Great Society Redux?
Senator Obama's economic program is a throwback, not change.


James C. Capretta

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.