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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Barack Obama in BusinessWeek



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In an exclusive interview with Bloomberg BusinessWeek, Barack Obama offers a number of interesting arguments and ideas, and I’d like to highlight a few of them. Perhaps you’ve heard about the president’s favorite CEOs. But there’s some other very interesting stuff in there too. 
(1) Obama on the his small business payroll tax relief proposal

You proposed a payroll tax [credit] for small businesses that boost hiring. Would you consider expanding that to all hiring? 

We think that small businesses are the area where a targeted jobs credit would make the most difference right now. We think bigger businesses that have healthier balance sheets, more money, are in a position right now to hire, and that their decisions are going to have more to do with, are they seeing enough customers out there to justify expanding payroll.

I am optimistic that in the months to come you are going to see more and more investment like that, people being willing to take additional workers on. But small businesses are still having problems, even where they are seeing more orders, they are still having problems just generating enough capital to be able to take on more workers.

And we think that a jobs credit might not have been appropriate in the depths of the recession, where just because of the lack of demand, people were not going to hire no matter what. They were just trying to hang on. Now, as the economy is recovering, a job credit can potentially accelerate people who may be planning to hire at some point, anyway, but right now are just dipping their toe in the water.

To some extent, this makes sense. Firms that can issue their own debt are having a far easier time than firms that rely on bank loans for expansion, etc., but that’s not exactly the distinction made in the legislation. What doesn’t make sense, however, is the president’s argument regarding the role of a jobs credit — or, more broadly, the role of payroll tax relief — might have played in the depths of the recession. As Desmond Lachman and others argued, part of the problem with the stimulus is that it wasn’t sufficiently fast-acting. A Boskin-style stimulus focused on across-the-board payroll tax relief might have prevented layoffs that in turn reduced demand by reducing the cost of retaining as well as hiring employees. So perhaps firms “were not going to hire no matter what,” but they might have avoided firing large numbers of employees, and those employees would thus continue paying taxes and consuming goods and services, thus mitigating the economic contraction. 


(2) Obama on the automobiles and the perception that he is anti-business

I will point out, while we’re on the topic of autos, that Ford (F) is doing very well and GM posted a profit. And although there was a lot of second-guessing about our interventions in these auto companies, we feel that we made the right decision. GM and Chrysler aren’t out of the woods yet, but there is an enormous opportunity for us to rebuild a U.S. auto industry that, absent our intervention, might not have been there, at least with those two companies.

This, of course, is the key difference of opinion. Critics of the auto bailout believed that the liquidation of those two companies would likely lead to a smaller, nimbler, ultimately more sustainable U.S. auto industry that would be led by other firms — perhaps firms that don’t exist precisely because GM and Chrysler are consuming taxpayer resources. 

So that is an example of a very hard decision and a very politically unpopular decision that from my vantage point is pro-business. And my expectation is that as the economy continues to grow, more and more businesses will recognize that.

There is no doubt that the decision was pro-GM and pro-Chrysler, which are both businesses.

The last point I want to make with respect to just our policies on business, generally, and this goes to your first question about the perception of us being anti-business: This year I will sign legislation that will cut corporate taxes by about $70 billion— their tax obligations will be reduced by about 10% because of bonus depreciation and some other steps that we intend to take. This notion, somehow, that we have been putting this enormous tax burden on business is just not true. It is not supported by the facts.

The trouble, of course, is that deficit spending will eventually be financed by taxes. Firms that expect to survive for more than a few months are presumably concerned about their future tax burden. Why the president can’t understand this objection — why he never references it as a way to demonstrate that he at least registers and understands it — is genuinely puzzling. 

I think that the two areas where we probably got the most [criticism] from the business community that are specific, as opposed to general and “we’re worried about your rhetoric,” one has to do with marginal rates. Now I was very clear during the campaign that for people making more than $250,000 a year, we were going to go back to the kind of rates structure that we had during Bill Clinton in the 1990s, when businesses were doing perfectly well. I do that not for any punitive sense, but simply that I can’t deal with debt and deficits in a realistic way and continue to sustain those particular tax cuts.

I’m disappointed to hear that the president is only being exposed to “we’re worried about your rhetoric” objections as opposed to more specific ones, like Matthew J. Slaughter’s contention that the president’s proposed tax increase on U.S.-based multinational will reduce employment in the U.S. 

Note also that the president falls back on the notion that tax increases will only apply to households earning more than $250,000 a year, a notion he all but discards earlier in the interview. 
In an earlier interview with BusinessWeek, from July of 2009, the president offered a number of other thoughts that reflect a very particular and peculiar view of our economic past and present that doesn’t inspire much confidence in his views about the future. 
(1) Obama on the 1980s-era “change in corporate culture”
The last lunch that I had, I guess we had the CEOs of Xerox (XRX), AT&T (T), Honeywell (HON), and Coke (KO). We talked about the fact that, in the 1980s, when everybody was afraid Japan was going to eat our lunch, a lot of companies did a 180 in terms of quality improvement, efficiency, increasing productivity. There was a change in corporate culture that significantly boosted corporate productivity for a long time and helped create the boom of the ’90s. What they pointed out was, there were a couple of sectors that were resistant to that: health care, education, energy, and government.
This is a sophisticated reading, and it is admirably cant-free. It is also woefully incomplete. Of course these are sectors where we saw a huge spike in wage dispersion, in part because we say an increase in pay-for-performance. This helps solve the next puzzle the president introduces.
[What we're saying] matches up almost perfectly with what those CEOs were saying: Can we introduce the same sort of productivity in the health-care industry, which we know is going to be a growing sector because of the aging population? Can we use the need to transition our energy economy in such a way that it ends up being a huge engine for economic growth? Can we revamp our education system so that it’s producing the kind of workers we need? And then can we make government sufficiently efficient so that it not only is delivering good services for taxpayer dollars but also regains credibility? Because in the 21st century economy, a lean, mean, but effective government is going to be important. And we need to get beyond this notion that somehow government is always just the problem.
Do we want to see the “change in corporate culture that significantly boosted corporate productivity for a long time” spread to these sectors that have traditionally been insulated from robust competition? One can make a decent case that part of the reason this “change in corporate culture” did not spread is that the sectors the president identifies, with the partial exception of energy, are sectors in which the productivity-enhancing dynamic of competition, liquidation, and innovation has been dampened by the heavy role of the state and relatively high levels of union density. It seems that the president is misinterpreting the cultural shift that took place in the 1980s. Firms didn’t embrace quality improvement, efficiency, and increasing productivity because fear of the Japanese lit a fire under their behinds. Rather, shrewd executives understood that corporate raiders would seize their assets if they didn’t. In a similar vein, the rise of pay-for-performance didn’t reflect some perverse disregard for working stiffs. It reflected a desire to retain footloose talent. 
And so I actually think that some of these conversations that I have with corporate leaders, as well as with small business leaders, there’s a real recognition of, rather than be bogged down in the old ideological debates, the whole question is how do we create a smarter economy? And if we don’t do that, then we’re going to be limping along with unsatisfactory growth rates for a pretty long period of time.
Actually, the “old ideological debates” are very salient. Do you believe that corporate culture changed because the federal government decided that it should change, and created a series of targeted federal initiatives to make it change? Do you believe that it changed because benevolent CEOs wanted to rescue the United States from a descending swarm of ferociously competitive Japanese firms? Or do you believe that firms and individuals responded to the incentives offered by lower marginal tax rates, labor market deregulation, and lower barriers to trade? The president seems to believe some combination of the first and second, which is a decidedly old and very ideological view. On the question of how do we create a smarter economy, some of us believe that the first answer is that there is no single answer, and more importantly that the answers aren’t likely to come from the White House. 
(2) Obama on taxes and why he’s perceived as anti-business
Let’s look at the record. I’ve been in office six months. So far my only tax policy has been to cut taxes for 95% of working people. I haven’t signed a bill that’s raised taxes yet. To the extent that we have put in place policies, they’ve all been directed at helping businesses. A number of those who think we’re antibusiness seem to forget that it was just three or four months ago when, at great political expense, we yanked them out of the fire. And they still—at least if they’re in the financial sector—are enjoying a whole bunch of government guarantees that are propping up their business models. So it’s hard for me not to be a little skeptical when I hear that somehow we’ve been antibusiness.
This strikes me as very sound. The president has not been antibusiness. He has offered vast subsidies to a wide array of powerful corporate interests. As for taxes, however, I’m struck by the president’s apparent failure to appreciate the argument from rational expectations — sensible people anticipate that the vast increase in spending will eventually lead to higher taxes. Indeed, the president has gone on to say that he is open to raising taxes on all households, including those making less that $250,000 a year. This is intellectually honest. It also helps explain why some are concerned about the prospect of future tax increases.
(3) Obama on bondholders

Example No. 2 has to do with GM and Chrysler. The perception was that we were not being sufficiently friendly to the bondholders in that situation. Once again I’d like to point out that most of these bondholders, many of whom were hedge funds, would have lost everything they had, had it not been for the extraordinary interventions that we made in the financial system. They had no problem with government intervention if it was helping them. When, on the other hand, we say that to ensure that GM and Chrysler survive, the intervention involves everybody taking a haircut and making some decisions about how we spread the pain more equitably, [they say,] “Well, a contract’s a contract. You can’t intervene like this. This is government meddling.” There’s a selectivity to how businesses perceived some of the more extraordinary actions we’ve had to take.
This statement is a bit odd. The president’s basic point appears to be that bondholders were lucky to get anything at all. And this could be very true! But surely he can understand that the decision to violate the terms of a contract might deter private investors in the future, and that this will have serious consequences. One could make a similar moralistic argument against the bailout of large financial firms — everybody needs a haircut from time to time, let’s spread the pain equitably, etc. — yet the president has patiently explained that it was an odious but necessary step to get the economy moving. 
We are now at the lowest tax rates for high-income individuals that we’ve had—what?—since 1979. We have an unsustainable structural deficit that is going to have to be closed. We’ve got an enormous amount of need out there. The top 1% [of taxpayers have] taken a larger and larger share of growing productivity. For us to return to some semblance of balance is hardly radical. If there are any other proof points that are out there, I’d be interested in hearing them.
There’s that “change in corporate culture” again. This reminds me of that whole thing about sausage-making and eating sausages. Pay-for-performance was an essential part of the cultural shift the president lauded, yet he objects to its inescapable upshot. I have no ideological objection to steeply progressive income taxes. They just don’t work very well, as Peter Lindert and Monica Prasad and other social scientists from the center and the left have argued for some time. To point this out isn’t to engage in senseless ideological thinking.



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