What Professor Obama Doesn't Understand

What Professor Obama Doesn't Understand
By Peter Ferrara on 4.27.11 @ 6:08AM

President Obama's self-congratulatory "economic recovery" is way too little, way too late. By historical standards for the American economy, we should be in the second year now of a booming economic recovery. Instead the economy is still struggling to get off the ground, and what is booming instead is prices and inflation.

If you listen to what President Obama is saying in his reelection campaign, which is already underway in his town hall tour across America, the reason for this is clear. President Obama does not understand the basics of economics. What he says repeatedly is that increased government spending is the foundation of economic recovery and growth. But the economic reality is that incentives for increased production are the foundation for recovery and booming growth.

As a result, what we are witnessing is a historical reenactment of the 1970s, if not the 1930s, with the same throwback economic policies that caused the dismal economic downward spiral of those years. But this is not all that President Obama doesn't understand. He also doesn't understand the budget, taxes, business, the energy and oil markets, and even health care.

Consequently, the American people will continue to suffer high unemployment, rising inflation, soaring gas prices, falling real wages and incomes, record poverty, and ultimately worse. That is until this tragically unqualified President who has spent his entire life cloistered in the fever swamps of the far left is replaced by new leadership that will restore the American Dream.

Facebook Fallacies

On April 20, President Obama took his reelection campaign to a town hall at the corporate headquarters of Facebook in Palo Alto. Facebook founder Mark Zuckerberg began with a question on the budget, asking "what specifically do you think we can cut…?"

Obama responded by saying first let me explain why the problem is Bush's fault. (Get the transcript if you don't believe me.) This from the President whose own 2012 budget projects that after just one term of office he will have run up more national debt in four years than all prior Presidents combined, from George Washington to George Bush. A President who in that same budget proposed a fourth straight budget deficit of over a trillion dollars, including a record deficit for this year of $1,645 billion, when the highest previously in American history was $458 billion.

If President Obama didn't want those deficits, he could have proposed spending cuts 2 years ago. Instead he enacted an utterly failed, trillion dollar, government spending stimulus package. And despite his misdirection rhetoric, he continues to oppose any serious spending cuts to this day. The real cause of the record deficits and debt is that President Obama increased federal spending by 28% in his first two years alone. And in his 2012 budget he proposed to increase federal spending by another 57% by 2021.

Professor Obama told the Facebook audience that the deficits arose because "we had a massive tax cut that wasn't offset by cuts in spending." But from 2001 when the first round of the Bush tax cuts were adopted until 2007, federal revenues increased by almost 30%. From 2003 when the Bush tax cuts were completed until 2007, federal revenues soared by 44%.

Obama's excuse for his runaway spending is that it was necessary to counter the recession. So he is both blaming Bush for the deficits and taking credit for them in promoting recovery. At the Facebook town hall, Obama further advanced his theory that government spending is the foundation for economic growth and recovery, saying, "If all we're doing is spending cuts and we're not discriminating about it, if we're using a machete rather than a scalpel and we're cutting things that create jobs, then the deficit could actually get worse because we could slip back into a recession."

But it is obvious to everyone but Obama and his hypnotized true believers, party apologists, and bought and paid for special interests that his government spending has failed to produce a timely and robust recovery. That is because President Obama's Keynesian theory that increased government spending and deficits promote economic recovery and growth was proven fully and finally wrong to everyone who was awake over 30 years ago.

President Obama persisted at the Facebook town hall, however, explaining that his spending spree will promote recovery and growth because then "we can still…invest in high speed rail" and, "We can still invest in something called ARPA-E, which is like DARPA except just focused on energy, so that we can figure out what are the next breakthrough technologies that can help to reduce our reliance on fossil fuels."

Spoken like a true central planning neo-socialist, for it is not the government's role, nor does the government even have the capability, to figure out what the next breakthrough technology is to reduce our reliance on fossil fuels. America has always enjoyed the world's highest standard of living precisely because we leave decisions like that to the competitive marketplace, not government bureaucrats. And no we are not going to create a booming recovery by wasting still more tens of billions of taxpayer funds on "high speed rail," which is a souped-up version of the mass transit boondoggles that have long proven so adept at wasting taxpayer funds without advancing any economic growth.

President Obama then thoroughly mischaracterized the differences between him and House Budget Committee Chairman Paul Ryan over the budget and taxes. Obama told the Facebook audience, "So what his budget proposal does is not only hold income tax flat, he actually wants to further reduce taxes for the wealthy, further reduce taxes for corporations, not pay for those, and in order to make the numbers work, cut 70 percent of our clean energy budget, cut 25 percent out of our education budget, cut transportation budgets by a third."

There he goes again with his idea that increased government spending on "clean energy" would enhance economic growth. But saddling the economy with high cost, unreliable energy, and burdening it with an entire energy industry that can survive only on corporate welfare, is only going to tank the economy rather than promote recovery and growth.

Moreover, exactly contrary to this misconceived rhetoric, Ryan's budget would only return federal taxes to their long run, postwar, historical level relative to the economy over the past 60 years at 18% of GDP. What President Obama is proposing is to increase the level of federal taxes well beyond that to new record levels, as I explained last week.

Then, indicating that he doesn't even understand his own tax proposals, President Obama told the Facebook audience, "Keep in mind, what we're talking about is going back to the rates that existed when Bill Clinton was President." Counting the end of the Bush tax cuts, Obama's proposed phaseout of deductions, the new Obamacare tax on investment, and Obamacare's increased Medicare payroll tax, the new top federal tax rate would be nearly 45%. State income taxes would put that over 50% in most states.

In his recent national budget speech, President Obama proposed adding another trillion dollars in increased taxes on the nation's job creators, investors and small businesses. Then he proposed an automatic tax increase trigger that would raise taxes still further in 2014 if "our debt is not projected to fall as a share of the economy." In his Virginia town hall on April 19, he raised the possibility of increasing the maximum taxable income for the Social Security payroll tax. All of these tax increases would leave the Clinton era tax rates in the dust.

A Tale of Two Budget Deals

Since President Obama doesn't understand economic growth or taxes, he fundamentally misconceives sound budget policy as well. Restoring robust economic growth is the essential foundation for balancing the budget. As revenues boom along with the economy, government spending reductions would eliminate the deficit relatively rapidly within a few short years. Trying to chase consistently lower than expected revenues because of a weak economy would lead to a vicious circle -- America's downward spiral of deficits, debt, and stagnation.

The foundation for that economic growth is not increased government spending, but incentives for increased production. Those incentives arise from lower tax rates, which enable producers to keep a higher percentage of what they produce, promoting still further production. Reducing unnecessary regulatory costs and barriers further promotes incentives to produce by increasing the net reward for production.

This is why Paul Ryan's reduced tax rates for both individuals and businesses promote a balanced budget, and lead ultimately to paying off the national debt entirely. In contrast, President Obama record increases in federal tax rates for virtually every major federal tax would have the opposite effect, on the economy and on the budget.

The contrast between the Ryan and Obama budgets is shown by the experience of the two budget deals of the 1990s. In 1990, then President Bush broke his famous "read my lips, no new taxes" pledge that won him the 1988 election, for a budget deal that supposedly reduced spending by $3 for every dollar of tax increases. But by 1992 the deficit, which had stabilized at around $150 billion in the late 1980s, almost doubled to $290 billion because the tax increases pushed the country into a brief recession. President Bush was booted out of office in the 1992 elections as a result.

This is exactly what President Obama is calling for today, only with much, much higher tax rates -- an increase of $1 trillion in taxes and more on top of the already scheduled tax increases from terminating the Bush tax cuts, Obamacare, and his proposed 2012 budget tax increases.

But the 1995/1996 budget fight between the Gingrich-led Republicans and President Clinton resulted in a budget balanced much like Ryan has proposed, with all spending cuts and tax cuts to promote the economy. The booming growth as a result cut the 1995 deficit of $164 billion to $22 billion by 1997, followed by 4 consecutive years of surpluses totaling $560 billion. That was the biggest reduction in the national debt in world history.

Confusing the Faithful

But President Obama's double talk was confusing even the faithful at the Facebook town hall. A very respectful, even worshipful Lauren Hale rose to ask the President:

"At the beginning of your term you spent a lot of time talking about job creation and the road to economic recovery, and one of the ways to do that would be substantially increasing federal investments in various areas as a way to fill the void left from consumer spending. Since then, we've seen the conversation shift from that of job creation and economic recovery to that of spending cuts and the deficit. So I would love to know your thoughts on how you're going to balance the two going forward, or even potentially shift the conversation back."

Now here is a student who has been paying careful attention to the Professor President. She has even adopted his language perversion of calling government spending investment. She thinks she has learned from the President's prior lectures that government spending is what promotes economic growth and jobs. But now she is confused, for if that's the case then why is he talking now about spending cuts and the deficit?

Her problem is Aristotelian logic. Under the new Marxian dialectic, you can both increase government spending to create jobs, until they show up some day, and cut government spending to close the deficit, if polls show that is what you need to do.

Peter Ferrara is Director of Policy for the Carleson Center for Public Policy and a Senior Fellow for the Heartland Institute. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under the first President Bush. He is the author of America's Ticking Bankruptcy Bomb: How the Looming Debt Crisis Threatens the American Dream, and How to Turn the Tide Before It Is Too Late, forthcoming from HarperCollins.