Tag: debt

Obama’s Economic Policy: From Tragedy to Farce

Herman Cain probably had the best reaction to the President’s speech: “We waited 30 months for this?”

My reaction yesterday was mixed. In some sense, I was almost embarrassed for the President. He demanded a speech to a joint session of Congress and then produced a list of recycled (regurgitated might be a better word) Keynesian gimmicks.

But I was also angry. Tens of millions of Americans are suffering, but Obama is unwilling to admit big government isn’t working. I don’t know whether it’s because of ideological blindness or short-term politics, but it’s a tragedy that ordinary people are hurting because of his mistakes.

The Wall Street Journal this morning offered a similar response, but said it in a nicer way.

This is not to say that Mr. Obama hasn’t made any intellectual progress across his 32 months in office. He now admits the damage that overregulation can do, though he can’t do much to stop it without repealing his own legislative achievements. He now acts as if he believes that taxes matter to investment and hiring, at least for the next year. And he now sees the wisdom of fiscal discipline, albeit starting only in 2013. Yet the underlying theory and practice of the familiar ideas that the President proposed last night are those of the government conjurer. More targeted, temporary tax cuts; more spending now with promises of restraint later; the fifth (or is it sixth?) plan to reduce housing foreclosures; and more public works spending, though this time we’re told the projects really will be shovel-ready.

And let’s also note that Obama had the gall to demand that Congress immediately enact his plan - even though he hasn’t actually produced anything on paper!

And then, for the cherry on the ice cream sundae, he says he wants the so-called supercommittee to impose a bunch of class-warfare taxes to finance his latest scheme.

What began as tragedy has now become farce.

If you didn’t see it when I posted it a month or so ago, here’s the video I did last year when Obama was proposing a second faux stimulus. Now that he’s on his fourth of fifth jobs-bill/stimulus/growth-package/whatever, it’s worth another look.

Though I must confess that I made a mistake when I put together this video. I mistakenly assumed the economy would have at least managed to get back to a semi-decent level of growth. More confirmation that economists are lousy forecasters.

New CBO Numbers Confirm - Once Again - that Modest Spending Restraint Can Balance the Budget

The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline.

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each year. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned.

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

Is Obama Really Going to Propose Another Keynesian Stimulus?

Just last week, I made fun of Paul Krugman after he publicly said that a fake threat from invading aliens would be good for the economy since the earth would waste a bunch of money on pointless defense outlays.

Yesterday, there were rumors that Krugman stated that it would have been stimulative if the earthquake had been stronger and done more damage, but he exposed this as a prank (though it is understandable that many people – including me, I’m embarrassed to admit – initially assumed it was true since he did write that the 9-11 terrorist attacks boosted growth).

 But while Krugman is owed an apology by whoever pulled that stunt, the real problem is that President Obama and his advisers actually take Keynesian alchemy seriously.

And since President Obama is promising to unveil another “jobs plan” after his vacation, that almost certainly means more faux stimulus.

We don’t know what will be in this new package, but there are rumors of an infrastructure bank, which doubtlessly would be a subsidy for state and local governments. The only thing “shovel ready” about this proposal is that tax dollars will be shoveled to interest groups.

The other idea that seems to have traction is extending the current payroll tax holiday, which lowers the “employee share” of the payroll tax from 6.2 percent to 4.2 percent. The good news is that the tax holiday doesn’t increase the burden of government spending. The bad news is that temporary tax rate reductions probably have very little positive effect on economic output.

Lower tax rates are the right approach, to be sure (particularly compared to useless rebates, such as those pushed by the Bush White House in 2001 and 2008), but workers, investors, and entrepreneurs are unlikely to be strongly incentivized by something that might be seen as a one-year gimmick. Though I suppose if the holiday keeps getting extended, people may begin to think it is a semi-durable feature of the tax code, so maybe there will be some pro-growth impact.

In any event, we will see what the President unveils next month. I’ll be particularly interested in how his supposed short-run jobs proposal fits in with his long-run plan for dealing with red ink. He has been advocating for a “balanced approach” and “shared sacrifice” - but that’s Obama-speak for higher taxes, and we know that’s a damper on job creation and new investment.

As you can tell, I’m not optimistic. The best thing for growth would be to get the government out of the way. The Obama White House, though, thinks bigger government is good for the economy.

This stimulus video was produced last year and was designed for another jobs plan concocted by the Administration, but the message is still very appropriate.

Obama’s Failed Response to the Downgrade and the Outlook for Fixing America’s Spending Crisis

President Obama just spoke about the downgrade and his remarks were very disappointing. He uttered some empty platitudes, offered no plan, (amazingly) called for more government spending, and continued his advocacy of class-warfare taxation.

So what does this mean? Other than expecting volatility, I have no idea what will happen in financial markets over the next few days. But I can opine about the downgrade, Obama’s unserious response, and what it means in terms of public policy over the next few years and into the future.

Notwithstanding the President’s cavalier attitude, America is in trouble. But while the crisis is severe, we have some breathing room.

Our fiscal crisis is akin to a very dangerous, but slow-developing cancer. It is not a car wreck with immediate life-threatening injuries.

And there are solutions, as explained in this good news-bad news-bad news-bad news-good news-good news analysis.

1. There is virtually zero chance of the United States defaulting in the next 10 years (heck, probably the next 20 years). Yes, fiscal policy has been reckless and irresponsible during the Bush-Obama spending binge, but I’m guessing it will take another 10-20 years of additional over-spending to bring America to the point of Greek-style collapse. Simply stated, the U.S. economy is so large and so rich that it can’t be destroyed quickly.

…but…

2. The United States does not deserve a triple-A rating, at least for long-term debt. The nation has a giant fiscal problem, but it’s not the annual deficit or the national debt. The true crisis is the $100-trillion-plus unfunded liability for entitlement programs - especially Medicare and Medicaid. This is why America deserved to be downgraded.

…and…

3. The left in America, as exemplified by Obama’s vapid press statement, has no serious intention of addressing this problem. The President has failed to present any sort of plan. His budget early in the year was a business-as-usual document with no reforms and even the Democratic-controlled Senate rejected it 97-0. But while Senate Democrats joined Republicans in deep-sixing Obama’s joke budget, they have failed to produce a budget of their own for more than two years.

…moreover…

4. The left is treating America’s fiscal crisis is an opportunity to trick Republicans into a tax increase. That would be smart politics, to be sure, since it would automatically give Democrats the upper hand, but higher taxes would probably worsen the problem of excessive government since politicians would spend any additional revenue. And the kind of class-warfare taxes Obama has in mind would further undermine growth, adding to the nation’s fiscal woes.

…however…

5. After eight years of being corrupted by “big-government conservatism,” the GOP may finally be sincere about reducing the burden of government. Led by Congressman Paul Ryan, House Republicans  approved a very serious budget plan that would have reformed both the Medicare and Medicaid and substantially reduced the long-run burden on the U.S. economy.

…fortunately…

6. America is not at the point of no return. I’ve periodically commented about the dangers of a nation reaching a tipping point, which occurs when the people riding in the wagon outnumber those pulling the wagon. But even though dependency has jumped in America, the national spirit of self-reliance, independence, and freedom remains strong. Indeed, I think that’s what the Tea Party largely represents.

But none of this should suggest optimism. We know the solutions, but that does not mean that the politicians will do the right thing. As I said in the beginning of this post, America is at a crossroads. We can either continue a descent into Greek-style fiscal morass or, at some point in the next few years, we can implement reforms.

But, barring some remarkable change in attitude,  Obama is mostly irrelevant except to the extent that he can make matters worse by luring Republicans into a phony tax-hike deal.

Deconstructing the Revenue Side of the Debt-Ceiling Deal: Yes, There’s a Real Threat of Higher Taxes

Politicians last night announced the framework of a deal to increase the debt limit. In addition to authorizing about $900 billion more red ink right away, it would require immediate budget cuts of more than $900 billion, though “immediate” means over 10 years and “budget cuts” means spending still goes up (but not as fast as previously planned).

But that’s the relatively uncontroversial part. The fighting we’re seeing today revolves around a “super-committee” that’s been created to find $1.5 trillion of additional “deficit reduction” over the next 10 years (based on Washington math, of course).

And much of the squabbling deals with whether the super-committee is a vehicle for higher taxes. As with all kiss-your-sister budget deals, both sides can point to something they like.

Here’s what Republicans like:

The super-committee must use the “current law” baseline, which assumes that the 2001 and 2003 tax cuts expire at the end of 2012. But why are GOPers happy about this, considering they want those tax cuts extended? For the simple reason that Democrats on the super-committee therefore can’t use repeal of the “Bush tax cuts for the rich” as a revenue raiser.

Here’s what Democrats like:

There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is “impossible for Joint Committee to increase taxes”).

In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.

But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about “shared sacrifice.”

This doesn’t mean there will be tax increases, of course, and this doesn’t mean Boehner and McConnell gave up more than Obama, Reid and Pelosi.

But as someone who assumes politicians will do the wrong thing whenever possible, it’s always good to identify the worst-case scenario and then prepare to explain why it’s not a good idea.

Republicans Employ Education Weapons, Too

A couple of days ago I blasted President Obama for, in repugnant tradition, using “education” as a political weapon, invoking it to scare Americans into demanding increased taxes for “the rich.” House Speaker John Boehner, thankfully, did not abuse education similarly in his rebuttal. But his proposal for raising the debt ceiling illustrates just how weak the GOP’s commitment is to returning the federal government to its constitutional – and affordable – size. And I say this not because of the relative puniness of his proposed cuts, but what the proposal would do in education, the only area it specifically targets: increase funding for Pell Grants.

Now, I know what many people will say to this: Pell is a de facto entitlement; it has a big shortfall; and Boehner’s bill would offset the Pell increase by eliminating federal student loan repayment incentives and grad student interest subsidies. And do you just hate education, McCluskey, or poor people?

On the first points, yes to all of those, and the CBO even projects that over ten years Boehner’s bill would achieve some savings from his student-aid moves. But ten years is a long time, during which a lot of things – especially spending increases – could happen. And the seemingly forgotten fact of the matter is that we have a $14.3 trillion debt and are sooner or later going to need big, tough cuts. And though Pell Grants sound so nice – they give poor kids money to go to college! – they should be eliminated for several reasons well beyond  frightening fiscal reality:

  1. They are unconstitutional: None of the Federal government’s enumerated – and only – powers say anything about paying for college.
  2. They are inflationary: Maybe Pell Grants, because they target low-income students better than federal loans and tax-based aid, aren’t the biggest drivers of tuition inflation, but research suggests they are a driver, especially at private institutions. There is also good reason to believe that schools target their own aid dollars to other, better-off students when they can use taxpayer dough for low-income ones.
  3. They take money from real human beings – taxpayers – to make others rich: Okay, maybe not rich, but as higher ed advocates will quickly tell you, on average a person with a college degree will make roughly $1 million more over her lifetime than someone without one. There’s a lot of play in that number, but the point is generally correct: A degree helps to significantly increase earnings. How, then – even absent a mind-blowingly colossal debt – can we justify taking money from taxpayers, many of whom did not go to college, and just giving it away to others so that they can get a lot wealthier? At the very least Pell should be made into a federally backed loan program – recipients should at least have to return taxpayers’ “investment” – which Boehner could have put into his bill.

Republicans might not be as quick as Democrats to rattle education-tipped missiles, but they’re fully committed to keeping them in their arsenal.