Rush to Judgment

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Talk show host
and conservative icon Rush Limbaugh recently ignited a firestorm
of criticism for expressing his desire that Barack Obama should
fail. Democrats, and even some Republicans, suggested that he had
put aside his patriotism to wish for an economic collapse that would
result in political advantage for conservatives. However, if you
believe as I, and apparently Rush, that Obama’s plans will prevent
recovery, then wishing that they fail to become actual policy is
the right thing to do. The problem is that since Mr. Limbaugh has
a history of partisanship, and since he did not forcefully criticize
the Bush Administration for similar (if slightly more modest) plans,
many cannot see past the messenger to recognize the truth in the
message.

I am certain
that if Obama and the Pelosi/Reid Congress succeed in fully implementing
their agenda, there is no chance the U.S. economy will recover its
position as world’s leading economy. Instead, America will start
down the road that has condemned so many nations to economic mediocrity.
By continuing and magnifying the Bush stimulus and bailout policies,
the economic rebalancing that is so vital to a sustainable recovery
cannot occur.

Limbaugh merely
said what members of the loyal opposition would say if they were
true to their supposed philosophy. But since so many Republicans
supported the Bush bailouts and stimulus packages, it would be too
blatantly hypocritical to reverse course now. In truth, for all
his talk of change Obama has merely continued and expanded the failed
policies of Bush.

The one aspect
of Obama’s agenda that has galvanized Republican criticism is higher
taxes on the rich. While I also abhor tax increases, the spending
increases supported by both parties are far more damaging to the
economy. In fact, I actually support Obama’s decision to eliminate
the "carried interest" tax advantages that had so unequally
benefitted hedge fund managers. If I had my way the income tax would
be abolished completely, but as long as we have one it is not fair
for hedge fund managers to pay lower marginal taxes than the guys
who shine their thousand dollar shoes.

The arguments
that higher tax rates will discourage hard work and initiative are
true across the entire income spectrum. It makes no sense politically
to single out the mega-wealthy for special treatment. The sad truth
is that Republicans are spending their dwindling political capital
on a non-issue. Most hedge funds relied on leveraged borrowing to
produce oversized returns. Now that the debt markets are essentially
closed, there is not much "carried interest" income left
to tax.

The bigger
issue is that few Republicans are making any serious effort to oppose
the staggering deficits that will guarantee huge future tax increases
and runaway inflation for everyone, rich and poor. By simply clinging
to tax cuts as their single economic miracle cure, Republicans risk
further marginalization.

The
president claims that his constituency is Main Street, not Wall
Street. But for all the scorn heaped on the "fat cats,"
we must remember that it took two to tango. Sure, Wall Street loaned
out too much money, but it was Main Street that borrowed it. Average
Americans used the windfall for the biggest shopping binge in world
history. As a result our entire economy has been transformed from
one based on savings and production to one based on borrowing and
consumption.

Now
that this false paradigm has been exposed, the transition back to
economic viability will be painful. Jobs must be lost in the service
sector so that labor can be reallocated towards goods production.
Asset prices, for both stocks and real estate, must decline to levels
appropriate for current circumstances. In addition, the dollar’s
exchange rate must fall to reflect our weakened competitive position.
However, by postponing these adjustments we merely assure an even
more painful transition in the future, especially for the average
Americans whose interests our new president claims to champion.
But by then Obama will have his coveted second term. Rush is right
on this one: Obama’s agenda must fail now, lest we wander too long
down the road to destitution.

March
7, 2009

Peter
Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets
and Crash
Proof: How to Profit from the Coming Economic Collapse
.

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