On the campaign trail with Bruce Springsteen, Obama says one reason for his welfare plan is that people will have some extra money to maybe download Springsteen songs for their Ipod.
The justification of the forced taking of wealth as a result hard work, risk taking, and sacrifice is so that someone else can buy a few songs? Scary.
As we have discussed many times, tax policies have serious investment consequences. The higher the capital gains tax rate, the higher the pre-tax rate of return investors require which in turn leads to lower equity prices. Further, due to the compound nature of return embedded in growth stocks, higher capital gains taxes will have a more negative effect on growth stocks than value stocks. We created the Palin Barracuda Index (PBI) to track the likely effect of the winning Presidential Candidate’s tax policies on the stock market. The basic premise is that under an Obama Administration, capital gains taxes will increase and value stocks should perform relatively better than growth stocks, conversely a McCain Administration should make growth stocks relatively more attractive.
The last update to the PBI took place on September 12th, showing the race to be a toss-up at the time, but leaning towards McCain. Since then, the index has moved decidedly in favor of value stocks, with a reading as of September 15th (before the last debate) of 97.6, a drop of 3.8 points. The credit crisis has distorted the index in the short term, along with most other market metrics, as decreased liquidity will more adversely effect growth stocks which rely on more external financing to achieve their business plans than value stocks. However, the movement in towards value stocks has also been very consistent with a new set of policies that portend higher capital costs in the near future.
Bottom line, the recent changes in the index certainly point towards an Obama victory but I would not place much value in the index readings since the credit crisis started. It will be interesting to see if the markets calm down where the PBI settles in the next couple weeks as we finish the election. It might just be that Obama gets a pass for a while raising the capital gains tax rate since in the short run there will only be capital losses and therefore tax policy is irrelevant for a while.
In general McCain was much more aggressive in this debate than the others. The most important aspect of this debate to me is that the election narrative should shift to Barry the terrorist’s buddy vs. Joe the everyman plumber. Here is the original exchange between Barry and Joe.
Joe brings a very down to earth sense of clarity and common sense to the discussion about Obama’s “Spread the Wealth” version of socialism. The entire interview is here. It makes for great reading and really frames the issue small businesses face under an Obama/Reid/Pelosi America.
McCain needs to make this election about how Obama will treat the thousands of people like Joe all over America. As they work hard to get ahead, Obama will set policies in motion that will punish them.
Last week I laid out how Obama’s economic plan is really nothing more than a marketing ploy to expand welfare via the tax cut moniker. This week the Wall Street Journal expands on this topic in some detail. It makes for excellent reading.
The issue that McCain needs to address head on in the remaining debate and campaign trail is that Obama has no economic plan, only a proposal to begin down the road of massive income redistribution via the tax code. Ultimately this will choke economic development, and through its disincentives to work at the margin create a permanent underclass of workers beholden to government elites for handouts from those that are productive. Sadly the producers in the country will seek opportunities and options elsewhere, or just go on a long vacation.
America as a nation has been built around the concept that paid tribute and idealized the good in man. Those that produced and worked hard had the chance for success; those that risked had the opportunity for gain. No one was ever guaranteed anything. But in aggregate, under American Capitalism, the chance for success inspired enough people to pursue their dreams that more wealth has been created than under any other system in the history of man. This has allowed all Americans to live better lives and help more people around the world than any other country throughout history.
However, it seems a new order is emerging that says working 60 or 70 hours to build a business is a sucker bet, since the government will take your money and give it to the “artsy” type that wakes up at 11 am works a few hours and parties til dawn. If the new motto is lets “spread your wealth around”, why bother to work hard? Better to let someone else take the risks and have their efforts “spread around”. While today it is the top 5% that will start to pay for others to have TIVO and Nike shoes, later it will be that the top 10% need to sacrifice so that “the ones behind us” can have new electric cars, and later it will be that the top 40% need to give to ensure everyone can go on vacation in Europe. Such promises worked for Castro back in the day, and the Cubans certainly got change.
It is not patriotic to work 80 hours a week, miss family events, get stuck in crappy airports, forget where you are sleeping after another long flight, watch your bank account dwindle month after month as you launch a business, and have to endure the stress of not taking another paycheck or laying someone off in order to meet payroll, so that one day the government comes and tells you its time to spread the wealth. In fact, I would say such a sacrifice is just plain stupid. Basically the government is breaking an implied contract with every entrepreneur in the country. Good luck bringing them back to the table in the future.
By stressing that it’s patriotic to pay more taxes, citizens are effectively being told that their efforts belong to the government and the government’s view of the “greater good”. This is such a far cry from an America born with a healthy skepticism of government, founded on a set of ideas that the best government is one that stays out of people’s lives and lets them live as freely as possible. An America that moves from those ideals may keep its name, but loses its heritage.
Obama says he will have a net spending reduction. Oh my, I looked up and the sky was green. Once the facts move so beyond the believable there is really no point to analyze in much detail.
As John McCain enters his 2nd debate with Barack Obama, the conventional wisdom is that he is a dog when discussing the economy. Much of this relates to Obama wrapping himself in the success of the Clinton administration, and portraying McCain as a continuation of the recent failures of Bush 43. The facts clearly point to a very different reality, in which McCain needs to be on the offensive on economic issues and forcibly ask Senator Obama: Which Clinton economy that you praised in your acceptance speech do you really admire?
The big government, tax the rich Clinton?
or
The small government, capital gains tax cutting Clinton?
Big Government and Tax the Rich
During his acceptance speech, Barrack Obama eloquently voiced the need for America to return to the successful economic policies of the Clinton Presidency when the nation prospered, and people came before Wall Street. During his speech, he referred to raising the tax rate on the highest earners, increasing the capital gain tax rate, radically revising the health care system, and aggressively pursuing spending on infrastructure projects. When Clinton entered office, he also proposed raising taxes on the highest earning Americans, expanding spending on the nation’s infrastructure, and redefining the nation’s health care system. There is no doubt that Senator Obama seeks to follow the Clinton’s economic blueprint. Unfortunately, those are a set of collective failed policies that he seems to idealize. Using a benchmark that Senator Obama often holds out to evaluate economic success, President Clinton’s first term was clearly a failure compared to that of President H.W. Bush who preceded him. Unemployment during Clinton’s first four years in office averaged 6.5% compared to 6.3% under the first Bush. The economic track record of Clinton’s first term is particularly distressing, as Clinton entered office on the tail wind of an economic recovery, yet he still fell short of Bush’s economic record. Collectively, Obama’s policies to raise taxes on income and capital gains, combined with massive spending related to expand welfare payments and health care reform has an empirical track record, and it is called failure.
Smaller Government and Cut Capital Gains Taxes
Ironically, Clinton’s economic success came during his second term, following a set of policies that Obama consistently vilifies, and seeks to undo. During this period, Clinton created the economy that led Alan Greenspan to remark how Clinton was the best “Republican” president in a long time. The defining economic policy driver of Clinton’s second term was aggressively cutting the capital gains tax. Though Clinton was politically forced to mold his policy to this new direction due to the sweeping success of House Republicans and their Contract With America in 1994, Clinton’s reputation will forever reap the benefits. The Contract With America sought to reduce capital gains taxes by 50 percent. Ultimately, with the final version of the Taxpayer Relief Act of 1997, capital gains tax rates dropped approximately 30% for the highest earning Americans. Also in late 1996, Clinton and Congressional Republicans agreed to welfare reform that further reduced the role of the federal government in everyday life. The result of lower taxes, and a smaller federal government under President Clinton was nothing short of miraculous. During Clinton’s second term, unemployment fell about 30%, from his first term to average 4.5%. Another perspective about the Clinton years is revealed through the stock market. While Clinton was clearly enacting the policies he advocated during his first campaign, the stock market underperformed its historic average of 9% annual gains, and instead only grew at approximately 5% a year. However, when it was clear that President Clinton would work with Republicans on the items covered by Contract With America, the market became much more favorably disposed, returning 20% annually during the last six years of his Presidency. Again, Senator Obama’s policies are diametrically opposed to the ideas that produced the Clinton economy he so warmly embraces. However, that does not stop Senator Obama from making it a point at every stump speech to position himself as the heir of the Clinton economy, he just does not let people know which economy he seeks to inherit.
Expanding the Welfare State as an Economic Plan
In addition, John McCain should be very clear that central to Senator Obama’s economic plan is an attempt to broadly expand welfare. In a very sneaky manner, Senator Obama has seemingly embraced Republican rhetoric, by claiming that his economic plan is built around reducing taxes for 95% of Americans. Sadly, Senator Obama seemed to only learn fuzzy math from the education system he refuses to fundamentally reform. After all, how can 95% of the population receive income tax reductions, when approximately only 41%, or 100 million individuals, of the taxable population pay no federal income taxes? This makes no sense. While it is of course physically and/or logically impossible to cut income taxes for those that do not pay them, Senator Obama works around this by providing refundable tax credits of $500 to individuals and $1000 to families that pay no taxes. This in essence creates $750 Billion a year of new welfare spending. Again the irony is President Clinton worked very hard to reduce and eliminate welfare, while Senator Obama makes it a fringe benefit for voting for him.
What is particularly disingenuous about this plan, is that unlike the logic of past tax cuts, which provided incentives for individual to work and earn more, and thus consistently resulted in higher revenue for the Treasury, this approach actually provides individuals incentives to work less. Obama currently couches his vision of expanding welfare under a fairness argument. He argues that only those earning more than $250,000 year will incur higher taxes. Unfortunately the number of earners making $250,000 or more a year is very small relative to the number of people they must support under this plan. In 2005, out of 104 million filed tax returns, approximately 3 million had incomes exceeding $250,000. In other words, Obama looks for each person in this income bracket to pay an annual welfare payment of $500 a year to 30 individuals, for an average burden of $15,000 per tax paying citizen. While Obama has currently stated this expense should only be the burden of those earning more than $250,00 a year, the sad truth is that it will be too easy and tempting to reach to lower income levels to and promise more and more benefits to those not paying taxes to keep getting their votes. History has consistently shown one thing, when the government begins giving money away to get votes, it tends to have very little restraint on its appetite to give even more away later for more votes. This eventually means tapping more and more citizens to feed the machine.
Senator McCain should ultimately complete his discussion of Obama’s economic plan posing the following question:
Senator Obama, you seem either ignorant or disingenuous discussing the means by which President Clinton achieved economic prosperity, which is it?
Did you find that kid choir singing about Barry spooky? I did. I think this makes a bit more sense.
1, 2 Barry’s coming for you
3, 4 He will tax you more
5, 6 Freedom gets kicked
7, 8 He thinks more government is great
9, 10 You will pay again and again
Que up a smiling Barry with a Freddy glove grabbing a poor guy’s money.
Listening to the debate on the way back from client meetings in San Diego, I was reminded of many encounters I have with professionals and job applicants discussing valuation with me. Sometimes they are knowledgeable and prepared, sometimes, they talk around an issue to sound smart, and sometimes they just do not have a clue. But when you really understand a topic, it is really easy to understand who knows what.
Obama for the most part seemed like an eager young finance professional that is trying to impress his bosses that he knows what he is doing and should be given more responsibility. But he really did not have the goods at his command.
After the first question, which made me think McCain was too tired from his Bailout Follies, the debate took a regular rhythm of McCain attacking and Obama defending. Its hard to feel that Obama really kept close to McCain with his knowledge or understanding of the issues. This particularly became clear during the 5 minute rebuttal phase, each candidate had to reply in the context of a specific issue raised by his opponent. McCain seemed to react to Obama’s claims with ease and confidence – essentially calling Obama out over his reference to Kissinger. Obama in contrast always seemed flustered, and his line “I have a bracelet too” remined me of the first grader that the teacher does not call on in class so he has to blurt out for attention.
The MSM spin after the debate is that for the most part it was a tie, and thus Obama won. So be it. Next year they will try to convince us that red is really blue.
