Sharing Prosperity: Obama’s Economic Plan for Small Business

Obama does have quite the plan. It is a mixed bag to be sure, as anything political would be, but it is both a sound and refreshingly moral plan to help this economy work for all Americans.

Presidential candidate Barack Obama once spoke to CNBC anchor Maria Bartiromo about the economy. Bartiromo made the usual comments an ideologically minded supply-sider might make, and Obama true to form, struck his usual centrist tone:

The one thing you can be assured of is I’m not going to be making these [economic] decisions based on ideology. I’m not a dogmatist…I believe in the market. I believe in entrepreneurship. I believe in opportunity. I believe in capitalism. And I want to do what works, but what I want to make sure of is it works for all America and not just a small sliver of America.

Obama does have quite the plan. It is a mixed bag to be sure, as anything political would be, but it is both a sound and refreshingly moral plan to help this economy work for all Americans. Instead of government spending per se, it consists of government investment, a key distinction from leftist ideological choices. It provides for targeted tax relief to the engines of our economy: the consumer and the more importantly small business. As a progressive he includes union protection, but departs from political pandering and opts for sensible regulation. See a pattern? I’ve said to my progressive/liberal friends that if they don’t get a pro-business, pro-growth policy that expresses their ideals and values, they might was well pack it in to conservatives whose policies smack of trickle down, faith based “economics.” No government in a free economy creates jobs. Businesses do and they don’t do so out of charity or good will. They do so out of necessity or incentive. So there has to be a system of carrots and sticks, that forces them to, as Taylor put it, “share in the surplus.” So to create jobs, you have to be pro-business in some way, and refreshingly Obama does not disappoint. More on this later.

Economy Out of Balance? An Understatement!

Back in march, his theme of an economy out of balance with Wall Street getting all the goodies at the cost of Main Street was a curiously politic way of putting what the numbers say is a clear cut case of what Warren Buffet says is “class warfare.” How else do you explain these numbers?
In 1970, the top 10% of U.S. taxpayers on average earned $119,249 and their share of nation income was 33%. Basic economic theory states that all of a nations income plus borrowing equals GDP. So, basically the Top Ten had a third of the pie while the rest got two thirds. By 2000, that same groups average income rose to $224,877 real terms, i.e. adjusted for inflation, and their share of national income rose to 48%. That means in the last three decades of the 20th century, the Top Ten doubled their incomes and increased their share of national income. This in isolation is no crime. But let’s see what happened to the lower 90%. In 1970, that group’s average income was $27,060 and in 2000, it actually fell in real dollar terms to $27,035! That means that the Bottom 90 enjoyed nothing of the growth in our economy in terms of greater wealth creation (higher incomes) or equity in the economy (share of income).
In other words, the rising tide only lifted the boats of the Top Ten according to figures from the Census Bureau. A working paper by Piketty and Saez published for the National Bureau for Economic Research (the people who tell us when recessions start and end) showed even more disturbing results. In that same period from 1970 to 2000, the very top 0.01% of taxpayers, the people who made more than 99.99% of all Americans, saw their share of national income quintuple from 1% in 1970 to 5% in 2000. Their average incomes went from $3.6M to $24M in inflation adjusted dollars. This group includes those who clamored for a repeal of the estate tax. They saw their incomes grow 560% while most Americans sat at a standstill and still they wanted more. That’s goes against basic fairness. The rising tide did not lift all boats. Forget being Christian, progressive or liberal; that’s just un-American.

A Balanced Approach

As noted earlier, there are two economic growth engines in our economy: the consumer and the small business. The consumer spends the income and small businesses provide the jobs, in America, that provide that income. Clearly if our long term prosperity is at stake, these two constituencies need to be healthy, and they are precisely who are under attack by our current economic regime. Consumers need higher wages and small businesses need an economic environment where they can thrive. Obama’s plan substantively tackles this challenges if, and this is a big if given our politics, he combines that with spending decreases. We have got to stop hemorrhaging budget dollars. (Chief on that list of cuts is that fiscal sinkhole in western Asia called Iraq. Just a 50% decrease would save us $60 billion a year. Yikes!) Exactly which cuts will come will not be solidified until after the election, of course. The candidates aren’t suicidal or stupid.
Here are some jewels I found in the plan:

  • Focus on Finance: Zeroing out the Capital Gains Tax. What makes Obama’s plan substantive rather than mere tax-cut pandering is his focus on finance and reducing impediments for investment in small startups, a clear pro-growth policy. First and foremost a business needs cash, working capital, to operate. For startups, this comes from investors and banks. Eliminating all capital gains on investment in these firms is a great step, one I’ve advocated for some time. I’m not surprised Bartiromo missed that, since it would steal some of her thunder on the raising-taxes-will-kill-the-economy line. And it is a line. The government has to create incentives and differential tax rates are exactly that.
  • Reducing Healthcare Costs: Small Business Health Tax Credit and Low-cost National Health Exchange. Increasing healthcare costs dog small business owners to afford medical insurance themselves let alone provide it to their employees. The aggressive, refundable tax credit goes a long way to cut costs, but that’s somewhat artificial. What’s better is using the national exchange acting as a monopsony, or single payer, with huge buying power and a large risk pool to benefit from market forces to drive down cost. The devil is in the details, of course, and I know both left and right have ideological reasons to derail this. Yet another reason why I like it.
  • Putting Our Best Foot Forward: National Network of Public-Private Business Incubators Financing entrepreneurs to create small businesses is great but most fail with in the first 5 years. This happens for many reasons and can lead to increased volatility in the market, but one of them is fixable: the quality of management. Training, advice, and assistance are key to increase a budding businesses chance of success. Reducing market volatility by increasing the number of successful investments promotes the virtual cycle of investment, growth, and job creation.

Like any politician this plan is essentially a big promise to the American people, and a promise is a comfort to a fool. Once Obama is President, it’s up to us to hold his and Congress’ feet to the fire and make it a reality. As for McCain’s plan, I’ll be taking on that in a later post. Stay tuned.

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