The President’s Pickle is Purely Political

I subscribe to the view that President Obama is in a true economic pickle, one in which out-of-control deficits are simply unsustainable, and will require forceful action. The economic pickle lies in how he addresses the deficits: Cut spending, and guarantee that you will receive the wrath of anyone and everyone affected by a cut in their precious social entitlement, OR, raise taxes, and risk the mother of all double-dip recessions. The economy has had a couple years to absorb the fact that President Bush’s historical reduction of marginal income tax rates, as well as dividend and capital gain tax rates, will be allowed to sunset at the end of 2010. What has not been priced in, though, is the idea of an additional super-tax on the top income bracket. And that is what I fear could very well happen.

None of this is happening because of an economic pickle, though. This is as purely political as anything we will see in our lifetimes. The top income bracket in our country make up barely 1% of the voting populace. The perception amongst the pop culture is that this tax bracket is primarily celebrities, hedge fund managers, and greedy oil tycoons. They are incredibly vulnerable to political wrath. The reality is that well over 75% of taxpayers who fall into the top marginal bracket are self-employed business owners, responsible for the hiring and firing of millions of people in American work life. A burdensome excess tax on the rich takes money from one group of efficient people (savers, investors, innovators, entrepreneurs, risk-takers, etc.) and gives it to another set of people (via an intermediary known as the federal government). Redistributionism is a lot of things, but it surely is not wealth-creating. Redistributionism is politically popular, and the collateral damage it unleashes can often be blamed on other factors. Political pressure tells the current administration to solve the deficit by raising taxes on the rich, but the other side of that is the tremendous hiccup that such a move would represent to economic recovery. Higher income taxes means higher unemployment, and frankly, the possibility of much lower tax revenue (as rich people do what rich people do best – figure out ways to pay less taxes).

Economic policies are always and forever supposed to be set to incentivize good [economic] behavior, and discourage bad [economic] behavior. The pickle Obama faces is that he can not de-value the currency via massive budget deficits and risk a refusal of foreign countries to buy our debt. Yet, he can not pass the expedient “soak the rich” tax increase he wants to, knowing what the spill-over effect will be. So, the only remaining option is what? Good old-fashioned spending cuts.

And this is where I mean he is stuck in a horrid political pickle. The taxpayers want their socialism – they just want it customized, personalized for them, and Obama knows this. Federal entitlement spending can not be pealed back without a backlash even politically worse than the other options, and federal entitlement spending is where the most flagrant budget abuses exist. So while a nice person can sympathize with the economic mess Obama has inherited, they can not sympathize with the politics of it all. What is the right thing to do? Once you are done saying that you will not raise taxes, CUT them some more. Then, simultaneously enact massive, large, noticeable spending cuts. Not only will the deficit be reduced, but you will spur on a generation of economic growth not seen since, well, Ronald Reagan did the exact same thing. The downside for Obama? He will never, ever, ever hold public office again. Can you imagine the irony? The political cost to doing the right thing is exile, and worse. (I would also point out that, unlike Bill Clinton, who I believe was a pragmatist’s pragmatist, there is also the very tragic proposition that Obama actually believes in this ideological redistributionism).

I do not know how this story will conclude. Inflation vs. deflation. Deficits vs. surpluses. Tax cuts vs. tax increases. Spending cuts vs. spending excess. Very strong forces are fighting each other right now for matters that truly represent the future of economic prosperity. If only these fights could take place without the politics of “me, me, me.”