October, 2010

Fruits of Thought

An Election Of Significance

It is quite likely that Barack Obama will go down in history as one of the most consequential Presidents the nation has ever had. Depending on how this current election falls, however, it might be that the reason he turns out to be so significant makes it an honor on which he would have rather passed.

Whatever one thinks about the President or his policies, one notes in the country a great awakening. There has been a sense in which the President has accomplished a great deal. He saw enacted a giant, trillion-dollar Stimulus Bill that changed forever the baseline on which federal expenditures are calculated; against enormous opposition, he spearedheaded his signature Health Care Bill.

Yet, for each action in politics, there is a reaction and the very magnitude of President Obama’s success has brought forth an enormous reaction, some of it from an inchoate group called “The Tea Party.” What is interesting about the Tea Party is that most of it’s “members” have never participated in a protest march or rally before. The overwhelming majority have jobs. They even clean up after themselves and leave the march sites clean. It is the political awakening of the bourgeoisie.

In America, politics were traditionally less ideological than in many other countries. The Democratic Party controlled the South, the most conservative region of the country. In contrast, the northeast was a Republican bastion, but these Republicans – Nelson Rockefeller, Jacob Javits, Henry Cabot Lodge, Jr. — if not precisely liberals, certainly added a moderate, internationalist weight to the Republican party. As a result, Americans could watch elections, if not precisely with disinterest, with the knowledge that, generally speaking, little would radically change even if the control of Congress switched hands.

This situation no longer applies. The Stimulus Bill, for example, was a warning flag. Such a substantial piece of legislation was passed with not a single Republican vote in the House and only three Republicans in the Senate. Then came the Health Care Reform Bill, and this enormous piece of legislation was passed without a single Republican vote.

Not only was Health Care passed without any Republican support, national polls indicated it was – and remains – unpopular legislation. Although one can sometimes pass legislation the public objects to, politics is mostly about persuasion, and if one fails to persuade the people but simply overrides their wishes, a lot of resentment will ensue.

It is easy to identify specific issues with the President’s programs that are of great concern to the produce industry. Congress adjourned without passing a budget, for the very first time since the budget process was adopted in 1974 – thus depriving businesses and the markets of the reassurance of a properly adopted budget, which enables year-out projections to be done.

On January 1, 2011, the Bush tax cuts expire. There is a great consensus in Congress that now is not a good time to raise anyone’s taxes, so a two-year extension would pass easily with substantial bi-partisan support. President Obama and the Democratic leadership in Congress want to avoid any bill that could provide any benefit to “the rich” and so won’t even bring up a bill for fear Democrats would amend it to vote the mood of the country.

The impact on the industry – and the country – will be substantial. There are many different increases but, as an example, the tax on dividends will go from a maximum of 15 percent to 39.6 percent, an increase of 164 percent. In 2013, when the health care law kicks in, an additional tax of 3.8 percent will go into effect. So the tax on dividends will almost triple in 24 months.

The impact on business is two-fold. On one side it will make it harder for businesses to raise equity. After all, the purpose of investing in a business is to either receive dividends or capital gains. The boost in taxes on both – the top capital gains rate will increase by a third – lowers the value of every share of stock.

There is another impact, though, and that is the consumer side. The higher the taxes are, the more likely are consumers to do things for themselves. If there are no taxes, then a $50 dinner costs $50. If you are buying dinner with your dividend income next year and have to pay city and state taxes, plus the new higher Federal levy, you may need $100 in income to go to the restaurant. Don’t be surprised to see people stay home.

Many see President Obama as seeking a “Europeanization” of America, with an expectation that the government will take care of the people and manage the economy. A lot of Americans recoil; they believe in American exceptionalism – they see the United States as distinct from the European ethos – where rewards are mostly market-determined, where entrepreneurs are national heroes, where those who achieve are praised, not demonized.

Arthur C. Brooks, the president of the Washington, DC-based American Enterprise Institute, argues that approximately 70 percent of Americans favor this vision of the country. The other 30 percent, however, are ensconced in highly influential posts in universities, journalism, entertainment, etc., and have had substantial influence, especially on the young. So it is not clear precisely how the battle over the future of America will come out.

President Obama has led us down a path, but his efforts have aroused opposition, whether by leading America on his proposed journey or by arousing a “Tea Party” that fights back the effort and moves the country in the opposite direction. President Obama will be seen to future generations as influential indeed. pb