On Shearing Sheep

Obama’s economic plans are relentlessly hostile to small business.
by Victor Davis Hanson
National Review Online

You don’t produce wool by skinning the sheep. But that seems to be the present strategy to get small businesses to begin hiring, buying, and expanding.

There is apparent surprise among Obamians that unemployment has soared the last six months. The much-anticipated stimulus sputtered, and there is a sense of bewilderment in the administration about why joblessness and economic growth are stagnant after the government injected trillions of dollars into the system.

Perhaps the Obama administration needs to remember the psychology of business. After the shock of the September meltdowns, the natural reaction of anyone whose livelihood relied directly on markets was to conserve, pull in one’s horns, and ride out the mess. To restart the paralyzed economy called not just for printing money, but also for words of encouragement to businesses that their assets would be safe, interest rates would be stable, and their work would lead to greater profits.

Instead, exactly the opposite message was sent in a time of crisis. Take first the “spread the wealth” rhetoric. The impression created in the last half-year is that business is culpable for the new mess, while unions and the general public are victims who need relief from the greedy.

Everyone is angry at the Masters of the Universe on Wall Street, but under Obama ironies abound: Banks and investment houses, whose recklessness largely caused this problem, have been lumped in with the small-business person as the kindred “wealthy” who make over $200,000 a year. The family dentist, neighborhood contractor, and owner of the local insurance firm feel neither wealthy nor culpable in the fashion of AIG or Lehman Brothers. If one wishes to stimulate the economy, it makes no sense to conflate productive small businesses with financial-sector zillionaires as enemies of the people.

Team Obama also talks of taxation as if it was slicing salami — a little slice here for new FICA taxes on income above $250,000 (or is it $200,000 or is it $150,000?), another little piece cut off for new income-tax rates of about 40 percent, an additional chop for a surcharge for health care, and then let the poor states have a go with more whacks for increased sales and income taxes. The result is that though each slice may seem tiny in itself, in the aggregate there is not much salami left. Paying out 50 percent of one’s income in taxes may not be socialism, but paying out 70 percent surely is.

For the wheat farmer, electrical contractor, and 20-person law firm, the strategic calculus now goes something like this: “I think I just lost about 20 percent of next year’s income to pay for more income, health-care, state, sales, and payroll taxes, so I won’t be buying that tractor, doing any more Saturday jobs, or hiring that new litigator.” Worse still, many may add, “I will begin reducing or hiding income, avoiding taxes, and dealing in barter to save my business — rather than paying for vast new dubious entitlements for someone else.” These reactions may be unfounded, even wrong, but they are based on logical conclusions nonetheless, considering the promiscuous rhetoric of taxation that emanates daily from the Democratic Congress and the White House.

Worse still, businesses see long trends ahead that in their reckoning are disturbing. They realize that even though they will soon be paying whopping new taxes, these contributions will neither balance the budget (given the new spending) nor win them any psychosocial satisfaction from “paying their fair share.”

More likely, the president will continue to demonize businesspeople, as if their compliance in paying new taxes is proof that such new taxes were long overdue — and evidence of their ability to pay even more. Remember, impressions, not just reality, are important right now in giving businesses the confidence to once again take risks.

Nor is there any certainty about investment and interest rates. How does one borrow or lend when there is no indication how a $2 trillion deficit, and another $9 trillion in proposed debt, are to be serviced? Will it be by inflation, more taxes still, higher interest rates — or all three? Why would a bank this year lend at 4.8 percent for 30 years when it suspects it may be forced to pay 10 percent on passbook accounts in the near future?

And when small businesses turn to vent their grievances to government, they see almost no one who has ever met a payroll, hired new employees, or purchased equipment. Instead there are plenty of Ivy League technocrats, whose past worlds involve economic theorizing, tenure, lifetime job security, and much experience in regulating productive others.

Had Barack Obama run a Chicago law firm, or had Timothy Geithner created a software company, perhaps they would have some understanding of all the psychological impulses that determine whether businesses gamble or freeze up. It does not help to suggest that those who make above $250,000 are somehow self-indulgent — while our populist first couple flies in cooks, serves $100-a-pound beef, wears $400 tennis shoes, and seems to enjoy the life of the rich and famous as much as they deplore it in others — especially given the past tax hypocrisy of Geithner, Daschle, Solis, and others. We are a long way from the lives of Harry and Bess Truman.

Nor does government accept any blame. One could argue that our Barney Franks and Chris Dodds were as culpable for the Fannie/Freddie meltdown as any Wall Streeter, and, in matters of probity and ethics, as lax — given their compromised positions as simultaneous regulators and donation recipients. Instead, they almost seem to think that if they blame others for the crises, we will forget their culpability. The message is again clear to business: “You made the mistakes; we, the morally superior beings, are here to put you back on the right path — and if you don’t like it, we are the only game in town.”

Then there are all the other random business-bashing efforts. Americans were shocked by the AIG bonuses, but to deny them would have involved potentially violating the workers’ contracts. In the bailout, GM’s creditors soon discovered that traditional rules of risk and exposure did not matter, because the government deemed some creditors more morally worthy than others.

Add in new regulations about charitable donations, and again the message is clear: “You need to be taxed more, regulated more, and preached to.” At no point did the Obama administration warn the American people that they must not spend more on their credit cards than they can pay back, take out mortgages for more house than they can afford, or spend on extraneous things rather than save for essentials like catastrophic health insurance.

The imagery was instead that 280 million Americans had been cheated by banks, gouged by credit-card companies, neglected by government, and held at the mercy of business — innocent children unable to think or act on their own behalf. That demagoguery may win elections, but it turns off businesses and persuades them to sit out the next few years in puzzlement over what the new landscape and rules will be.

So the proper question is not why is unemployment rising, growth stagnant, and the future uncertain — but rather why shouldn’t all this be true, with worse still to come?