The Democratic nominee for president has finally offered the details of his campaign theme—that he will radically change America if elected—by posting on his website “The Blueprint for Change: Barack Obama’s Plan for America.” Senator Obama’s call for “change” has mesmerized America’s youth and raised unprecedented grassroots donations. Every American longing for real change that will address the serious problems our republic faces should look carefully at his plan.
The most evident goal of the Obama Plan is a bold expansion of the welfare state, driven by comprehensive national healthcare, untouchable Social Security, and measures to reduce poverty. The universal healthcare component “will provide affordable quality healthcare coverage for every American.” Obama’s healthcare policies will be comparable in cost and coverage to those of government employees, and subsidies will enable those not eligible for Medicaid or State Children’s Health Insurance (SCHIP) to afford income-adjusted premiums, while the costs of consistent quality policies will be reduced $2,500 per year by “health information technology.” Why should we believe that a socialist program that aims at equality of price and provision will resolve the healthcare dilemma? What will keep it from becoming a rationed healthcare system like those of Canada and Europe, which are highly inefficient and burdensome on taxpayers? How would Obama’s plan compare with alternative plans based on responsible consumers and competitive providers, such as universal (even public-assisted, if necessary) health savings accounts (HSAs) that are backed by high-deductible health plans (HDHPs), with government as the reinsurer of last resort? Or policies that offer a range of premiums that reward healthy lifestyles and seek to curtail obesity, indolence, and stimulant abuse? Or legislation that offers equal tax treatment to both individual and group policies? Or regulations that require local competitive markets to publish the prices of pharmaceuticals, diagnostics, and medical treatments, and limit price variations based on cost?
Under the Obama Plan, Social Security retirement benefits for indigent seniors would pile additional burdens on a shrinking workforce and increase both the number of retirees and the longevity of retirement. This, in turn, would reduce the overall number of marriages and lower birthrates for workers. Fear not, because
Obama will protect Social Security benefits for current and future beneficiaries alike. And he does not believe it is necessary or fair to hard working seniors to raise the retirement age. Obama is strongly opposed to privatizing Social Security.
Obama believes that the first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker makes. Obama supports increasing the maximum amount of earnings covered by Social Security . . .
Social Security payroll taxes were first collected in 1937 at a combined worker and employer tax rate of two percent. Monthly retirement benefits, which were first paid in 1940, began at age 65, which was near the life expectancy. Today, life expectancy at birth in the United States is 78 years; the full retirement age for Social Security is now 66 (67 in 2027); and FICA rates total 15.3 percent on the first $102,000 of earned income (up 4.6 percent from the 2007 cutoff of $97,500). The Medicare portion of this tax (1.45 percent) applies to unlimited earned income. If Obama means what he says about protecting Social Security benefits, then Social Security rates will also have to be applied to unlimited earned income (something Obama is, in fact, considering). This alone demonstrates that Social Security has become a welfare Ponzi scheme rather than a stable trust fund containing workers’ pensions. Why would any responsible worker not prefer his own personal retirement account over a political farce that is repeatedly on the brink of insolvency?
As if expanded healthcare and Social Security spending would not be enough of a burden for taxpayers, a wish list of additional giveaways and subsidies intended for poor and middle-income Americans is seeded throughout the Obama Plan. Those below the poverty level would be offered “green jobs” (a modern Works Project Administration?) and an expanded Earned Income Tax Credit, which already allows for income-tax refunds that exceed taxes paid—including FICA taxes. Other subsidies include a thousand-dollar tax reduction for middle-income taxpayers; $500 home-mortgage credits; rural pork, including nationwide broadband internet access; illegal-immigration amnesty (a welfare black hole); a $4,000 per year American Opportunity Tax Credit for college students who log 100 hours of public service; and “investments” in low-cost housing and community not-for-profit agencies.
While the Obama Plan opens with proposals to “change Washington” by putting an end to self-serving lobbying, secrecy, and wasteful spending, his proposals would result in incredible additional spending for welfare transfers, which ultimately benefit self-serving politicians. The Great Society of the 1960’s proved that the handouts and subsidies of the welfare state lead only to stagnation. As a consequence, we are witnessing the relentless growth of welfare transfers of income; according to President Bush’s 2009 budget, such transfers amount to $2 trillion out of the $3.1 trillion to be spent by the federal government.
In his plan, Obama tells us, “I don’t want to send another generation of American children to failing schools.” To change the situation, he would “recruit, prepare, retain and reward teachers.” To accomplish these goals, he would spend more taxpayer dollars (Teacher Service Scholarships, federally funded mentoring programs, and residency programs). Obama’s plan also “makes math and science a national priority” by recruiting the necessary talents, but it makes no mention of implementing competitive pay according to the teacher’s performance in the classroom, rather than seniority. It calls for us to “address the dropout crisis,” but it does not mention that in low-income neighborhoods crime and drugs often prevent schools from functioning properly, while work-study and technical tracks are needed for those who are not headed for college. Obama wants to “support English Language Learners” by employing ineffective “transitional bilingual” instruction. Finally, teachers’ unions often stand in the way of more accurate assessments of teacher performance, appropriate compensation, and student discipline. The Obama Plan does not address any of this. Admittedly, his proposals for early-child, afternoon, and summer supplementary education are worth addressing, given the number of families with two parents working. Nowhere does the plan admit that increases in spending do not automatically translate into increases in performance. In fact, the American Opportunity Tax Credit, which would provide $4,000 toward each student’s college education, would result in tuition inflation. What we really need is government-mandated transparency; standard expense reports should reveal each school’s overhead and the number of paid personnel per student, allowing trustees to identify the necessary reforms.
The economy in general, and energy in particular, get substantial attention in the Obama Plan. He proposes to double the federal investment in the research and development of “green technology,” clean energy, biofuels, and more fuel-efficient motor vehicles. But nowhere does the plan address the possibility of opening coastal, Rocky Mountain, and Alaskan reserves during the transition to renewable sources of energy, in order to stop the runaway cost of foreign fuels. Obama proposes to strengthen labor unions by promoting the “Freedom to Unionize” and promises to “Protect Striking Workers.” Any businessman who has dealt with unions knows that they already have more than enough power.
Contrary to the theorems of supply-siders, his proposal to increase the minimum wage and index it thereafter to rise with inflation is necessary to increase incentives for employment. A “living wage” of ten dollars per hour for full-time workers would be an effective incentive to work instead of relying on welfare. On the other hand, Obama’s concern for boosting middle-class incomes is at odds with his proposed amnesty for illegal immigrants. Those illegal aliens who stand to benefit from such an amnesty, and who have been a major cause of depressed wages and salaries, will bring yet another invasion of relatives to depress incomes further. Obama’s “Fight for Fair Trade” represents an area that has been neglected by Washington, allowing for the depression of both white- and blue-collar workers’ incomes. But the Obama Plan fails to address why the United States can no longer compete in world trade, the chief reason incomes are falling.
The plan hardly scratches the surface of the meltdown of Wall Street and the financial markets; Obama’s proposals only address the subprime mortgage crisis, loan disclosure, and credit-card practices. The United States has not yet paid off the federal debts incurred in the late 80’s and early 90’s from the meltdown of the savings and loans that spread to the commercial banks. Washington failed to learn any lessons from this disaster. Instead, at the urging of the Wall Street barons, Congress repealed the Glass-Steagall Act of 1933 and replaced it with the Omnibus Financial Institution Reform Acts of 1999, which removed from the Federal Reserve Bank the power to keep commercial banks, investment underwriters, and insurance companies separate and did not make the Fed responsible for regulating the risks, transparency, and solvency of the worldwide financial conglomerates that emerged as a result of this legislation. Thus, investment bankers, with their hedge funds, and banks, with their “SIVs” (structured investment vehicles), have collaborated in highly leveraged buyouts and collateralized debt obligations that have taken excessive risks. Supposedly, these risks would be offset by “derivatives,” but they failed to prevent yet another meltdown. The restoration of the Glass-Steagall Act, and appropriate regulation of financial institutions, are of paramount importance.
That Obama’s plan devotes only two out of sixty-five pages to “Restoring Fiscal Discipline” is significant. To accomplish this, “Obama will reinstate pay-as-you-go (PAYGO) budget rules, so that new spending or tax cuts are paid for by spending cuts or new revenue elsewhere.” The federal deficit is over $300 billion and rising, and that, of course, does not take into account the huge spending increases required by the Obama Plan. He proposes (without being specific) to cut “pork barrel spending” while calling for a smorgasbord of welfare giveaways, presumably to be paid for with his repeal of the Bush tax cuts for the wealthy. On August 14, the Obama Tax Plan was profiled in the Wall Street Journal by its authors, Jason Furman and Austan Goolsbee, who claim that it contains tax cuts for “ninety-five percent of workers and their families” (though only sixty percent of Americans pay income taxes). The tax plan as a whole is a net tax cut, reducing revenues to 18 percent of GDP. Current revenues are at 21 percent of GDP. Even if federal spending remained at present levels under a President Obama, his proposed tax cut would increase the deficit to $400 billion. (So much for PAYGO.) Obama would raise the maximum personal income tax to 39.6 percent (as under Clinton), and taxes on capital gains and dividends would be increased to 20 percent (as under Clinton) for families making over $250,000 per year. The individual taxpayer would add that 20 percent to a 35-percent corporate-income tax, forcing him to pay half of his return on an investment to the government.
Many of the issues identified in the Obama Plan, particularly involving fiscal affairs, are left unanswered. Problems associated with foreign trade and the movement overseas of the manufacturing sector are barely mentioned, with no emphasis on solving them. Yet the trade deficit has accumulated a three-trillion dollar debt over the past four years alone. This deficit has been mirrored by decreased saving for investment, which has required massive borrowing abroad. Since chronic trade deficits began in the manufacturing sector in 1982, manufacturing has decreased to less than half of its previous share of GDP, and manufacturing jobs have declined by half as well. The inability of U.S. manufacturers to compete lies not in a lack of innovation or productivity: In these, the United States still leads the world. It is because of the value-added taxes (VATs) adopted by all our competitors, ranging from 15 to 25 percent ad valorem. VATs are rebated to foreign producers when they export their products, and no comparable tax is applied to those products when they are imported to the United States. These VATs are levied on U.S. exports to foreign markets, but our government offers no offsetting rebates on those exports. The result is a 15- to 25-percent price disadvantage in domestic and foreign markets on goods and services. At the same time, our competitors are gradually reducing corporate-income taxes and allowing capital expenditures to be tax expensed immediately.
The United States desperately needs tax reform that includes a competitive border-adjusted VAT to replace corporate-income taxes. Devaluing the dollar has not worked, because it inflates commodities and other costs and offers U.S. real estate, factories, and securities for sale at bargain-basement prices. Devaluation will reduce Americans to serfs under foreign landlords. The very process of devaluing the dollar through low interest rates that do not even offset inflation and devaluation results in inadequate savings to restore and update the manufacturing sector, as well as to supplement retirement income for the prudent. If we are serious about regenerating a prosperous and growing middle class and shrinking the ranks of the poor, then we need both reduced federal government spending and tax reform.
The Obama Plan is not a blueprint for the kind of change that America needs. It is radical in its pursuit of a leftist social agenda that would transfer income from the most productive to a large enough portion of the electorate to buy the office of the presidency. But the perverse incentives and effects of such a plan have already been clearly demonstrated by the failed New Deal, which drove recession to depression, and the Great Society, which caused stagflation and aided in the demise of families. What Americans need is a leader who is radical enough to get to the very root of our dilemmas, visualize the necessary solutions, and effect real and lasting change.