Published October 22, 2008
Senator Barack Obama is clearly benefiting from voter anxiety associated with turmoil in worldwide financial markets. Confronted with daily reminders that the economy has slowed down considerably, many voters are instinctively moving toward the candidate whom they and the media associate with “change.”
Ironically, though, Senator Obama really does not represent change on economic matters — or at least not a change toward something that hasn’t already been tried before, and that might have a chance of improving our economy. Indeed, Senator Obama’s economic ideas and outlook — large expansions of federal entitlements and explicit efforts to redistribute income — look little different from the failed liberal policies of the 1960s.
In the aftermath of President Lyndon Johnson’s landslide victory in 1964, Congress embarked on a period of unprecedented governmental activism. A flurry of new laws expanded welfare benefits, created two health-care entitlement programs, thrust the federal government into education financing and policy — and much, much more. To pay for these initiatives, Congress increased federal taxes substantially, including payroll taxes. Between 1965 and 1969, federal taxes increased from 17.0 to 19.7 percent of GDP.
Senator Obama’s economic plan is remarkably similar to those Johnson-era efforts in terms of its goals, even if the legislative tactics are somewhat different. Senator Obama promises to expand welfare benefits to many more households, although he would do so mainly with a series of expensive, refundable tax credits. He has proposed an unprecedented increase in federal spending on K-12 education programs. And his health-care plan would offer publicly funded insurance to nearly 50 million more people — at a time when the federal budget is already groaning under the weight of existing health-care entitlements.
Senator Obama would pay for this expansion of government with a massive tax increase. He is promising to raise the top marginal income-tax rate to nearly 40 percent. He wants to increase payroll taxes on high-income earners as well to pay for an unreformed Social Security program that will have fewer workers paying the benefits of growing numbers of baby-boomer retirees. And, according to an analysis from the independent Tax Policy Center, his plan depends on somehow finding nearly $1 trillion in revenue over ten years from as-yet-unspecified sources.
Americans are not averse to paying for government programs that genuinely help people. Indeed, many Americans would have concluded that 60s government activism was worth the cost — if it had actually worked to bring about prosperity and equality. But no reasonable observer could conclude that it did — and frequently enough, it made matters worse.
Instead of ending poverty, the Great Society ushered in an era of deepening welfare dependency and inner-city cultural decline. Well-intentioned support for single mothers and their children enabled an epidemic of fatherless families, with disastrous results. Family breakdown accelerated, and out-of-wedlock births soared. Moreover — with taxes and spending rising, the national economy fell into a decade-long period of sluggish economic growth, with high inflation and high unemployment. American businesses became less competitive. Confidence in our future fell.
Were Senator Obama’s program to be adopted, expect unintended consequences. Alex Brill and Alan Viand of the American Enterprise Institute have shown that his lavish new refundable tax credits would have the perverse effect of increasing the tax rate faced by many low-wage workers looking for better-paying jobs. The more these households earn, the less they would get from Senator Obama’s program of government-engineered financial assistance.
Similarly, Senator Obama’s plan for improving education would backfire. Increasing federal spending for K-12 education would simply allow state and local governments to cut back on their own funding commitments. The net financial gain to schools would be minimal at best. Moreover, with more federal funds comes muddled political accountability: No matter how much money is provided, it won’t stop local school administrators from claiming that their problems are due to insufficient federal support.
In addition, Senator Obama’s health-care plan would stifle job creation. Employers would be required to “pay or play,” meaning they would either have to offer government-approved insurance, or pay a new payroll tax. Such a mandate would make it more expensive for firms to hire low-wage workers. Unemployment would rise.
Moreover, many businesses that sponsor insurance for their workers today would stop doing so when faced with Obama’s expensive insurance mandates. Millions of workers and their dependents currently in private insurance would therefore end up in a government-run plan, with price controls and other regulatory red-tape. In time, increased government dominance in the health sector would undermine quality and stifle investments in those new drugs and devices which might provide breakthrough improvements in patients’ health.
And of course, Senator Obama’s marginal income-tax rate increases would reduce incentives for work and entrepreneurial activity at a time when our global competitors are moving in the opposite direction.
It took the presidency of Ronald Reagan to get things back on track after the decade-long malaise of the 1970s. Reagan understood that broad-based prosperity comes not from the government trying to engineer economic results but from the accumulated efforts of millions of individuals striving to improve their standards of living with hard work. Given the right incentives — and it’s the government’s job to get the incentives right in tax and spending policy — businesses and households will find ways to improve productivity and bring valuable innovations to the marketplace.
Even President Reagan came up short when it came to reforming the welfare state. That did not occur until Republicans took over Congress. Voters going to the polls in November would do well to recall the debate over the 1996 welfare-reform law. At the time, proponents argued that ending the entitlement to cash welfare benefits was crucial to breaking the culture of dependency so prevalent in urban America. They pushed successfully to replace the entitlement structure with a fixed block grant that states could use to provide temporary cash assistance and support services for those families trying to stay in the workforce.
Opponents of the law argued strenuously that it would produce a calamity, with millions of households getting pushed into poverty — with children starving in the streets, according to the most hyperbolic Democratic rhetoric.
What happened? Welfare caseloads fell by more than half almost overnight, from 4.6 million in 1996 to just over 2 million in 2002. And the Congressional Budget Office found that the lowest-income households experienced a 35-percent jump in their real incomes between 1991 and 2005, as rising wage income more than offset the reduction in cash welfare benefits. The 1996 welfare reform law is almost surely the most successful social-policy change in a generation.
It is instructive that Barack Obama, then a state senator in Illinois, strongly opposed n> welfare reform — and criticized President Bill Clinton for signing it — before claiming to have changed his mind about it during the presidential campaign.
The present moment cries out for an aggressive economic-reform agenda. Federal tax law has become a jumbled mess of excessive social engineering. Entitlement spending is set to rise dramatically over the next two decades as baby boomers head into retirement. Government agencies operate today much like they did in 1980, even though businesses have been transformed by the information-technology revolution.
What is not needed, however, is to revert to the policies of an era during which activist government undermined incentives for work with ill-advised promises of expanded entitlement benefits. That may constitute change, but history shows that it would offer little hope.
— James C. Capretta is a Fellow at the Ethics and Public Policy Center, a health policy and research consultant, and the author of the health care policy blog “Diagnosis.”
