Boskin And Obama's Radicalism

Michael Boskin, a professor at Stanford and a chair of the Council of Economic Advisers under President Bush (41) describes the Obama administration's initial efforts as radical and claims that investors do not like it. Boskin is very good economist (vita) with expertise in taxes, budgets macroeconomic policy and is not an ideologue, a charge to often made by anyone who opposes the sitting president's policies.

During his confirmation hearings as chair of the Council of Economic Advisors, he correctly lowered the forecast growth rate of the economy produced by the Reagan Administration (Kilborn, Peter T. "Top Bush Economist Sees Growth As Slower Than Reagan Projected," New York Times, January 27, 1989). He, along with Richard Darman, advised Bush to break his "no new tax" pledge to close the budget deficit (Pious, Richard M. "Why Presidents Fail: White House Decision Making from Eisenhower to Bush II," Rowman & Littlefield, 2008). He still believes that raising taxes benefited the economy and was a factor in economic growth during the Clinton administration (Wash, Kenneth T. "Reflecting on George H. W. Bush's Legacy," U.S. News & World Report, February 23, 2009). His opinions merit thoughtful consideration.

Like Bittlingmayer and Hazlett, he believes at least part of the sell-off on Wall Street is caused by the shocked reaction to the "radical" change proposed by the Obama administration.

The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.

On taxes, Boskin writes,

Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets...

Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.

New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.

On subsidies and mandates to remake the economy in energy and health he writes,

The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.

He concludes,

On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.