STAFF NEWS & ANALYSIS
Congratulations. Now Let's Talk About Those Tax Cuts Shall We?
By - January 23, 2009

House Speaker Nancy Pelosi, in a post-inauguration interview with Bay Area reporters Wednesday, said she will move far-reaching climate change legislation this year, but opposes – at least for now – the idea of Congress approving another costly bailout for troubled banks. The San Francisco Democrat, arguably the second most powerful person in Washington, with immense power to shape the legislative agenda, sought to tamp down expectations about how quickly Congress and President Obama will address vexing problems, from a weak economy to an ailing health care system. "We can't fix it all overnight," she said from her Capitol office overlooking the Mall, "but we have to begin." Pelosi said one of her favorite moments from Inauguration Day was when Marine One lifted off the Capitol grounds, signifying former President George W. Bush's exit from Washington. "It felt like a 10-pound anvil was lifted off my head," she said. – San Francisco Chronicle

Dominant Social Theme: Powerful people, feeling free. Is there trouble brewing in the henhouse?

Free-Market Analysis: The last few issues of the Daily Bell have been devoted to tracking the kinds of change that may take place in America as a result of the Barack Obama presidency. But it is not just Obama who intends to provide change. The American federal legislature is broadly Democratic now, and also has the intention to provide change. House Speaker Nancy Pelosi is a leader of this wing.

We have already pointed out that much of what Barack Obama intends to do to address the economic crisis is likely to actually prolong it. Bailouts, not letting prices fall, monetization, all will stretch out the process of resolving the current high levels of mal-investment. What Obama needs to do, from a free-market perspective, is get as much money into the hands of individuals and private enterprise as possible. He can do this by cutting taxes, cutting regulation and reducing monetization.

While Obama's planned stimulus package does have a kind of tax-cutting component, it is not exceptionally strong or clear-cut. If passed, his tax cuts would likely be akin to standing in a category five hurricane with an umbrella and expecting it to help. And that's primarily because all the other monetization plans he has promised will destroy any benefits that would have accrued. And that's because what is needed are not band-aid tax cuts but a complete overhaul of the tax system. He may as well not even bother to hold up his tax umbrella for all the good it will do. In fact what Nancy Pelosi seems to have in mind will reduce even the small level of tax relief that Obama was prepared to provide. Take a look at some of the broad-stroke specifics that Pelosi is considering, as reported in the Chronicle article excerpted above:

When she appeared on Fox News Sunday and seemed to break with Obama over the repeal of Bush's tax cuts for families making over $250,000 a year – she wants them revoked right away, he's suggested he'd rather let them expire in 2010 – Politico ran the headline, "Pelosi Draws Her Lines with Obama." Pelosi sought to downplay the policy rift, suggesting that she and the president may end up on the same page. "I don't know that he's made that decision," she said. "It's my view that (tax cuts for the wealthy) are big contributors to the national debt." The speaker disappointed environmentalists when she said earlier this month that she may not bring climate change legislation to the House floor this year because it may lack the votes needed for passage. … But in the interview Wednesday, she shifted her stance, saying she plans to move the bill this year. She said she hopes to hold a vote before December, when climate negotiators gather in Copenhagen, Denmark, to work on a successor to the treaty many countries adopted in Kyoto, Japan, in 1997. "I believe we have to because we see that as a source of revenue," she said, noting that proposed cap-and-trade bills would raise billions of dollars by forcing major emitters to buy credits to release greenhouse gases. "Cap-and-trade is there for a reason. You cap and you trade so you can pay for some of these investments in energy independence and renewables."

Obama expects to pay for his stimulus and public works programs mostly through monetization of debt, it would appear. Pelosi wishes to pay for additional green-industry programs through a new broad-based "cap and trade" greenhouse tax. This would seem a double whammy – monetize the economy via central banking printing presses and then add in significant additional taxes.

After Thoughts

Our only question regarding the Obama administration was whether it would manage to get more money into the hands of the private sector by adopting free-market policies and then leave it alone to grow. The answer is resoundingly NO. Obama seems to be headed in the direction of adopting further socialist policies that will embrace government activism. If so, wages will stagnate along with jobs, while inflation will move up more aggressively. Such a recipe will benefit those who own significant real assets including gold and silver. Did you like the 1970s? Get prepared for what's coming… ‘cause from up here in the Alps it doesn't look as though it's going to be pretty.

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