Obama-Clinton Debate in Philadelphia Spawns Weird Economics

Hey, if you thought you could afford to miss the 537th Democratic presidential debate of 2008, you were wrong. Last night's shootout in Philly was extremely illuminating. A few thoughts and observations on the economic talking points from Barack Obama and Hillary Clinton:

1) If Obama is correct and the economy (where the current jobless rate is 5.1 percent vs. recessionary peaks of 8.8 percent in 1975, 10.8 percent in 1982, 7.8 percent in 1992, and 6.3 percent in 2003) is "in a shambles" and "teetering not just on the edge of recession, but potentially worse," why would he want to nearly double the capital-gains-tax rate, which is a tax on savings, investment, and, yes, housing?

In the YouTube moment of the debate, comoderator Charlie Gibson of ABC News asked Obama twice why he wanted to raise capital-gains taxes since such a move would both 1) hit the middle class and 2) produce less government revenue. Obama—who didn't seem to know that middle-class people pay capital-gains taxes, since he had just moments earlier promised not to raise taxes on people making under the $200,000-to-$250,000 range—gave this answer:

Well, Charlie, what I've said is that I would look at raising the capital-gains tax for purposes of fairness....[And as to higher rates bringing in less revenue], well, that might happen or it might not. It depends on what's happening on Wall Street and how business is going.... ...And if we can stabilize that market and we can get credit flowing again, then I think we'll see stocks do well, and once again I think we can generate the revenue that we need to run this government and hopefully to pay down some of this debt.

OK, let me get this straight: Obama thinks we may be heading into a near depression, and he wants to double a tax that might or might not, as he sees it, have a negative effect on economic activity, all for the sake of "fairness." Now that is a man of principle.

2) If Obama is correct and the economy is "in a shambles" and "teetering not just on the edge of recession, but potentially worse," why would he want raise payroll taxes by 6 to 12 percentage points on people making $100,000 or more? And again, Obama said this right after pledging not to raise taxes on people making under $200,000 to $250,000. Here are Obama's exact words:

What I have proposed is that we raise the cap on the payroll tax, because right now millionaires and billionaires don't have to pay beyond $97,000 a year. That's where it's kept. Now most firefighters, most teachers, you know, they're not making over $100,000 a year. In fact, only 6 percent of the population does. And I've also said that I'd be willing to look at exempting people who are making slightly above that.

So he would be willing to look" at exempting some middle-class folks at some income level, but no promises. Second, I keep hearing that Democrats only want to raise taxes on the top 2 percent of income earners, since they are the so-called rich. But now that number seems to be drifting downward to the top 6 percent. It is also clear, though, that Obama does take seriously the solvency problems of Social Security.

3) Obama again committed to "spending "$150 billion over 10 years in an Apollo Project, a Manhattan Project to create the alternative energy strategies that will work not only for this generation but for the next." Now here is the problem with that: Both the Manhattan Project and the Apollo program attacked a definable—and "technologically sweet," to borrow the words of Robert Oppenheimer—challenge, the basic parameters of which were pretty well understood. Governments, even hapless ones like that of the old Soviet Union, can throw plenty of dollars and bodies at those sorts of problems and come up with some sort of workable solution.

Alternative energy is more like curing cancer: broad and amorphous. Which is the best path to clean energy and energy independence? Is it cellulosic ethanol, nanotech solar cells, bacteria that can turn grass clippings into hydrocarbons, or something else completely? Who knows? But I am pretty sure government planners and bureaucrats don't know the answer. Why not subject all possible paths to the cool and cruel logic and reasoning of Mr. Market—investors, venture capitalists, and entrepreneurs?

4) Interestingly, Hillary Clinton implied she would only raise capital-gains-tax rates to 20 percent—the low point of rates during her husband's administration rather than the 28 percent that Obama mistakenly thinks was the nadir—and maybe even leave them where they are. Her answer: "I wouldn't raise it above the 20 percent if I raised it at all. I would not raise it above what it was during the Clinton administration."

5) Clinton also promised to raise taxes on people making over $250,000, no matter what the economic circumstance. Here is that exchange:

SENATOR CLINTON: Well, George, I have made a commitment that I will let the taxes on people making more than $250,000 a year go back to the rates that they were paying in the 1990s.

MR. STEPHANOPOULOS: Even if the economy is weak?

SENATOR CLINTON: Yes. And here's why: Number one, I do not believe that it will detrimentally affect the economy by doing that. As I recall, you know, we used that tool during the 1990s to very good effect and I think we can do so again.

And here is the problem with that approach. When Bill Clinton signed his big tax increase bill in August 1993, the economy had been expanding for nine consecutive quarters, more than two years, and was able to power through the negative economic impact of the hikes. In 2009, the United States might be just emerging from a nasty downturn only to get hit by a tax increase.