Obama’s State of the Union Speech: The Good, the Bad, and the Ugly

David Shulman is a retired Wall Street executive who is now a senior economist at the UCLA Anderson Forecast. He is also affiliated with Baruch College (CUNY) and the University of Wisconsin.

There was a lot to like and a lot not like about President Obama’s State of the Union address last night. First the good: his proposal to pay outstanding teachers more and replace poor teachers is long overdue. However, whether his allies in the teachers’ unions allow him to accomplish this worthy goal remains to be seen. Keeping with the education theme the idea of tying support for community colleges with job specific training programs certainly makes sense.

[Check out political cartoons about the economy.]

His “all of the above” strategy for energy development sounded like the John McCain of 2008. Support for increased natural gas production through the new hydraulic fracturing technology and increased offshore drilling were more than welcome. Of course the president would have more credibility on this issue if he supported the Keystone XL Pipeline which aside from bringing oil from Canada would hook up to the prolific Baaken oil fields in North Dakota.

More near term, the call for extending the payroll tax cut for all of 2012 would certainly improve the economic outlook. I like his ideas about increasing infrastructure spending, especially in this time of very low interest rates. The president talked about doing away with the “red tape” requirements for new projects, but unless this means waiving or fast-tracking environmental reviews and waiving the prevailing wage requirements of the Davis-Bacon Act, not much will come of this.

[Read David Primo: Two Fundamental Flaws With Obama's State of the Union Message.]

Now for the bad: To be sure it is a good idea to encourage manufacturing, but to bringing more complexity to the tax code hardly seems the right way to do it. The government does a very poor job in picking winners over losers and this has been especially true in the energy field. Government policy has been supporting alternative energy since 1973 without a whole lot to show for it. While it certainly makes sense to support basic research in this area, running a venture capital fund is an open invitation to “crony capitalism.” The idea of allowing underwater homeowners to refinance their mortgages at lower rates has been around for a while, but at the end of the day it is recipe for extending the housing crisis. The strategy of delaying the pain hasn’t really worked.

As to the ugly the president’s proposal for a new 30 percent minimum tax on millionaires is hardly an incentive for economic growth and reads like recipe for a stock market crash. To be sure there are many loopholes in the tax code; most notably the capital gains treatment allowed for certain carried interest income.(Disclosure: In the past I benefitted from this provision.) It was that feature of the code that kept Mitt Romney’s effective tax rate at 15 percent on his $20 million a year income. A more serious proposal would call for a flatter loophole free tax code that would have far better results for both economic growth and economic equality. Of course the ugliest part of the speech was in what was left out. There was no mention of fixing the long term debt problem our nation faces. A full throated endorsement of the Simpson-Bowles Commission recommendations as a starting point for fiscal reform would have been most welcome.

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• See photos of the Obamas behind the scenes.