In 1957, the Soviet Union launched a satellite into space. Therefore, taxpayers should give more money to politically favored corporations. This is not a rigorous line of thought. But it was typical of yesterday’s State of the Union address.
Take President Obama’s proposed spending freeze. It would save $400 billion over ten years. That’s a lot of money. But almost anything looks big over ten years. The average per-year savings would be $40 billion per year. That is a little more than one percent of the budget.
The budget deficit is around $1 trillion, or nearly 30 percent of the budget. $40 billion is better than nothing, yes. But this is not a serious proposal to close the budget gap.
Besides, spending would still go up. Mandatory spending accounts for over half the budget, and the freeze won’t touch it. Social Security, Medicare, and other programs have unfunded liabilities running into the trillions. But the freeze only covers non-security discretionary spending, which is barely one-sixth of the budget.
There was some good in yesterday’s speech. The president would like to lower corporate tax rates. After Japan’s recent rate cuts, America now has the highest corporate tax rate in the developed world — nearly 40 percent in most states. This is not the way to encourage businesses to invest in America.
I wish the president had spent a little more time on the rate cut. He could have explained to the country and his party that businesses don’t actually pay corporate taxes. That’s because businesses pass on their costs. Consumers — you and I — foot the bill.
Though he touched on it only briefly, President Obama would like to enact the pending US-Korea free trade agreement. This is welcome news. The agreement has been stalled for years, even though it would have billions of dollars in economic benefits for both countries.
America also has pending free trade agreements with Colombia and Panama. Hopefully President Obama will use his upcoming South American tour to press forward with those agreements.
His export initiative leaves much to be desired. Economists have been openly mocking mercantilist “balance of trade” thinking since the 1700s. But some fallacies die hard. In practice, the export initiative is also an open invitation to rent-seeking. Companies will flood Capitol Hill to lobby for government subsidies and favors even more fiercely than they already do.
Besides, more exports without more imports means fewer consumer goods back home. And most people would rather have actual goods and services than useless green paper rectangles. By bringing those dollars back home, the export initiative would also result in fewer dollars abroad for direct foreign investment in America. Given America’s low savings rate, this could mean less investment overall. That’s bad for long-run growth.
The speech’s overall theme was the future. But it was surprisingly backward-looking. If anything, it affirmed that President Obama remains intent on making his presidency into George W. Bush’s third term. President Bush was the first president to pass a $2 trillion budget and the first to pass a $3 trillion budget. Obama is on his way to passing a $4 trillion budget before he leaves office.
President Bush believed very strongly in expanding government’s role in health care. So he signed into law Medicare Part D, which was the largest entitlement expansion since Lyndon Johnson’s Great Society. Or at least it was. Obama beat Bush at his own game with last year’s health care bill.