woody_zimmerman_118_2007Our young president is an amazing guy. He never ceases to astonish me and go far beyond my expectations. On Wednesday, April 13, he stood before the entire nation and did not back down an inch from his progressive vision for the country. He spat in the eye of economists and his political opponents, the Republicans. And he basically said to the American people (who had dealt him and his party a serious thrashing in the November elections): “I fahrt in your general direction…”

Faced with gigantic budget deficits of over $1.5 trillion (that’s $1,500,000,000,000), as far as the eye could see, Mr. Obama tried to pose as a serious deficit cutter with proposals to shave $4 trillion off those deficits over 12 years. That amounts to $333 billion a year. Reporters and other talking heads puzzled over why Mr. Obama used 12 years as his baseline, instead of the usual 10 years – evidently failing to notice the simple fact that his “cuts” look bigger for 12 years than they would for 10. His cuts for 10 years would total just $3.3 trillion, or just about half of what Congressman Paul Ryan has proposed in his already-released plan to cut the federal budget.

The sobering fact is that the deficits over 10 years, at a projected $1.5 trillion a year, would total a gigantic $15 trillion – all added to the national debt. Mr. Obama would cut a mere 22% off that. Of course, it is far from certain that the deficits would stay that low.

Keep in mind that this is only the deficit. If the budget simply stays at $3.7 trillion per year, without growing, our total federal expenditures over 10 years would be $37 trillion. Those cuts of $3.3 trillion over that time look pretty paltry. Indeed, they amount to only 8.9%.

To translate this to household terms most of us can grasp, suppose a family’s budget is $50,000 a year, but its income is only $30,000. Its budget is out of balance by $20,000 each year. To try to put things right, they cut $4400 out of the budget. This is some help, but the annual shortfall is still $15,600. Think this will keep the ship afloat? If you think so, you either snoozed through math class or you’ve been snookered by Obamanomics. As they say in the ‘hood, “There ain’t no way, Jose.”

Various Republicans, including Rep. Ryan, have called Mr. Obama’s proposal “unserious.” (Mr. Ryan also said, “A speech is not a plan.”) The president’s proposal relies on tax increases of $1 trillion on “the rich” – those malefactors of great wealth who make over $200,000 a year. Mr. Obama wants to repeal the “Bush tax cuts” for them. They can afford to “give a little bit more” to help us solve our deficit problem, Our President has declared.

This is only the Envy Politics of the dismal past, however – echoes of Franklin Roosevelt, who pushed the marginal tax rate up past 90% on top incomes. Economists have repeatedly shown that those high marginal rates always depress tax collections because high income earners have many ways to shield income from taxation. Also, they can afford to work less – a prudent move when you get to keep only a dime out of those dollars subjected to the top tax-rates.

The other ironic fact is that “the rich” do not earn nearly enough, in the aggregate, to fund government operations. Current figures are hard to nail down, but according to data from a 2005 study, people with incomes over $200,000 earned approximately $2 trillion in annual income. If those people were taxed at 100%, they would fund the federal government for just over half a year. Of course, that’s only a data point, not a real prospect. It’s not possible to tax people at 100%, or anything close to that rate. No sane person would continue to work under such confiscatory rates.

This truth is conveyed by the so-called Laffer Curve (shown below), which indicates that there is a rate which optimizes tax-collection. Above that rate, tax-collections fall off precipitously. (Despite the graph’s scaling, suggesting that 70% is that optimal rate, there is no consensus on what that true optimal rate is.)

tax_graph

Of course, even Mr. Obama would not propose taxing “the rich” at 100%. This means that their “contributions” to solving our deficit problem would be significantly less. Mr. Obama, himself, suggests that higher rates on these earners would generate $1 trillion over 12 years. This works out to only $83 billion a year – a drop in the bucket against a $1.7 trillion deficit. His call for higher taxes on “the rich” can be seen as little more than posturing for his leftist base. As his critics have said, it is “unserious.”

Democrats – especially liberal Democrats – do not really believe in the Laffer Curve. Instead, they believe in a mindless taxpayer who will continue to work and earn and pay taxes, no matter how high the rates. This is called the “static model.” It assumes that tax rates produce no adjusted behavior. Whether rates go up or come down, no change in taxpayer-behavior will occur. It is an article of faith for liberals.

This is one reason why Mr. Obama has no problem proposing higher taxes on people who have the wherewithal to control how much income they earn. Such increases are almost certain to produce less of a boost in tax revenue than originally assumed. Yet Mr. Obama and his economic advisors push the idea that tax-revenues have a straight-line relationship with tax-rates, no matter how high (or low) those rates are. Naturally he expects higher rates on earners of high incomes to produce higher revenue. But it “ain’t necessarily so.”

Economists stand aghast as Mr. Obama boldly recommends raising taxes in the midst of a recession. Why would he do this? I see two possible answers. First is the possibility that he doesn’t think the recession is still going on. He may even think a recovery is under way. Is it possible he thinks that? Yes, I think so. The president may look like he’s out and about, mixing it up with the hoi polloi, but in reality he’s not. He jets here and there and has photo-ops in small factories, or on seashores looking concerned over oil-detritus. Otherwise, he lives in a small bubble surrounded by advisors who tell him what he wants to hear – or, at least, what they think he wants to hear. I don’t know if Mr. Obama is a numbers guy, or if unemployment statistics make an impression on him. Perhaps he just shrugs them off as so much chaff, while he holds the overarching vision of what he wants America to become.

Second, he might not believe higher taxes on “the rich” will actually hurt the economy and thus deepen the recession. It would not be surprising to find such a belief in a liberal. In the aggregate, liberals evince a certain tone-deafness to the true dynamics of the economy. The reality that small business is the backbone of the economy, creating most of the new jobs, is lost on them. Instead, they believe (really believe) that government creates new jobs with tax money extracted from working people – typically from those evil “rich” people who run the small businesses.

This absurd belief reminds one of a belief in alchemy – the medieval faith that ordinary matter could be turned into gold if one could only find the secret. Liberals keep crippling businesses by extracting more taxes from them, and then wonder why the “gold” of new jobs hasn’t come forth. It almost fits a classical definition of insanity: repeating the same unsuccessful action, over and over, in the hope that a different, more positive result will occur.

More than that, I believe Mr. Obama does not comprehend the true driver of business and the economy: namely, mutual self-interest. Countless business decisions and transactions are based on the simple expectation that each party will obtain something it wants. Party A has widgets and wants money. Party B has money, but wants widgets. They reach an agreement on price, and make the transaction. Each walks away with what he wants. Party A does not (unreasonably) expect to keep his widgets and still get money. Nor does Party B (unreasonably) expect to keep his money and get the widgets for free. (This simple aspect, alone, is amazingly elusive to many government bureaucrats.) The parties exercise mutual self-interest, thereby creating a slice of business. Multiplied millions of times over, throughout the country, this is what makes the great engine of commerce run. It is the economy.

As I said, Mr. Obama is an amazing guy. He never lets facts, history, human nature, and the true dynamics of business get in the way of his “vision.” To him, it is all about “sacrifice” by the “haves” to help the “have-nots” – a matter of those who have been “more fortunate” giving back “a little more” to help those who are less fortunate. It is a perverse, profoundly un-American vision which has no foundation in either history or reality. But that’s his version, and he’s sticking to it. I wish I could wish him good luck, but even I have my limits.