It's hard not to see the continued sell-off on Wall Street and the
growing
fear on Main Street as a product, at least in part, of the realization
that
our new president's policies are designed to radically re-engineer
the
market-based U.S. economy, not just mitigate the recession and
financial
crisis.


The illusion that Barack Obama will lead from the economic center has
quickly come to an end. Instead of combining the best policies of
past
Democratic presidents -- John Kennedy on taxes, Bill Clinton on
welfare
reform and a balanced budget, for instance -- President Obama is
returning
to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense
drawdown.


Mr. Obama's $3.6 trillion budget blueprint, by his own admission,
redefines
the role of government in our economy and society. The budget more
than
doubles the national debt held by the public, adding more to the debt
than
all previous presidents -- from George Washington to George W. Bush
--
combined. It reduces defense spending to a level not sustained since
the
dangerous days before World War II, while increasing nondefense
spending
(relative to GDP) to the highest level in U.S. history. And it would
raise
taxes to historically high levels (again, relative to GDP). And all of
this
before addressing the impending explosion in Social Security and
Medicare
costs.


To be fair, specific parts of the president's budget are admirable
and
deserve support: increased means-testing in agriculture and medical
payments; permanent indexing of the alternative minimum tax and other
tax
reductions; recognizing the need for further financial rescue and
likely
losses thereon; and bringing spending into the budget that was
previously in
supplemental appropriations, such as funding for the wars in Iraq and
Afghanistan.


The specific problems, however, far outweigh the positives. First are
the
quite optimistic forecasts, despite the higher taxes and government
micromanagement that will harm the economy. The budget projects a
much
shallower recession and stronger recovery than private forecasters or
the
nonpartisan Congressional Budget Office are projecting. It implies a
vast
amount of additional spending and higher taxes, above and beyond even
these
record levels. For example, it calls for a down payment on universal
health
care, with the additional "resources" needed "TBD" (to be
determined).


Mr. Obama has bravely said he will deal with the projected deficits
in
Medicare and Social Security. While reform of these programs is vital,
the
president has shown little interest in reining in the growth of real
spending per beneficiary, and he has rejected increasing the
retirement age.
Instead, he's proposed additional taxes on earnings above the current
payroll tax cap of $106,800 -- a bad policy that would raise marginal
tax
rates still further and barely dent the long-run deficit.


Increasing the top tax rates on earnings to 39.6% and on capital gains
and
dividends to 20% will reduce incentives for our most productive
citizens and
small businesses to work, save and invest -- with effective rates
higher
still because of restrictions on itemized deductions and raising the
Social
Security cap. As every economics student learns, high marginal rates
distort
economic decisions, the damage from which rises with the square of the
rates
(doubling the rates quadruples the harm). The president claims he is
only
hitting 2% of the population, but many more will at some point be in
these
brackets.


As for energy policy, the president's cap-and-trade plan for CO2
would
ensnare a vast network of covered sources, opening up countless
opportunities for political manipulation, bureaucracy, or worse. It
would
likely exacerbate volatility in energy prices, as permit prices soar
in
booms and collapse in busts. The European emissions trading system has
been
a dismal failure. A direct, transparent carbon tax would be far
better.


Moreover, the president's energy proposals radically underestimate the
time
frame for bringing alternatives plausibly to scale. His own Energy
Department estimates we will need a lot more oil and gas in the
meantime,
necessitating $11 trillion in capital investment to avoid permanently
higher
prices.


The president proposes a large defense drawdown to pay for exploding
nondefense outlays -- similar to those of Presidents Carter and
Clinton --
which were widely perceived by both Republicans and Democrats as
having gone
too far, leaving large holes in our military. We paid a high price for
those
mistakes and should not repeat them.


The president's proposed limitations on the value of itemized
deductions for
those in the top tax brackets would clobber itemized charitable
contributions, half of which are by those at the top. This change
effectively increases the cost to the donor by roughly 20% (to just
over 72
cents from 60 cents per dollar donated). Estimates of the
responsiveness of
giving to after-tax prices range from a bit above to a little below
proportionate, so reductions in giving will be large and permanent,
even
after the recession ends and the financial markets rebound.


A similar effect will exacerbate tax flight from states like
California and
New York, which rely on steeply progressive income taxes collecting a
large
fraction of revenue from a small fraction of their residents. This
attack on
decentralization permeates the budget -- e.g., killing the private
fee-for-service Medicare option -- and will curtail the
experimentation,
innovation and competition that provide a road map to greater
effectiveness.


The pervasive government subsidies and mandates -- in health,
pharmaceuticals, energy and the like -- will do a poor job of picking
winners and losers (ask the Japanese or Europeans) and will be
difficult to
unwind as recipients lobby for continuation and expansion. Expanding
the
scale and scope of government largess means that more and more of our
best
entrepreneurs, managers and workers will spend their time and talent
chasing
handouts subject to bureaucratic diktats, not the marketplace needs
and
wants of consumers.


Our competitors have lower corporate tax rates and tax only domestic
earnings, yet the budget seeks to restrict deferral of taxes on
overseas
earnings, arguing it drives jobs overseas. But the academic research
(most
notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals
the
opposite: American firms' overseas investments strengthen their
domestic
operations and employee compensation.


New and expanded refundable tax credits would raise the fraction of
taxpayers paying no income taxes to almost 50% from 38%. This is
potentially
the most pernicious feature of the president's budget, because it
would
cement a permanent voting majority with no stake in controlling the
cost of
general government.


From the poorly designed stimulus bill and vague new financial rescue
plan,
to the enormous expansion of government spending, taxes and debt
somehow
permanently strengthening economic growth, the assumptions underlying
the
president's economic program seem bereft of rigorous analysis and a
careful
reading of history.


Unfortunately, our history suggests new government programs, however
noble
the intent, more often wind up delivering less, more slowly, at far
higher
cost than projected, with potentially damaging unintended
consequences. The
most recent case, of course, was the government's meddling in the
housing
market to bring home ownership to low-income families, which became a
prime
cause of the current economic and financial disaster.


On the growth effects of a large expansion of government, the
European
social welfare states present a window on our potential futu
standards of
living permanently 30% lower than ours. Rounding off perceived rough
edges
of our economic system may well be called for, but a major, perhaps
irreversible, step toward a European-style social welfare state with
its
concomitant long-run economic stagnation is not.

By MICHAEL J. BOSKIN

Mr. Boskin is a professor of economics at Stanford University and a
senior
fellow at the Hoover Institution