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The President's Budget Reality Check

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
April 20, 2011

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President Barack Obama is crisscrossing the country this week hosting a series of town halls about the future of the U.S. economy. The civic visit format plays to his strengths, especially the president's ability to unify. Obama, like many of us, seems to carry about in his head a great vision of one American fiscal community. In his first town hall in Virginia on Tuesday, Obama addressed the problem of the mounting U.S. budget deficit by saying, "We're going to have to ask everyone to sacrifice." The president's general posture was that of teacher or chastiser. He added: "We can't just tell the wealthiest among us: You just sit there and relax."

Obama is wrong about one thing here. The wealthiest do not want to sit. They want to split. Exhorted by the budgeter in chief to pay more tax, they won't stand up and help. They will stand up and leave. This is because they have a different vision of community. They favor church communities, local communities, communities dedicated to specific international causes. But they nurse doubts that the greater American community actually benefits from individual tax sacrifice to a dysfunctional government. And they act on doubts. In California where the president will be today, for example, Obama will get to meet plenty of venture capitalists and more. But not as many as he might have. That's because California, a big-spending, high-tax state, has lost hundreds of thousands of private-sector jobs in recent years. Nationally, low-tax states by contrast have gained. Especially income-tax-free Texas, which created 1.2 million jobs (PDF) in the preceding decade.

The California vs. Texas problem is only a state-state version of a larger U.S.-world problem that the president's community-oriented approach does not address. Major corporations don't have to situate in the United States. They choose to. Foreign buyers don't have to purchase U.S. Treasuries. On April 18, Standard and Poors announced that there was a one-in-three chance it could cut the AAA bond rating of the United States due to "material risk" posed by congressional inability to agree on a budget. The 1 percent drop in the Dow Jones Industrial Average was as clear a signal as the passengers who line up at daily San Jose Airport to head off to Austin on the "Nerd Bird," as that San Jose-Austin flight is known. In both cases, a market is saying: "We can transact elsewhere."

These reality checks are reminding Obama to make his nation more competitive. Corporate tax cuts, a plan by his own Treasury, would be a valuable move since that levy's rates are higher than corporate taxes in most foreign countries. A second step would be to take seriously the plans of his opponents, such as House Budget Committee Chair Paul Ryan (R-WI), as well as the plan of his own fiscal commission, which both delved into entitlement reform more deeply than the president has. The president's emphasis should be to attracting business, not chastising it.

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