The Obama/Romney Debate Was a Long Walk Through Fantasy Land

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On economic matters, the second presidential debate on Tuesday evening is one that took place in fantasyland.

Despite the spin, it bore no relation whatsoever to the problems we actually face.

Much of the economic part of the discussion centered around the President Barack Obama's and Governor Mitt Romney's competing plans to cut taxes. That discussion itself was laughable.

The federal budget is in deficit to the tune of $1 trillion per annum; without a major program of spending cuts and — yes – tax increases, we will be staring bankruptcy in the face by the end of the next presidential term.

The truth is any possible tax cuts will be trivial.

The important questions revolve around which taxes will be increased and, most important, how will we ensure that Congress actually makes the gigantic spending cuts that are necessary.

Romney Has Serious Math Problem

Romney was the worst offender in this respect. But neither candidate's plans were anywhere close to adding up. At least the president's emphasis on soaking the rich makes a gesture towards balancing the budget.

Romney's attempt to prove that he can cut tax rates, keep the proportion of taxes paid by the wealthy constant and give the middle class a tax cut all without widening the deficit doesn't work algebraically.

He's imposing four incompatible criteria on an equation with only three unknowns, and it won't work.

As both candidates know perfectly well, the next four years will be ones of austerity, with the ideal mix of austerity being three dollars of spending cuts for every dollar of tax increases. As Britain has discovered, a more tax-centered austerity simply plunges you back into recession.

Yet the question of how they would cut spending was never discussed, even though, if we are to avoid another deep recession, it needs to be about three quarters of the solution to our problems.

Romney's proposal to eliminate tax deductions is the best way to increase taxes, but his offsetting tax rate cuts are hopelessly unrealistic.

Spending has been allowed to grow out of control, a process begun by a Republican President, George W. Bush, and a Republican Congress led by Dennis Hastert.

Given the lack of discipline in the past, some tax increases are now necessary. We should hope that they can be confined to eliminating the home mortgage and charitable deductions, both of which would be economically beneficial.

Obama Has A Big-Government Problem

If Romney's tax arithmetic was most skewed, President Obama failed to address the real economic problem with his presidency.

I'm reasonably confident that a re-elected President Obama would produce only moderate tax increases — he'd have difficulty getting severe ones through Congress.

As for spending, the president will undoubtedly try to waste some more money, but again the real problem is in Congress, which is quite capable of wasting huge amounts of money on its own.

However, the real economic area where President Obama has free rein is in regulatory policy, and here his re-election is genuinely dangerous.

His EPA has already effectively banned the construction of new coal-fired power stations and asserted its right to regulate greenhouse gases by regulatory diktat, rather than through a market-based carbon tax pricing system.

He has also refused permission for the Keystone pipeline, which would have brought us vast quantities of cheap Canadian oil. His EPA hasn't prevented fracking, however, and has doubtless kicked itself for missing the opportunity to kill it before it took off.

But with four more years he may well find a way of killing its expansion.

His automobile fuel standards have set a goal of over 50 miles per gallon that is impossible to meet with current technology, and thus imposes ruinous costs on both Detroit and U.S. automobile buyers.

Regulatory costs are the principal reason why U.S. growth has been so unsatisfactory, and has produced so little benefit for the middle class.

Productivity growth averaged 2.8% annually for the quarter-century to 1973, then took a sudden nosedive and has since averaged only 1.8% annually, more than a third lower.

It is not a coincidence that the early 1970s saw the birth of the EPA, along with OSHA and other regulatory agencies; it also saw the birth of the environmental trial-lawyer movement, which ties up every new project for years with legal disputes.

That's also why we can't build infrastructure these days. The legal and regulatory costs are so great as to make it impossibly expensive. The Holland Tunnel under the Hudson River between New York and New Jersey was completed in 1927 at a cost of $48 million, equivalent to $700 million today.

A functionally identical duplicate tunnel was recently vetoed by New Jersey Governor Chris Christie on the grounds of its cost of $8.7 billion. The two tunnels were across the same river, and designed to do the same thing — carry two lanes of traffic in each direction.

Yet today's tunnel costs 12 times as much in real terms as the one built in the 1920s — and would doubtless take 5 or 6 years longer to complete.

Without our current regulatory and trial-lawyer infrastructure, our GDP would be about 40% higher, based on the difference between pre-1973 and post-1973 productivity trends.

That's the hidden secret of U.S. decline, and that's the hidden cost of an additional Obama term, far above any tax increases or wasteful government spending.

The problem is bipartisan; the major additions to the regulatory bloat came under President Nixon and the first President Bush. A President Romney might not tackle the problem, but at least he probably wouldn't make it worse.

The bottom line is neither candidate's plan is based in reality at the moment.

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  1. Mike Wei | October 19, 2012

    Well balance analyzed, but you seem to make the common mistake of equating tax rate to tax revenue. Democratic President like Kennedy and Republican President like Regan both found out that when they reduces the tax rate, tax revenue increases (although sadly for both, spending also increases even more)

  2. Michael Lindner | October 19, 2012

    Keith, the problem with your algebra saying that it cannot work is this: It has already worked ! It worked under Reagan, and also to some extent under Clinton when Gingrich and Congress forced him to be more economically sound. So it DOES work. That is why Obama's half-Keynesian approach will and can never work. It is also why capitalism will and does work every time. More job = more tax payers = more corporate profits = more corporate taxes paid. It is a win , win, win way to to build an economy. (and a nation under God.)

  3. HMH | October 19, 2012

    SAT(Save America Tax), a Consumption Tax just like every other major Nation in the world has, VAT,HST,call it what you want but it is coming, the U.S has No Choice
    .Fiscal Wall is more accurate than Fiscal Cliff, a runaway train that is about to come to a sudden stop.
    I never understood why Canada does not get more recognition in the U.S ,maybe because the problems the U.S has, Canada has resolved.
    The possibilty exists that one day the U.S will invade Canada for its' water,oil and Food,reminds me of that 60;s song, One Tin Soldier.

  4. Matt G | October 19, 2012

    Can you say, "snail darter, boys and girls?" I knew that you could.
    AMEN, Martin! The endless legal battles over meaningless garbage are what has killed the greatness of America, in the vain attempt to protect someone's feelings. Guess what, folks? Species have been going extinct and evolving and new ones emerging for hundreds of millions of years on this planet, and if we run a pipeline through the desolate barren sand hills of Nebraska, what re the REAL chances that it's going to kill off a species that will preserve the Earth for another hundred million (or even an additional hundred, for that matter) years?? We need to focus on advancing technology, and keeping down the cost of energy for humanity to continue to thrive. Issues like killing the Keystone pipeline and refusing to build nuclear power plants (NIMBY) are going to be the death of America, because affordable energy is what enables us to produce EVERYTHING…

  5. jim anderson | October 19, 2012

    Sounds like you will be voting for Obama.

  6. Richard Lefcourt | October 19, 2012

    Martin: I suspect that Romney's approach will worsen our debt problem for about a year. But once the business community is freed from the job-killing burdens Obama has created, intellectual theft and currency manipulation addressed, pan-American trade improved, and energy self-sufficiency gets closer, I envision a boom in investment and hiring along with a huge improvement in our balance of foreign trade followed by explosive revenue growth for the government. It may take him more than one term to right our ship but on the other hand, I believe another four years of Obama will be the end of America as we know it.

    • Eldon J. Bloedorn | October 24, 2012

      Let's hope we see the "end of America as we know it." Unregulated capitalism-cause of the Great Depression. Unregulated capitalism-cause of the current great depression. You very well may have some valid points in your missive. Although I would say this to many of your ideas as I say to the fat lady when she goes to the beauty parlour. "Good Luck."

  7. Bill | October 20, 2012

    Just a couple of things; Cheap Canadian oil? According to Kent, the days of "cheap" oil is over. Tar sands and shale oil are expensive, or am I missing something?

    Regulations that protect our health and safety are needed because of the greed factor. You know and I know why the various regulations were puit in place. We want to continue to breath without the need for personal air filters and we want to drink without the necessity of purifying the water from our taps. YYOu imply the cost of a tunnel increased 12 times because of regulations. Ha, What were the union wages for the workers back in 1927? What requirements were imposed on the job by the unions back then?.

    Looking back to "the good ol' days" without remembering the bad things, may make for good fantasy, but if we didn't learn from the past… well you know….

  8. H. Craig Bradley | October 21, 2012

    POLITICANS USE CHILDREN AS "HUMAN TAX SHIELDS" BY "KICKING THE CAN DOWN THE ROAD" SOME MORE

    The Democrats are exploiting the vagueness of Romney/Ryans Tax Reform Proposals (a.k.a. "Sketchy Deal"). http://www.romneytaxplan.com/?source=20121019_dnc_blog

    Mitt Romney needs to respond with greater tax policy clarity, detail, and repetition. This attack is subtile, yet effective. It plays on Mitt Romney's policy weaknesses; a lack of detail or specifics. Will he reduce the tax deductability of mortgages on a primary residence or just on second home mortgages? Its also a trap because if he is too specific, he won't get the votes he needs.

    The Real Estate Industry will oppose any tax reform that adversely affects them. So, its more politics, as usual. Nevertheless, Mitt Romney should not let this cheap shot go unnoticed. He needs to turn the tables and focus on the need of Americans to sacrifice now rather than force their children to do the sacrificing.

  9. Dave | October 22, 2012

    So you propose keeping an inept administration that has increased the deficit by 6T with no plan to reduce that except taxing the wealthy which at its best can only scratch the surface.
    Or are you proposing that we try a more fiscally sound approach, relying on the fact that there are plans to cut spending with a new administration post election because that is the only avenue?

  10. Eldon J. Bloedorn | October 24, 2012

    You have nailed some important points. Yet, your views on "regulation, hmm?" My comment is simple. Cause of the Great Depression-unregulated capitalism. Cause of the great current depression-unregulated capitalism. When capitalism is regulated, the Plutocrats win. When capitalism is unregulated, the Plutocrats win. Healthy regulation has not been the dream of the Plutocrats.

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