Obama’s radical economic remake promises gloomy future

President Barack Obama’s budget plan illustrates the degree to which he wants to reconstruct the U.S. economy. So radical are the changes of Obamanomics, and so at odds with historical experience, that the next few months may very well decide the economic future of the United States for a generation.

The president plans a massive reallocation of capital and investment towards “clean energy” technologies and away from conventional energy sources like oil and gas. The government will direct $140 billion to clean energy technology investments. It will also introduce a cap-and-trade system that imposes fees (taxes) on companies emitting greenhouse gases. The value of the taxes is $646 billion between 2012 and 2019. He will simultaneously increase taxes on oil and gas companies. This will result in higher energy costs in both the short and long run and will hobble energy-intense businesses.

The president also envisions another major step toward single-payer, government-controlled health care. The blueprint establishes a $630-billion fund, referred to as a “down payment,” to finance expanded government health insurance coverage over the next 10 years. Large spending increases are also proposed for education, transportation, and foreign affairs.

New taxes on upper-income Americans and businesses are also in the works. Some of the Bush tax cuts will expire in 2011, which raises the top two personal income tax rates to 36.0 and 39.6 percent, respectively. The plan also calls for limits in the value of itemized deductions to 28.0 percent. Capital gains taxes will be increased to 20 percent for higher-income earners.

The estate tax had been scheduled for repeal in 2010, but Obamanomics preserves the tax for estates larger than $3.5 million, to be taxed at a rate of 45.0 percent. Taxes on private equity, venture capital, and fund investment are also increased. So are taxes on U.S. multinationals. Despite all these tax hikes, the President’s plan will still increase the national debt by trillions over the next four years.

Obamanomics also evokes an intellectual battle spanning more than 50 years, which many believed had been put to rest in the late 1970s. Can a central government with its peculiar incentives (politicians primarily want to be re-elected, interest groups compete for government benefits, etc.) outperform a market-based system where individuals invest their time (labor) and savings (investment) according to what they deem to be in their best interest?

One of the central figures in that debate was Nobel laureate F.A. Hayek, who explained that individuals possess local knowledge required to make informed consumption and investment decisions. The choices of millions of people interacting based on their localized knowledge determine prices. These prices then direct people’s choices. The ideal structure emanating from Hayek’s insight was to limit distortions to the price signal. The better the price signal, the better the decisions.

The Obama administration reject this argument. It believe its officials will accumulate the information necessary to make better decisions than the people themselves in health care, energy, education, transportation and other endeavors.

If the president is wrong, which history and experience tells us he will be, it will mean the waste of trillions of dollars of resources, a massive increase in the nation’s debt, and all the negative effects of a slow growing economy: higher unemployment, less job creation, less investment and ultimately less hope for the future.

Jason Clemens is the director of research at the San Francisco-based Pacific Research Institute (www.pacificresearch.org).

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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