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  • Morning Bell: There's No Growth Here

    In the first episode of Seinfeld‘s eighth season, Jerry tries to use his broken engagement from the last episode of the seventh season to conquer the elusive “Dolores” who has rejected him multiple times in the past. But after one brief date, Dolores dumps Jerry saying, “There’s no growth here.” Looking at Sen. Barack Obama’s economic plan, we know how she feels.

    According to published reports, Obama’s economic plan consists of raising taxes on both capital gains and incomes over $250,000, $50 billion in new economic stimulus spending, and untold billions more spending in the form of extended unemployment benefits and a bailout for home buyers. From previous statements we also know Obama wants to keep America’s corporate tax rate as the second highest in the world and unilaterally renegotiate NAFTA. Democrats in Congress are even claiming his rhetoric on the campaign trail demonstrates a mandate for a “timeout” on all new trade deals. None of these policies can ever hope to grow the economy.

    Taxes
    A growing body of literature and experience indicates that higher taxes are associated with a smaller economy. For example, economists Christina Romer and David Romer have shown that, as a rule, higher taxes diminish economic activity. Their data shows that a tax increase of 1% of GDP today (about $135 billion) would eventually shrink the economy by about $400 billion annually. The Annenberg Political Fact Check disputes Sen. John McCain’s claim that Obama’s plan would be the biggest tax raise since World War II. Annenberg’s study shows that Obama would raise taxes by $103.3 billion, which would only be the fifth largest tax increase since 1943. Whether he’s fifth, seventh or first, the fact remains that Obama is raising Americans taxes by billions of dollars at a time when the economy needs tax cuts to grow.

    Spending
    Earlier this year Congress passed a $170 economic stimulus spending package. As predicted, this increased deficit spending has done nothing to help turn the economy around, so there is no reason to believe Obama’s new $50 billion in stimulus spending will be any different. Increased spending through extending unemployment benefits is also a poor way to cause economic growth since only 50 cents of every dollar in unemployment insurance benefits finances new consumption, while the other 50 cents finances consumption that households would have made otherwise.

    Trade
    Free trade is the engine of economic growth in the United States. In the first 13 years since the passage of NAFTA the U.S. economy grew by 50%, added 25 million jobs and compensation for manufacturing workers increased 1.6% annually versus 0.9% before NAFTA. We should not be putting these gains in jeopardy by threatening to unilaterally pull out of NAFTA unless big labor demands are met.

    Neither should we be stalling our efforts to expand other free trade agreements. Since January 2000, the U.S. has implemented seven FTAs with 11 countries. Between 1999 and 2007, U.S. merchandise exports to these countries increased by 75.1%, compared to the 66.7% growth in these exports to the rest of the world. The U.S. is the world’s largest exporter. U.S. exports amounted to $1.6 trillion in 2007 alone, and those exports generated 25% of U.S. GDP growth.

    Pressed on his tax plans this week on CNBC, Obama admitted he might “possibly defer” some of his tax increases if economic conditions warranted. Never mind that uncertainty in tax policy is also bad for economic growth, this statement alone shows Obama doesn’t even believe his economic plan will lead to economic growth.

    Quick Hits:

    • The New York Times editorial board admits that any carbon capping bill “would inevitably raise energy prices.”
    • U.S. Chamber of Commerce Vice President Randy Johnson says labor unions and liberals in Congress are attempting “nothing short of a rapid rewrite of our nation’s labor laws.”
    • Environmental activists are giving up on the Senate and are planning “global warming boot camps” for members of the House.
    • According to a RAND Corp. study, virginity pledges do deter some teens from having sex.
    • President Bush won European support for additional punitive sanctions against Iranian banks if Iran doesn’t suspend its uranium enrichment program.
    Posted in Economics [slideshow_deploy]

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