There are a number of salient issues that warrant consideration regarding the reason why classical/conservative free market economists have such a negative view of President Obama. The first overarching issue is based on the reality that robust economic growth cannot be sustained over time unless productive capital grows continuously (remembering that productive capital includes human as well as physical and intellectual capital). It is at this juncture in any economic debate that the Keynesian and Classical/Free market (including monetarists and supply siders) schools of thought collide. One espouses that economic downturns are best countered by pushing economic growth from the demand side while the other views pushing from the supply side as more efficient.

The Keynesian approach is favored by the left because it gives them cover to increase socially inspired transfer payments that have not proven to efficiently drive economic growth especially when there are structural supply issues underlying the subject downturn. The Conservative/Free market approach is favored by the right because it directly influences capital formation and should be more efficient in the medium to long term when addressing productive capital adjustments needed to correct structural supply issues. If strictly followed, however, this approach does not directly address the short run needs of those most affected by a severe downturn. The Keynesian approach, unfortunately, as administered by politicians and bureaucrats has not historically proven to benefit the unemployed and working poor as effectively as the left purports. It is my opinion that a strict adherence to one of these approaches to addressing an economic downturn, such as the one we are slowly crawling out of, is like clapping with one hand. When the 2008 downturn occurred I was of the opinion that a relatively slow recovery would actually be good in the long run, but the painfully slow recovery of the economy, given the lack of effective fiscal policies offered by the Obama Administration, the country has endured (aside from the valuation of equities) has been totally unnecessary and extremely hard on the middle class, the unemployed and the under employed.

It is the position of the right that the dereliction of the present Administration to adopt properly sculpted fiscal policy to address the structural issues that helped precipitate the severe 2008 downturn has constrained our present slow growth economy. In absentia, the Obama Administration has failed to adopt a well-formatted body of demand side policies that could have a positive influence on human capital. In effect, carefully crafted and coordinated demand and supply side fiscal policies have been relegated to ‘back seat’ positions in favor of ideological agendas, which have increased the already burdensome Federal regulatory structure and swelled the size and power of government bureaucracy. In an upcoming discussion, examples of positive fiscal policy that combine demand and supply side stimulus will be offered.

I empathize with the Federal Reserve Board of Governors (Open Market Committee) whose primary mandate is to maintain a stable monetary policy with priorities such as controlling inflation while considering full employment objectives. The ‘Fed’ has twisted and turned itself inside out trying, with novel financial instruments, to stabilize the national economy without the requisite stimulus of a well designed fiscal policy which should have been doing the major lifting. Even though I, as well as many conservative economists, have questioned the need for quantitative easing after the first innovative round, the Federal Reserve must be commended for stepping into the vacuum created by the obvious lack of positive fiscal policy that is the responsibility of the Administrative Branch.

Some Fiscal Policy and Health Care Ideas

The next discussion will suggest some ways that fiscal policy could create guided investment incentives that would benefit entrepreneurs as well as the middle and working classes. The first proposal suggests how unemployment and other related transfer payments can be utilized to increase the value of human capital as well as increase the competitive position of American companies in the world market. The second proposal offers a tax strategy for small businesses that would give a significant boost to the economy in a short period of time. Obviously, taxation will be a hot topic in the upcoming 2016 presidential debates and many recommendations will be made to simplify and lower tax rates. The devil will be in the details. Simplifying taxation and regulations are critical aspects of any effort to incentivize investment and economic growth. Lower tax rates, however, are more likely to occur alone than in coordination with the simplification of regulation and/or taxation. Keep in mind that politicians sell loop holes and exemptions, and the elimination of complexity will severely dig into their reelection (campaign) coffers. In the final discussion a top down view of the Affordable Health Care Act will be offered. In many written and verbal presentations, I as well as others have referred to the Affordable Health Care Act, since the day of its inception, as a ‘Rube Goldberg contraption’. All of us who have done so owe Rube Goldberg an apology because his machines are humorous and insightful.

Fiscal Policy Recommendations Related to Unemployment and Training

The unemployed and working poor receive unemployment and other benefits with little or no significant accompanying conditions. The following recommendation applies only to those individuals receiving benefits who are deemed to be able bodied and/or trainable and to those employers participating in the proposed program. For those individuals, all of their benefits would be tied to an education/training program. The dollar value of all benefits for each subject individual would be accumulated and allocated to a participating employer with the individual having some input as to the selected employer. Clearly, the program will have to offer sufficient financial incentives to make it profitable for many prospective employers to participate. Each participating employer would offer a training program based on its own present and projected human capital requirements. The employee would be compensated at a level higher than the sum of his or her benefits and perform entry-level tasks during the training period.

Obviously, all levels of government would have to cooperate in this venture. The Federal Government, through fiscal policy directives, would offer substantial targeted tax incentives and other direct subsidies to the employer as well as offer cost sharing plans to state and local governments in support of the program. Any direct training by the employer and /or associated basic or continuing education at a local community college (or public school system) would be directed toward the skill requirements of the participating company. The employee in this program would not only be receiving more compensation than the sum of his or her previous benefits from the employer, they would also qualify for earned income credit as specified in the Federal tax code.

This general approach to training is multifaceted in that it increases the value of human capital within the low skilled segment of the workforce while it enhances the competitive position of the companies in the program by increasing the productivity of their physical capital. The training received is focused on the skill requirements of real jobs that elevate the worker to a higher skilled position. The unemployed low skilled workers in America case face substantial if not debilitating competitive pressure from low wage labor in emerging markets and the only real path to financial independence from the government dole is to develop marketable skills. The lenient treatment of illegal low skilled immigrant labor only serves to exacerbate the unemployment situation faced by domestic low skilled labor. Innovation will also play a role in the attrition of low and middle income jobs. For example, the evolution of self driving cars will effectively eliminate millions of jobs in the transportation industry over time because drivers will no longer be needed. The automobile insurance sector employment will also be decimated because the number of accidents due to driver error will be drop to an insignificant level. The program suggested above will continually upgrade the skill set of domestic workers most impacted by international low wage labor and those displaced by innovation.

The primary measure of unemployment, the overall unemployment rate figure generated by the Department of Labor is a weak measure of total unemployment because it does not account for underemployment (involuntary part time) and the labor force participation rate. The unemployment situation of the low skilled labor is not adequately represented by any of these statistics. Even, a breakout of low skilled sector unemployment from the aggregate total will not be a good representation of the level of unemployment in that sector because the level of underemployment and the rate of labor force participation will again have to be factored in to any analysis. And, unfortunately, both of these factors can be expected to exhibit negative skews toward low skilled labor, and I have not been able to find any information relating to those metrics.

Taxation- Fiscal Policy Ideas

Undoubtedly, tax reform will be a hot topic item in the upcoming 2015 presidential election. There has been a lot of discussion regarding corporate taxes especially because the U.S. corporate tax rate is among the highest in the world. There is no debate regarding the negative impact U.S. corporate tax structure has on the competitive advantage of U.S. exporters in the world market. It is highly likely that a drop in the in the top corporate tax rate below 30% will be part of numerous candidates’ campaign platforms in the presidential election. Also, there will be a push to incentivize American multinational corporations to repatriate trillions of dollars of profit held overseas to avoid the massive tax bite that would occur if they brought those funds back to the United States. Taxation proposals such as the flat tax, fair tax or value added tax (or a hybrid of these proposals) will be advanced as replacements for the existing Federal tax structure. Any of these proposals, especially if set up in a simple, user friendly manner, promulgated by an act of less than twenty-five pages would be a vast improvement over the behemoth that exists now.

Any proposal aimed at improving the competitive advantage of large American corporations in the world market would give a significant boost to the U.S. economy. We must, however, also pay attention to the primary source of domestic employment, small business. Although given lip service on occasion, small businesses have been and may continue to be effectively overlooked. The adoption of a fair tax or flat tax would, to a great extent, diminish much of the unnecessary and nonproductive burdens that weigh on small businesses. As discussed earlier, however, simplification of tax codes as well as the overall regulatory process is an uphill battle, especially on the federal level. Until the existing tax code is replaced by a simple tax system such as the fair tax or flat tax that does not overburden small business, the issues that constrain the growth of small business must be addressed if sustainable robust economic growth is to be achieved.

Small businesses employ over 60% of the domestic workforce, but do not have the political clout to generate favorable regulatory loopholes and tax exemptions. There is an old Texas saying that appropriately addresses the role that small business has played in building the American economy and what their role should be in addressing the severe structural issues underlying the downturn that started in 2008 and are still a drag on the economy. The saying states that you should “dance with the one that brought you” and in the case of the American economy, that would be the entrepreneur. In addition to offering small businesses a substantial financial incentive to participate in the training program suggested earlier, a carefully structured tax reform plan for small business could significantly increase investment by small businesses and would increase their demand for labor at all skill levels.

During the first term of his administration, President Obama supported the push to increase the highest tax bracket for individuals earning over $250,000 from 35% to over 40%. He even had Warren Buffet pitch the argument that his overall tax rate was lower than his secretary’s rate. In the process he endorsed a tax increase on retained earnings for small businesses. Note that virtually all small business are structured as limited liability partnerships or companies for whom the existing tax code treats profit as personal income of the owners. Warren Buffet’s income is entirely or virtually entirely capital gains and is taxed at 20% plus a Medicare surtax and a net investment income tax. His prescription of higher taxes, therefore, was for a person or business entity other than himself.

At that point in time (about four years ago), I brought up the following recommendation, but it didn’t get much traction, because small businesses do not have the political clout to advance such proposals. If we want the entrepreneur do his magic for the economy, however, we need to encourage him or her to continually innovate and expand his or her business. The following proposal does not apply to profit that is taken out of the business as a distribution which should be taxed at the prevailing rate for personal income. The focus here is on retained earnings which would have to stay in the business. Instead of taxing retained earnings for LLPs or LLCs at personal income rates, the tax rate for their retained earnings should be set at the long term capital gains level. This tax structure would lead to a significant increase in investment by small business in a relatively short period of time. Small businesses are not likely to allow retained earnings to sit idle for an extended period of time. Retained earnings that must stay in the business can be expected to be quickly invested by the entrepreneur to expand his or her operation. The unemployed, underemployed and the economy as a whole would be near term beneficiaries of such a tax policy. In other words, America should heed the old Texas that says you should “dance with the one that brought you,” and not shackle the golden goose.