Obama's Destiny, and The End of Laissez-Faire
In 1926 the great Austrian economist Ludwig von Mises traveled through the United States for three months on a speaking tour. Knowing well that the American standard of living had long been the world's highest, and as importantly, knowing why that was so, Mises nonetheless was fascinated by the perpetual flywheel of commerce and bustling economic activity that he observed everywhere. It was "inconceivable," he would write at the time, that having built the institutions of a capitalist economy which never fail to yield sustainable prosperity, that the American people would ever purposefully choose to abort this beneficent system. Years later he would add that
"What the workers must learn is that the only reason why wage rates are higher in the United States is that the per head quota of capital invested is higher. What is called the American way of life is the result of the fact that the United States has put fewer obstacles in the way of saving and capital accumulation than in other nations. The comparatively greater prosperity of the United States is an outcome of the fact that the New Deal did not come in 1900 or 1910, but only in 1933... [But sadly, the] truth is that the United States is subsidizing all over the world the worst failure of history: socialism. But for these lavish subsidies, the continuation of the socialist schemes would have become long since unfeasible."
Unfortunately for generations yet unborn, the "inconceivable" happened on November 6. This brilliant discernment of Mises, the 20th century's most able defender of the market economy's wealth-creating properties as well as socialism's fiercest critic, came to mind on Election Night just as Ohio was called for President Obama. For the Buckeye State put Mr. Obama over the magic number of 270 electoral votes, thus guaranteeing him another four years in office and ensuring, too, that his signature legislative priorities will now be embedded in the fabric of American life. It was a moment of inflection laden with historic consequence, though curiously few have apprehended this.
For in contravention to Mises' prediction, the United States in fact has now chosen an irrevocable path toward becoming a European-style welfare state, similar in nature to, say, modern Denmark or France. That is to say, American voters ratified a course set by President Obama and his allies in the political class to purposely lower living standards in the United States in order to level the distribution of income - exactly akin to the welfare states of Europe. Of course their policy aims are not stated so crassly: instead, Mr. Obama talks of a "new security for the middle class", ensuring that "everyone has a fair shot" by all "paying their fair share", and of "building the economy from the middle out" by financing government-directed "investment" in education, energy, health care and infrastructure programs with progressively higher taxes.
In describing this better society, his phraseology is vague if not vacuous, and his quotient of economic literacy in such pronouncements is poor. Economies don't grow via middle class spending, for example; that's an effect, not a cause, of economic growth. Rather, prosperity is engendered via saving and capital investment, as Mises noted. In fact, government-directed spending programs crowd out and distort the very capital allocation that drives efficient job-creating investment, and Mr. Obama's programs are thus in so many ways tantamount to the eating of seed corn, directly leading us to lower living standards in the long run.
Further, government spending invites cronyism at best, which can only lead to corrupt outcomes (e.g., Congresswoman Maxine Waters [D.- CA] assisted OneUnited Bank in a government-backed recapitalization and other business dealings while her husband was a fee-collecting director there); or, worst case, outright waste of taxpayer wealth (e.g., Solyndra). And the evisceration of entrepreneurial energies in the face of the high-tax, high-spending, big bureaucratic regulatory apparatus that drives the modern welfare state has also led to another unfortunate fact lost to American voters: per capita living standards in the world's developed welfare states such as Denmark or France are between 25-40% lower than here in the U.S. As talented as Mr. Obama is, he cannot import the government-centric social welfare model of Denmark without also importing its lower standard of living and sclerotic economy.
Yet promises of a "level playing field" and good-paying "jobs of the future" led voters to believe the President cared about them far more than his opponent, and the messy factual details of the diminished life that comes with European-style government intervention went unremarked in the long campaign. Mr. Obama's activist government approach is never questioned by recipients of government transfers, including many in election-ending Ohio, courtesy of the President's "saving" of the auto industry there. So perhaps the climax to the contest to 270 on Election Night was appropriate.
Lost in the accolades, however, are inconvenient facts: this self-same auto industry bail-out may ultimately cost American taxpayers $85 billion in unrecoverable funds, according to the Treasury Department; and, to effect the government-dictated restructuring, bondholder rights were usurped in favor of auto workers' union shareholding - one of the most offensive examples of government plundering (or, shall we say, rape?) of private property rights in U.S. history.
A private sector-led bankruptcy would have been far more efficient, and surely have preserved more American jobs over all - though they would not have been United Auto Workers certain to vote for Mr. Obama and his acolytes. Indeed, gone unquestioned is the very thesis that the auto industry was "saved" at all, in any meaningful sense, or whether there even is an "American" auto industry so much as a global one - after all, the supply chain for the automotive sector is truly worldwide, and American final production ensues with 70% of the parts coming from abroad in many cases.
A New Economic Reality Now
The veritable certainty now of regression of American living standards thanks to the stultification of investment and commercial activity was lost on the chattering classes Tuesday night, as well as the vanquished and hapless Governor Romney. But for the President, the call for Ohio thrust him within range of lifelong dreams of, as he says, the "fundamental transformation" of American society - and for him personally, timeless fame as well. No doubt this is a heady time for Mr. Obama, but more broadly for the American economy, it's an historic inflection point that will guarantee long-term pain.
The reasons for this are simple:
Brutal job-killing regulation. Mr. Obama's regulatory initiatives commence in high fashion on January 1, when the 3.8% ObamaCare surtax is added on to the base capital gains tax rate, in addition to the 1.2% upcharge levied on high-income earners. The sprawling complex of ObamaCare's bureaucracy, including the professional review boards infamously euphemized as "death panels", will be installed across 2013-14, and fully in place by the next presidential election cycle. Its ten-year cost, originally propounded by Mr. Obama as roughly $900 billion, will be closer to a $2.7 trillion price tag per Congressional Budget Office analysis.
And this is just the direct program cost. Far more onerous are the correlative costs imposed on the matrix of health care providers contained in regulatory compliance (as well as tax hikes on the industry's providers) - not to mention declining quality and choice for hard-pressed taxpayers, many of whom will, per force, lose their preferred physician or, in the time ahead, be denied scarce care that's rationed politically. And in the end, of course, the only rational response of business corporations to ever-higher costs is to eliminate employer-provided coverage as the United States transforms into a single-payer healthcare system. The incentives are such that that should eventuate within a decade.
Meanwhile Dodd-Frank's full implementation, as spelled out in the legislation's 12,000 pages of rule-making paperwork that no human being has fully read, will prove just as onerous to economic growth in the U.S. Indeed one little-noted reason for more than $1.5 trillion in excess reserves in the U.S. banking system at the moment is the increasing costs of financial intermediation at all levels - in the end, parking funds at the Fed at least brings safe interest for zero-cost funds. And while the inaptly named "Wall Street Reform and Consumer Protection Act" will not come close to actually "protecting consumers" or "reforming Wall Street" - indeed, the risk of eventual collapse is heightened as our financial system becomes more brittle - one thing at which it will certainly excel is in discouraging commercial activity, and thus macro-economic growth and jobs. Nor will the rising costs of all forms of financial services serve to prevent the danger of yet another round of bank bailouts, from behemoths like Citigroup to Fannie and Freddie, which are still under-capitalized and over-leveraged with bad assets, four years on from systemic meltdown.
High-taxing, big-spending government draws resources away from job- and wealth-creating private sector. Mr. Obama's policy mix also calls for an array of tax increases in the next few years - some of them embedded within ObamaCare - and these are slated to begin in just 50 days. Even if incomes below $250,000 are shielded in a deal next month, a $300 billion hit to the investor class seems likely, including dramatic spikes in dividend and capital gains - that is to say, job-creating - taxes.
Consider, for example, high income earners in California. The top 1% of California's wage earners provide more than 40% of the state's income tax receipts, and because many own incorporated businesses as well, up to a third of the total tax take in the Golden State. Yet Proposition 30 passed there on Tuesday, in what can only be called "piling on" by government. Along with heightened sales taxes on various product classes, this measure taxes upper income earners at progressively higher rates, with earmarked funds going to schools, police, and fire protection; that is to say, to public sector union-dominated professions.
For example, for incomes above $680,000, a 3% marginal surcharge is added to the existing 9.3% income tax rate, for a 12.3% total. With President Obama's federal income tax hikes and surcharges in January taking the new top marginal rate to 43.3% from the current 35%, the new effective marginal rate on these high incomes in California will be 55.6%. It boggles the mind trying to understand why the political class cannot apprehend that such oppressive taxation will only result in stultified investment, outright capital flight, and thus lost jobs.
As for federal spending, Mr. Obama's commitment to a permanently larger government role in our lives is best exemplified by his budget deficits and related debt. Between George Washington and the first Obama Inaugural in January 2009, gross federal debt totaled $10.6 trillion. Today it is at $16.25 trillion - a 53% increase in his term - on the way to over $20 trillion before he leaves office.
Current and near-term debt levels are now so severely stretched that there is no painless way to wind this down, and one necessary consequence is lowered growth and higher taxes to pay for this outsized government consumption (which, by definition, crowds out private sector resources and consumption, directly lowering living standards). It's tragic this issue was never aired during the late campaign, and it's to both candidates' discredit that it was bypassed. But the dynamic between economic growth and debt obligations is very real. The U.S. is a $15.5 trillion economy in 2012, and if it grew for the next 15 years at the long run historical rate of 3.3% per annum (as evinced between 1850-2000), the real GDP in 2027 would be $25.3 trillion. Yet continued growth at the 1.7% rate achieved since 2001 would produce a $19.9 trillion economy in 15 years - a staggering $5 trillion, or 25%, gap. The higher growth achieved would bring higher tax revenues to pay down government debt as well as cover government health care and retirement obligations, whose unfunded obligations are conservatively estimated at north of $60 trillion.
But in a harsh irony, Mr. Obama's spending and legislative initiatives will only further retard the U.S. economy's growth drivers, worsening our fiscal problems and inviting a true debt crisis and bond market collapse.
Monetary instability. And then there is the Federal Reserve, and its purposive dollar-cheapening and ratification of a gargantuan bubble in the U.S. bond market thanks to outsized government borrowing and spending. Neither the President nor Governor Romney paid any heed to monetary policy or the dollar's declining trade-weighted value (a 28% drop in the last decade against major currencies) throughout the long election season - again, a joint disservice to the American people. But the severe monetary interventions in recent years, done to ratify fiscal profligacy that's led to massive waste, have served only to destabilize financial markets and misallocate capital flows. Only concurrently poor economies around the globe have prevented further deterioration in the value of the U.S. dollar, but investment levels in the U.S. are nowhere near their pre-recession peak (down 15.5% from the 2006 top, and currently at 1998 levels). Nor will they recover anytime soon as long as a sound currency remains only a textbook concept, and absent attention to this, growth in output, jobs, and wages will prove elusive.
In short, the newly-cemented Obama agenda, true to the welfare state model, stunts growth in jobs and incomes in multiple ways: (1) through bone-chilling and costly regulation, (2) higher taxes and spending that crowd out private sector activity and consumption, and (3) monetary and financial market volatility that scares off the investment capital that is the ultimate source of our prosperity.
The End of Laissez Faire
Mr. Obama's re-election was disappointing to students of sound economics who well understand that his policy mix is destined to fail. That is to say, there is nothing now that will prevent years of higher joblessness, stagnant incomes, or increasingly burdensome debt and taxes. The troubles of the last five years will now continue indefinitely; it is always so, when the government grows to the point of stifling the productive private sector. And this, sadly, is the sure and intended result of the Obama policy paradigm.
More troubling for the long run, November 6 was the historic death knell of the age of laissez faire. Perhaps it was over years ago, effectively, but the cementing in place of Mr. Obama's major legislative initiatives, coupled with the outsized spending trajectory his budget priorities imply, removes any hope of revival of sustained prosperity. And, Obamanomics guarantees a larger government footprint in the economy and its corollary, a Japan-like economic torpor for the U.S. that is, again, more or less permanent.
That's an axiomatic result of Mr. Obama's European-style policies, which lead to a decapitalization of the economy in favor of current social welfare spending - to say it again, the eating of the seed corn that alone can engender a brighter future, but only when planted. And while the politicians' intentions may be noble, the end result is often inimical to their aims. For example, four years and $5.7 trillion in debt later, the Obama agenda has brought higher unemployment, lower wages, and stagnation to most Americans who've not been in the small minority of direct recipients of the recent largesse. And lower incomes and minorities have been hardest hit in this de facto five-year recession.
The ancient and venerable concept of individual liberty, first well-espoused by sages including Aristotle, Cicero, and Cato the Younger, was given its classic expression in the writings of John Locke, whom Jefferson anointed as the intellectual progenitor of the American Founding. And the age of individualism, wherein free agents, supreme moral ends in and of themselves, were entitled to inalienable rights to property and the just fruits of their labor, led to an explosion in wealth, incomes and living standards unparalleled in world history. Further, this capitalist revolution provided bounty to all, including especially the masses who were now living far better than kings had a mere century before.
But this historical epoch, defended as the "shining city upon a hill" by supporters in the United States in the post-war era, is now finally and fully over. With Mr. Obama's re-election, the United States has joined Europe and Japan in moving toward a post-modern, government-centric economic model. Thanks to the success of the President's unbridled class warfare demagoguery, a marginally flatter distribution of incomes and wealth will result, but at the expense of lowering GDP growth and living standard advancement for all. And, much to the consternation of the world's denizens, a permanently-impaired U.S. economy will come to mean lower living standards for them as well: back-drafting in the wake of high-octane progress in the United States, from thriving venture capital to managerial innovations and much more, will no longer be available to them.
For investors, this implies a new level of needed scrutiny to asset classes around the globe, and surely must include long-term inflation hedges. Capital preservation is now the paramount goal, as the quick evisceration of $750 billion in U.S. equity wealth in the first two days following Mr. Obama's re-election has affirmed.
For Governor Romney's disappointed supporters who saw a renaissance of Reagan in him, the truth has now been revealed: Nelson Rockefeller was always the better analog. Mr. Romney, in effect, got what he deserved; given a choice between two candidates who were both former Paul Tsongas supporters, were committed to progressive taxation, had disavowed Reagan, favored large government oversight of education and health care, called for direct government aid to the ailing auto industry, ignored a miscreant Fed, and so on, it is no surprise that in the end the voters chose the truer of the two welfare state adherents.
Mr. Romney also confirmed that after six years of pursuing the Oval Office merely because he wanted to be President, voters nonetheless prefer candidates who actually want to accomplish something - even if, alas, that entails a permanent slow-growth economy reeking of interventionism and its concomitants: cronyism, corruption, and waste, all of which we will now see in countless bad moments in the years ahead. Such are the bitter fruits of the redistributive state.
But there is always a silver lining in life's misfortunes. For these former Romney-backers, all sixty million of them, are now wiser, even if sadder. And the cause for which they fought, the preservation of liberty and a right to property, is indeed a sacred fire, as someone known as General Washington once taught.
It was a poor messenger and not the message that failed on November 6, but the coming naked expropriation of wealth, however veiled or, like California's Proposition 30 quite out in the open, will fail, too. And those who, like the great Mises, understand how an economy grows, and how human life can flourish only through the peaceful and harmonious social cooperation inherent in a free market entailing sound money, must be engaged and active in explaining the moral superiority and greater economic efficiency of such an economy. For there are cycles in the affairs of men, and a moment will come when the populace desires a genuine and sustainable prosperity once again.