The Obama Budget Nightmare

When I was young, foolish and teeming with avarice, I came upon a novel solution to deal with my mounting credit card debt.I decided to take out a new credit card to pay the debt on the first one.

The solution seemed to have unlimited potential.

Colossally pleased with my shrewd gaming of the system, I shared my new found secret with family and friends.

My parents, children of the Great Depression and its cold realities, were momentarily flummoxed; astonished that life’s lessons had not taken root in their progeny. Disappointed but also resigned that this was something I would have to learn for myself, my father simply told me, “You can’t rob Peter to pay Paul.”

Twenty years later, apparently you can.

Welcome to the Obama budget blueprint.

The Administration’s plan is simply breathtaking in its size, scale, and fundamental realignment of government priorities and government control. As President Bush might say, Obama is not playing “small ball;” the V-chip, midnight basketball and school uniform initiatives that populated Bill Clinton’s idea of consequential.  Instead, Obama is swinging for the ideological fences.

Decisive action is enabled by a citizenry hungry for solutions amid economic crisis.  But Obama has, in fact, leveraged the current crisis to move well beyond the economic recession to propose an ideological seismic-shift in American society.

In reviewing the Obama strategy, there is eerie similarity between the Bush administration’s response to 9-11, and the Obama administration’s reaction today to the crisis triggered by the collapse of Lehman Brothers on 9-15, seven years later.

Both administrations believe(d) that singular events exposed grave operational and philosophical weaknesses with the government and society, requiring immediate attention.  As each crisis emboldened citizen outcry for action, both Administrations saw the singular events in the context of a vastly broader mandate to implement policies and priorities under the rubric of “a new reality.”

In Obama’s case, the new reality is the complete failure of the private sector and the need for direct government intervention and management, perhaps in contravention of what is currently understood to create and measure economic growth.

Consider the four pieces that make up economic growth in the US as reported by the Commerce Department.

But for all the hype, the Obama plan is antithetical to those goals and concentrates solely on the fourth item, government spending. In the process, he lays out the most sweeping redistribution of wealth since the Great Depression.

For instance, the Cap & Trade system Obama proposes is expected to generate $646 billion in revenue over a decade by monetizing the value of Green House Gas emissions (GHG). This will be used to make Obama’s “Happy Meal” tax rebate permanent for middle class Americans, and fund targeted, government-directed green technology investments.2

$318 billion in increased taxes on higher income earners will help pay for Obama’s planned expansion of health insurance coverage for the uninsured.  This will be coupled with “savings” achieved by forcing private sector health care providers to compete with the government. Under Medicare Part C, private health plans allow Medicare participants to “opt out” and choose a private plan for individualized coverage based on need and choice.3

However, with the government setting the price for procedures and drugs and restricting services, Obama can “squeeze” the private sector health insurers out of the business. By making the government alternative cheaper, he will back-door national healthcare, wreaking havoc on an industry that represents 1/7th of the US economy.

Clearly, none of these actions help revive the economy, and the budget plan writ large is rife with significant obstacles to recovery and sustained growth.

Beyond the increased taxes of the “wealthy”, a category that already pays between 50-60% of all federal taxes, the plan increases capital gains taxes on individuals, a disincentive to investment and risk taking, particularly in new technologies and small businesses.4

The wealthy will also lose mortgage deductibility (affecting the housing industry and its subs), deductibility for state and local taxes (goodbye NY and CA) and deductions for charitable giving (sorry endowments, soup kitchens and faith-based programs).

Note the general ideological hostility of the Administration to the energy industry Energy and power companies, which will be critical to any economic recovery, will be hit with a double whammy.

The Cap & Trade proposal is nothing less than a targeted tax on fossil fuel producers and users. It will have a significant ripple effect in the economy as different sectors react to potential scarcity of capacity or limits of supply with an unfortunate impact on the GDP. This is before new excise taxes for oil and gas companies, valued at $31 billion, which penalize additional drilling for US energy sources.

Before the recession, the US was approaching an energy deficit (see rising energy costs last summer) with an ancient and failing power grid and overwhelming demand. Regrettably, any recovery of the economy will be stunted by both the lack of capacity and the lack of incentive for the private sector to expand energy production delivery to anything but expensive “green” alternatives.

Finally consider that we are in a global economic downturn and the US remains the largest economy and best engine for growth.  But the Obama plan increases taxes on US companies doing business overseas by $210 billion over ten years.5

The hilarity and obvious fault of all this can be seen in the microcosm of the auto bailout package. Instead of focusing on working with the Big Three to makes cars at a profit that consumers will buy, the deal is predicated on government diktats that the Big Three produce “green cars;” regardless of their marketability to Americans, and designed to be powered by fuels that are not widely available in the US.

Remember, Americans used to laugh at Yugos. Now they’re going to be making their 21st century equivalents.

This massive redistribution of wealth and unparalleled government control is matched by an avalanche of government red ink, previously unthinkable.

Even under some notably “rosy” economic scenarios, the Obama administration, acknowledges it will add a figure equal to 80% of the “Bush  eight-year debt” to the national debt in its first term.6  Deficits still hover at the $500 billion mark after, fully $100 billion higher than the previously “unacceptable” Bush deficits. And drowning in this sea of debt at the end Obama’s first term, we will only be five years away from the projected bankruptcy of Medicare.

Irony abounds. The candidate of change is very much the president of the liberal status quo. The candidate elected to fix an economy sinking into recession has instead proposes a plan for massive social engineering that humbles or retards economic recovery at every turn.

The philosophical problem with the Obama approach is that he and the Democrats are beginning from a static mindset where the government can simply reallocate the pie to accomplish their ends.

But as any economist will tell you, government can’t create wealth. Government can only redistribute wealth or print it in the form of money, which ultimately devalues wealth.  This makes the Obama approach deeply flawed. Income isn’t static, but dynamic when incentivized. Not based on redistributionalist policies, but on private sector economic growth.

It is left to the Republicans to make that point and carry the water.

But in opposing this “Obama-nation,” Republicans need to resist the temptation of being “September 10th economists.” As all will remember, Democrats were undermined in opposition to Bush policies when they refused to acknowledge the new security reality, a reality based in the genuine fear and uncertainty of the American people. Republicans cannot fall into the same trap of falling back on familiar talking points for a new era.

The world is indeed a different place today than it was even six months ago. Our society has been frayed by a collapse in credibility among some many institutions in our daily lives, from Wall Street to Main Street. People are again insecure, uncertain and afraid. An across the board tax cut is not a real or credible comprehensive solution, though it is a reflexive solution for the GOP.

But to say that the solution is not a simple tax cut does not imply  that personal responsibility, individual choice, empowerment, ownership and limited government are not tested principles and a foundation for prosperity.

Republicans would do well to practice what they preach.  Deny the impulse toward rigid ideological solutions and embrace the ingenuity of the marketplace to tailor government programs that generate recovery, spur economic growth and mend our societal uncertainties.

“No” is an answer, not a solution. To beat the Obama experiment, Republicans need one of their own. They should start by acknowledging you can’t rob Peter to pay Paul.