The Republican Budget and Middle Class Economics

Yesterday the House Republicans released their “Balanced Budget for a Stronger America” and the Senate Republicans will release their budget proposal today.

House Republicans would cut $5 trillion over 10 years and get rid of Obamacare. Their main goal is to balance the budget without raising taxes over that 10-year period. I wrote about this in Forbes yesterday.

Republicans are more likely however to dissipate energy fighting amongst themselves over increased defense spending.

Obama, by contrast, will respond to the House and Senate Republicans by giving a speech reiterating his “Middle-Class economics” pitch, which, in short means more spending and more government. Democrats will unite behind this.

Obama’s fiscal year 2016 budget proposal called for $3.999 trillion, just shy of the four-trillion-dollar heights we were in during the downturn. On our current path, the deficit would be $1 trillion in 10 years. The Republicans would spend $3.8 trillion in 2016, so their future cuts would need to be aggressive to really attain a balance at the end of the decade.

The president seeks seven percent spending increases in both domestic and military. He wants taxpayers to provide free community college for C-students.

He wants big new infrastructure spending projects including an “infrastructure bank” at the level of some half a trillion over six years. Stimulus anyone? Why not, since it worked so well before.

As I wrote in February about Obama’s “middle-class economics” plan:

[T]he class warfare tone from the administration ensures worse results.

The president wants to raise $320 billion with new taxes on financial institutions by slapping a fee on overseas profits and dinging high earners and estates in the name of “middle-class economics.” The administration proclaims “everyone who works hard should have the chance to get ahead”; but how achieving that translates into Washington needing more money is mysterious.

The president’s supposed “one-time” 14 percent tax on corporate overseas profits feels like an attempt to lay a foundation for two things: (1) doing it more than once, and (2) implementing assorted baby steps toward the left’s dream of a Thomas Piketty-ish “wealth tax,” such as a proposed limit on retirement accounts.

Obama’s unhelpful framing of the American Dream—the middle class can have things just so long as the upper class doesn’t—aggravates divisions between people, setting them at odds. To him there’s a fixed pie; what one guy got, he got from you. Wealth isn’t created, you “spread the wealth around.”

Real middle-class economics is actually policy that lets the poor rise to middle class, and the middle class rise to become wealthy. Obama could easily promote middle class tax breaks without attacking the wealthy, by pointing to where government ought to roll back.

Rolling back government is part of the Republicans’ approach, and it is the genuine middle-class economics. But their primary emphasis should be on rolling back over-regulation so the economy can recover. That indirectly helps reduce deficits.

Interestingly, federal outlays as a percentage of GDP have hovered at between 18 and 21 percent annual since the 1960s; it’s almost as if, whatever is done, government remains the same as a proportion of the economy. The debt, however, has dangerously topped $18 trillion.

The economy booms and busts with government spending comparable amounts. That we remain sluggish now after so much spending and so much quantitative easing implies government trying to do too much in the economy. Obama’s answer? To do still more. The administration’s new net neutrality regulations to turn the Internet into a public utility are emblematic.

Republicans should shop their budget plan, and point out we’ve already tried Obama’s way. But the real energy would be better spent on regulatory liberalization. They should send serious but strategic reform bills to Obama knowing he will veto them, but also knowing that some Democrats do want sensible reforms that benefits their constituents.

Real middle-class economics should emphasis regulatory liberalization. It’s not that the budget can take care of itself; with the entitlements time bomb, that’s clear. But a booming economy makes the rest easier.