‘Manchurian Candidate’ Starts War on Business

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‘Manchurian Candidate’ Starts War on Business

March 9 (Bloomberg) -- Back in the 1960s, Lyndon Johnson
gave us the War on Poverty. In the 1970s, Richard Nixon launched
the War on Drugs. Now that we have seen President Barack Obama’s
first-year legislative agenda, we know what kind of a war he
intends to wage.

It is no wonder that markets are imploding around us. Obama
is giving us the War on Business.

Imagine that some hypothetical enemy state spent years
preparing a “Manchurian Candidate” to destroy the U.S. economy
once elected. What policies might that leader pursue?

He might discourage private capital from entering the
financial sector by instructing his Treasury secretary to
repeatedly promise a brilliant rescue plan, but never actually
have one. Private firms, spooked by the thought of what
government might do, would shy away from transactions altogether.
If the secretary were smooth and played rope-a-dope long enough,
the whole financial sector would be gone before voters could
demand action.

Another diabolical idea would be to significantly increase
taxes on whatever firms are still standing. That would require
subterfuge, since increasing tax rates would be too obvious. Our
Manchurian Candidate would have plenty of sophisticated ideas on
changing the rules to get more revenue without increasing rates,
such as auctioning off “permits.”

These steps would create near-term distress. If our
Manchurian Candidate leader really wanted to knock the country
down for good, he would have to provide insurance against any
long-run recovery.

There are two steps to accomplish that.

Discourage Innovation

First, one way the economy might finally take off is for
some entrepreneur to invent an amazing new product that launches
something on the scale of the dot-com boom. If you want to
destroy an economy, you have to persuade those innovators not
even to try.

Second, you need to initiate entitlement programs that are
difficult to change once enacted. These programs should transfer
assets away from productive areas of the economy as efficiently
as possible. Ideally, the government will have no choice but to
increase taxes sharply in the future to pay for new entitlements.

A leader who pulled off all that might be able to finish off
the country.

Let’s see how Obama’s plan compares with our nightmare

Treasury Secretary Timothy Geithner has been so slow to act
that even liberal economist and commentator Paul Krugman is
criticizing the administration for “dithering.” It has gotten
so bad that the Intrade prediction market now has a future on
whether Geithner is gone by year’s end. It currently puts the
chance of that at about 20 percent.

No More Deferral

On the tax hike, Obama’s proposed 2010 budget quite
ominously signaled that he intends to end or significantly amend
the U.S. practice of allowing U.S. multinationals to defer U.S.
taxes on income that they earn abroad.

Currently, the U.S. has the second-highest corporate tax on
Earth. U.S. firms can compete in Europe by opening a subsidiary
in a low-tax country and locating the profits there. Since the
high U.S. tax applies only when the money is mailed home, and
firms can let the money sit abroad for as long as they want, the
big disadvantage of the high rate is muted significantly.

End that deferral opportunity and U.S. firms will no longer
be able to compete, given their huge tax disadvantage. With
foreign tax rates so low now, it is even possible that the end of
deferral could lead to the extinction of the U.S. corporation.

If any firms are to remain, they will be festooned with
massive carbon-permit expenses because of Obama’s new cap-and-
trade program.

Importing Drugs

Obama’s attack on intellectual property is evident in his
aggressive stance against U.S. pharmaceutical companies in the
budget. He would force drug companies to pay higher “rebate”
fees to Medicaid, and he included wording that suggests Americans
will soon be able to import drugs from foreign countries. The
stock prices of drug companies, predictably, tanked when his
budget plan was released.

Obama will allow cheap and potentially counterfeit
substitutes into the country and will set the U.S. price for
drugs equal to the lowest price that any foreign government is
able to coerce from our drugmakers.

Given this, why would anyone invest money in a risky new
cancer trial, or bother inventing some other new thing that the
government could expropriate as soon as it decides to?

Finally, Obama has set aside $634 billion to establish a
health-reform reserve fund, a major first step in creating a
universal health-care system. If you want to have health care for
everyone, you have to give it to many people for free. Once we
start doing that, we will never stop, at least until the
government runs out of money. 

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