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Obama will eventually have to tax middle class

That's where the money is

‘It’s a Barnum and Bailey world, just as phony as it can be.” Those words are from the 1933 song “It’s Only a Paper Moon.” Seventy-five years later, Americans understand that the financial system has as much substance as a handful of moon dust: the big banks are broke, sitting on mathematicized synthetic portfolios and derivatives that threaten to touch off a nuclear reaction because they are so interconnected in the global financial system. Meanwhile, the consumer, government, and financial sectors are drowning in excessive debt that guarantees a deep recession experts did not see coming but are being called upon to head off. In short, U.S. growth since the 1980s has been powered largely by unsustainable debt. In great measure, that growth was phony.

During the recent political campaign, Barack Obama and John McCain both boasted that as president, they would cooperate with the opposition. That is a certainty now and would have been had McCain been elected. The reason: no one wants to see the global economy go back to 1933. “There will be more cooperation,” says Keith Poole, professor of political science at the University of California, San Diego. Two years ago, Poole was coauthor of a hot academic book, Polarized America: The Dance of Ideology and Unequal Riches, showing that over the past three decades, political polarization and income inequality have increased in tandem. Now, with the economic threat hanging over the world, the political polarization may melt a bit. And since Obama wants to rein in the fat payoffs at the top, income inequality may ease somewhat.

When they were politicking, Obama and McCain generally spewed the same line. Obama blasted Wall Street and showered love on Main Street. So did McCain. Both talked reregulation. Both tried to distance themselves from Bush administration laissez-faire ideology.

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“The kinds of economic policies normally associated with Democrats are seen as the solution” to the sinking economy, says Gary Jacobson, a professor of political science at UCSD, whose office is adjacent to Poole’s. The current Republican administration has thrown trillions of dollars at the credit crisis — even taking ownership positions in banks and arranging shotgun marriages of financial institutions. President Bush “has put government in charge of the private sector in ways that in the past no Republican would have ever touched.”

Although the Bush crowd basically threw money at banks, not people, in my opinion the Republicans may not put up much of a fuss about Obama’s health-care and entitlements-expansion proposals. Both sides of the aisle will honor spending and easy money. Certainly, reregulation won’t encounter much resistance: “There is a broad consensus that under deregulation, things got out of hand. There will be some form of increased regulation and oversight” of private-sector activities, says Jacobson.

“The most disastrous thing was not regulating those things called credit default swaps,” the unregulated, unmonitored, incendiary derivatives that guarantee debt, says Poole. “But you have to be careful with regulation. The road to hell is paved with good intentions.” When the Enron/WorldCom fraudulent-accounting controversies hit in the early 2000s, Congress passed Sarbanes-Oxley, a bill requiring companies to spend much more on internal financial control. But the requirements “raised the costs of compliance for small firms” and therefore had bad side effects.

Taxes must be approached carefully too. Obama’s proposed increases on higher-income citizens “won’t hurt the economy that much,” says Poole, but to rake in tax receipts, eventually “you have to go down to the middle class. It’s like Willie Sutton. He robbed banks because that’s where the money was.” If things get worse, Obama may have to tap the middle class. After all, Governor Arnold Schwarzenegger is proposing a 1.5 percent sales tax increase to help close a huge budget gap in California.

Obama and McCain promised change, and it is coming, without question. “There is certainly a possibility of a new era, although not a New Deal,” says Jacobson. “There will be a period of more social consciousness. Extravagance will be out. There will be more focus on the societal costs of economic development.” The environmental movement may gain traction lost since 1980. Here’s a tip for cocktail conversation: Alan Greenspan, Rush Limbaugh, and Ayn Rand are out; Paul Krugman, Al Gore, and Rachel Carson are in.

Energy and environmental strategies “have to be designed not to murder low-income people,” says Poole. To please one constituency without upsetting another, “Obama will have to be the Harry Houdini of politics.”

The late historian Arthur Schlesinger Jr. theorized that there were 30-year cycles in politics. The public-sector activists (call them liberals) take over, and then they are ousted in favor of the private-sector expansionists (conservatives). The liberals prevailed under Teddy Roosevelt (1901), Franklin Delano Roosevelt (1933), and John F. Kennedy (1961). In between the liberal periods, conservatives such as Warren Harding, Cal Coolidge, Herbert Hoover, Dwight Eisenhower, Richard Nixon, Ronald Reagan, and George H.W. Bush had their times in the spotlight. Schlesinger had thought a liberal cycle would rev up under Bill Clinton, but Newt Gingrich and then George W. Bush threw off the timing.

Corporate America was in the saddle in the 1980s and from 1995 to 2007 and was able to thwart so-called liberal initiatives. But greed got out of control: chief-executive pay got ridiculous, while middle-class incomes stagnated. Stockholders realized they had been paying big bucks for nonperformance. The public may be getting wise to that too. Perhaps the watershed was this fall, when Congress initially voted down the $700 billion bailout. Pundits said 99 percent of the mail received by Congress members bitterly opposed it. “It was standard populism at work — Wall Street bankers in silk top hats versus the little guy,” says Poole. Clearly, “Obama will do something about lifting the bottom” rungs on the income ladder, particularly through education initiatives. There won’t be resistance from the right: “I have been reading the blogs of conservative intellectuals. They know we have to start getting serious about education.”

And Poole knows that something must be done about derivatives: “We have to get this questionable paper out of the credit system quickly to unclog the thing,” he says. But no one has come up with a credible plan to wipe away the toxic derivatives and start winding down the whole process. Consumer debt is a dilemma: the savings rate is close to zero. But if people start saving, the recession will deepen. Any ideas?

You may find yourself lamenting, “It’s only a paper moon,” unless the pols who now love each other and promise to cooperate prove that they know how to prevent a 1933 redux.

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‘It’s a Barnum and Bailey world, just as phony as it can be.” Those words are from the 1933 song “It’s Only a Paper Moon.” Seventy-five years later, Americans understand that the financial system has as much substance as a handful of moon dust: the big banks are broke, sitting on mathematicized synthetic portfolios and derivatives that threaten to touch off a nuclear reaction because they are so interconnected in the global financial system. Meanwhile, the consumer, government, and financial sectors are drowning in excessive debt that guarantees a deep recession experts did not see coming but are being called upon to head off. In short, U.S. growth since the 1980s has been powered largely by unsustainable debt. In great measure, that growth was phony.

During the recent political campaign, Barack Obama and John McCain both boasted that as president, they would cooperate with the opposition. That is a certainty now and would have been had McCain been elected. The reason: no one wants to see the global economy go back to 1933. “There will be more cooperation,” says Keith Poole, professor of political science at the University of California, San Diego. Two years ago, Poole was coauthor of a hot academic book, Polarized America: The Dance of Ideology and Unequal Riches, showing that over the past three decades, political polarization and income inequality have increased in tandem. Now, with the economic threat hanging over the world, the political polarization may melt a bit. And since Obama wants to rein in the fat payoffs at the top, income inequality may ease somewhat.

When they were politicking, Obama and McCain generally spewed the same line. Obama blasted Wall Street and showered love on Main Street. So did McCain. Both talked reregulation. Both tried to distance themselves from Bush administration laissez-faire ideology.

Sponsored
Sponsored

“The kinds of economic policies normally associated with Democrats are seen as the solution” to the sinking economy, says Gary Jacobson, a professor of political science at UCSD, whose office is adjacent to Poole’s. The current Republican administration has thrown trillions of dollars at the credit crisis — even taking ownership positions in banks and arranging shotgun marriages of financial institutions. President Bush “has put government in charge of the private sector in ways that in the past no Republican would have ever touched.”

Although the Bush crowd basically threw money at banks, not people, in my opinion the Republicans may not put up much of a fuss about Obama’s health-care and entitlements-expansion proposals. Both sides of the aisle will honor spending and easy money. Certainly, reregulation won’t encounter much resistance: “There is a broad consensus that under deregulation, things got out of hand. There will be some form of increased regulation and oversight” of private-sector activities, says Jacobson.

“The most disastrous thing was not regulating those things called credit default swaps,” the unregulated, unmonitored, incendiary derivatives that guarantee debt, says Poole. “But you have to be careful with regulation. The road to hell is paved with good intentions.” When the Enron/WorldCom fraudulent-accounting controversies hit in the early 2000s, Congress passed Sarbanes-Oxley, a bill requiring companies to spend much more on internal financial control. But the requirements “raised the costs of compliance for small firms” and therefore had bad side effects.

Taxes must be approached carefully too. Obama’s proposed increases on higher-income citizens “won’t hurt the economy that much,” says Poole, but to rake in tax receipts, eventually “you have to go down to the middle class. It’s like Willie Sutton. He robbed banks because that’s where the money was.” If things get worse, Obama may have to tap the middle class. After all, Governor Arnold Schwarzenegger is proposing a 1.5 percent sales tax increase to help close a huge budget gap in California.

Obama and McCain promised change, and it is coming, without question. “There is certainly a possibility of a new era, although not a New Deal,” says Jacobson. “There will be a period of more social consciousness. Extravagance will be out. There will be more focus on the societal costs of economic development.” The environmental movement may gain traction lost since 1980. Here’s a tip for cocktail conversation: Alan Greenspan, Rush Limbaugh, and Ayn Rand are out; Paul Krugman, Al Gore, and Rachel Carson are in.

Energy and environmental strategies “have to be designed not to murder low-income people,” says Poole. To please one constituency without upsetting another, “Obama will have to be the Harry Houdini of politics.”

The late historian Arthur Schlesinger Jr. theorized that there were 30-year cycles in politics. The public-sector activists (call them liberals) take over, and then they are ousted in favor of the private-sector expansionists (conservatives). The liberals prevailed under Teddy Roosevelt (1901), Franklin Delano Roosevelt (1933), and John F. Kennedy (1961). In between the liberal periods, conservatives such as Warren Harding, Cal Coolidge, Herbert Hoover, Dwight Eisenhower, Richard Nixon, Ronald Reagan, and George H.W. Bush had their times in the spotlight. Schlesinger had thought a liberal cycle would rev up under Bill Clinton, but Newt Gingrich and then George W. Bush threw off the timing.

Corporate America was in the saddle in the 1980s and from 1995 to 2007 and was able to thwart so-called liberal initiatives. But greed got out of control: chief-executive pay got ridiculous, while middle-class incomes stagnated. Stockholders realized they had been paying big bucks for nonperformance. The public may be getting wise to that too. Perhaps the watershed was this fall, when Congress initially voted down the $700 billion bailout. Pundits said 99 percent of the mail received by Congress members bitterly opposed it. “It was standard populism at work — Wall Street bankers in silk top hats versus the little guy,” says Poole. Clearly, “Obama will do something about lifting the bottom” rungs on the income ladder, particularly through education initiatives. There won’t be resistance from the right: “I have been reading the blogs of conservative intellectuals. They know we have to start getting serious about education.”

And Poole knows that something must be done about derivatives: “We have to get this questionable paper out of the credit system quickly to unclog the thing,” he says. But no one has come up with a credible plan to wipe away the toxic derivatives and start winding down the whole process. Consumer debt is a dilemma: the savings rate is close to zero. But if people start saving, the recession will deepen. Any ideas?

You may find yourself lamenting, “It’s only a paper moon,” unless the pols who now love each other and promise to cooperate prove that they know how to prevent a 1933 redux.

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