February 15, 2008

Obama’s proposed economic policies

This week Democrat presidential candidate Sen. Barack Obama laid out the economic policies he would put forward if he were elected President.  Here are some of the highlights:

“Making Work Pay”:  tax credits of $500 per person or $1,000 per family to offset payroll taxes on the first $8,100 of earned income and also offset some of the self-employment tax.

“Universal Mortgage Credit”:  provide tax credit to those with mortgages that do not itemize.

“Eliminate Income Taxes for Seniors making less than $50,000.”

Require the IRS to give taxpayers the option to have their tax forms filled out by the IRS.  People would then verify what the IRS has received from employers and banks, sign the form and submit it back to the IRS.

“American Opportunity Tax Credit”  a $4,000 college education tax credit that requires community service.

Expansion of Earned Income Tax Credit and the Child Care Tax Credit for those earning less than $50,000

Require employers to enroll every employee in a direct deposit retirement account.

“Credit Card Bill of Rights” a multitude of changes to the credit card industry including a ban on charging interest on fees, banning interest rate changes on existing balances and unilateral changes to credit card agreements.

“National Reinvestment Bank” program to invest $6 billion a year for 10 years for roads, bridges, etc. designed to increase the number of construction related jobs.

“Invest in a Clean Energy Economy” Obama would spend $150 billion over 10 years on “next generation of biofuels and fuel infrastructure” and “promote development of commercial scale renewable energy.”

What to make of this?

One thing is certain:  Obama (and his chief economic advisor Austan Goolsbee of the University of Chicago’s business school) are putting forward economic policies aimed at the middle and working class.  Policies from his middle class tax credits, to reforming the credit card industry, to college tuition credits are aimed squarely at benefiting America’s middle and working class. Obama has also talked about raising taxes “on the rich” but has not offered, as far as I can tell, specifics of what exactly this means.

But what will be the economic impact of the proposed Obama economic policies?

Thomas Sowell, Senior Fellow at the Hoover Institution at Stanford, has argued that government subsides, supposedly including tuition tax credits, will actually push up the cost of college tuition.  He also has argued that government subsidies for clean energy will push up the cost of these alternative fuels.

As for reforming the credit card industry and reducing predatory lending, Sowell argues that this will result in a reduction in the amount of lending available in economically depressed areas.

So which is it?  Will Obama’s policies help the middle and working class or will they merely increase the cost of living and the size of the federal government?  Put another way:  what are the costs and benefits of the Obama economic policies?

To answer that question you have to ask yourself this question:  how screwed up is our economic system?

If you believe that the American middle class is being left further and further behind because either:

1) they don’t understand what is good for them (i.e. they should be required to put money away for retirement, etc)

2) they are being taken advantage of (predatory credit cards, high tax rates on seniors and middle income, etc)

and/or

 3) they can’t afford to get ahead (again the tax rates on low/moderate income workers and they can’t afford college tuition)

then, one could argue, that the implicit and explicit costs of the Obama policies are less than the benefit society will gain from the middle class being allowed to prosper.

If, on the other hand, you believe our economic system is working relatively well, then you, like Sowell, will see the Obama policies as nothing more than huge increases in the size and power of the federal government.  You would then see these policies resulting in slower economic growth, higher taxes and a much higher cost of living for everyone.

Reasonable people can disagree about these things.  I only wish these were the types of things that were discussed by the media, instead of personal attacks and delegate counting.  Can we please debate policies and not get into ugly partisan political squabbling?  Economics ultimately, is much more interesting than politics.

Next time an analysis of McCain’s economic policies.

Regards,

M. Brandl