you probably know).

while i find both obama and mccain to be absolutely horrifying, i tend to think of obama as the lesser of two evils. this is simply because i think the war agenda will advance faster and stronger under mccain than under obama (though i expect it to advance under both). anyway, while the candidates seem to be suggesting otherwise, i think deficit spending will increase under both puppets, and i expect this to prove to be inflationary, adding to all the inflation that US govt policies thus far will prove to be.

but excellent analysis, thank you for sharing.

12:28 AM  
Anonymous holgs said...

The Obama policies of higher marginal tax rates across the board, higher government spending, increased regulation and protectionism will seriously damage a already weak U.S. economy, something which will of course also hurt the rest of the world economy.

On the other hand, isn't it the lack of regulation and lack of protectionism (jobs being shipped overseas) that is the core problem? Are you blaming that on Obama as well?

Higher government spending... Is that possible, compared with Bush? Have you even looked at the graphs of government spending under the "conservative" Republicans, or are you just quoting talking points?

1:22 PM  
Blogger stefankarlsson said...

Holgs: no, lack of regulation and trade barriers is not the core problem. It is not a problem at all.

Increased trade barriers and regulations will aggravate the problem, just like it did when that solution was tried in the 1930s.

As for government spending, while it is true that it has increased under unified Republican rule (though not as much as you seem to suggest), that doesn't mean it will increase as much during McCain, especially since he will face a Democratic congress who will oppose him for partisan reasons. By contrast Obama will lead a unified Democratic government.

And yes, spending can increase faster. Government spending increased fast under Herbert Hoover, but increased even more under Franklin Roosevelt.

6:01 PM  
Anonymous holgs said...

Increased trade barriers and regulations will aggravate the problem, just like it did when that solution was tried in the 1930s.

I agree that trade barriers can only make things worse, however, I haven't heard much from either candidate supporting their stance FOR trade barriers, and I would really like it if you could point to evidence of:
1.) Obama declaring that he would enact trade barriers.
2.) Recent democrats being in favour of trade barriers.

Clinton was recent, and I don't remember him being a protectionist.

If you can't provide any evidence, then you are, in my opinion, just quoting talking points.

And yes, spending can increase faster. Government spending increased fast under Herbert Hoover, but increased even more under Franklin Roosevelt.

Recent president? The US gov't just bailed out their buddies in finance with 700 billion, and the national debt has doubled in the last years under Bush. Or does that not count?

Again, talking points...

7:35 AM  
Blogger stefankarlsson said...

Holgs: with regard to trade I provided links to the Obama and McCain campaign web sites that showed that Obama wants increased trade barriers and McCain wants less. That's about as conclusive evidence as you could get. What more could you ask for?

As for the bailout spending, it is true that McCain was for it, but so was Obama. And a bigger majority of House Democrats supported it compared to House Republicans.

8:49 AM  
Anonymous holgs said...

Holgs: with regard to trade I provided links to the Obama and McCain campaign web sites that showed that Obama wants increased trade barriers and McCain wants less. That's about as conclusive evidence as you could get. What more could you ask for?

I actually agree with Obama's position that he will repeal tax breaks for corporations that ship jobs overseas and/or have tax shelters overseas. I don't think the US gov't, or any other gov't for that matter, should subsidize such practices, although they should remain legal.

As for the bailout spending, it is true that McCain was for it, but so was Obama. And a bigger majority of House Democrats supported it compared to House Republicans. You have a point there. But then again, McCain is associated directly with the S&L crisis (Keating 5) and has Phil Gramm as an advisor, whereas Obama has Volcker and you can't deny that he seems to be much more open about listening to differing opinions than Bush and McSame... Sorry, McCain. Eller Hur?

10:20 PM  
Anonymous holgs said...

About the bailout... I agree with you that it was a crock of sh*t, but you gotta admit that if either of those two had failed to sign off on it, they probably would have lost the election. At least Obama didn't "suspend his campaign to focus on the crisis..."

I think there's a lot of unjustified fear mongering going on about the Obama, especially amongst right-leaning indoctrinated "economists". Historically, democratic presidents have been better for the stock markets and economy in general, but they are still characterized as big spenders when they have been far outspent by most republican governments. Look at the numbers, they speak for themselves! (Ask the googles for proof)

Of course Obama can't deliver everything that he's promised... that's impossible... but I'm taking a wait and see attitude... At least it seems the guy is smart enough to realize that he needs to ask for outside opinions...

Hey, did you read who just got appointed to the Fed? Nope, no clowns in office these days!

http://www.clusterstock.com/2008/11/fed-hires-bear-stearns-risk-boss

10:30 PM  
Anonymous Ultra Clean Coal said...

On energy issues, he and Joe Biden opposes increased oil drilling, coal production and nuclear power...thanks to you providing great article.

12:01 PM  
Anonymous Ultra Clean Coal said...

There are more opponents for clean coal technology and McCain is that he advocates reduced trade barriers and allowing increased drilling for oil as well as allowing more clean coal and nuclear power...

12:06 PM  

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