Will Obama’s proposed budget kill the patient?
By Alyssa A. Lappen
Right Side News | March 19, 2009
President Barack Obama wants Americans to see his $3.6 trillion 2010 federal budget as a long term bail out for the sick U.S. economy. Yet it focuses on key budgetary and economic issues only at the margins—through an ancillary hit list designed to overhaul health care, education and energy policies, and abate a purported global climate crisis that evidence totally debunks, according to over 31,000 scientists.
No, the economic turmoil originated in two decades of “irrational exuberance,” as former Federal Reserve Chairman Alan Greenspan correctly termed excessive market optimism in December 1996. Social spending can’t resolve the mess, no matter how hard Obama wishes.
“In just 50 days, Congress has voted to spend about $1.2 trillion” on the $787 billion so-called stimulus and $410 billion omnibus spending bills, noted Senate Minority Leader Mitch McConnell of Kentucky. “[T]hat’s about $24 billion a day, or … $1 billion an hour — most of it borrowed.” Those astronomical sums, moreover, followed a host of 2008 spending and relief programs that cost the government $2.3 trillion—including the February $168 billion Economic Stimulus Act and October Trouble Asset Relief Program to buy $700 billion in distressed securities. Since late September, U.S. debt has risen to nearly $11 trillion. In January, the Congressional Budget Office (CBO) projected that the U.S. deficit would rise to more than 8% of the gross domestic product (GDP) later this year.
The new budget, however, proposes to add more to the national debt “than all previous presidents—from George Washington to George W. Bush,” according to Stanford University economics professor Michael Boskin. Obama promised that 95% of Americans will see no tax increase. Yet his budget proposes to raise earnings taxes over the current payroll cap of $106,800, the top marginal rates to nearly 40% and capital gains and dividends taxes to 20%. That means, as Boskin notes, Obama is cutting average Americans’ work and savings incentives—most heavily impacting the middle class, not the super-rich.
Undoubtedly, Obama’s economic maneuvers will worsen matters, something reflected in Obama’s speedily declining popularity. Obama’s support already undercuts that of President George W. Bush at an equivalent moment in 2001, reports the Wall Street Journal. Roughly 83% of Americans worry that Obama’s financial measures will fail, and things will get worse. Two thirds wanted Obama to spend less. And most Americans expect to pay higher taxes, despite assurances to the contrary. Obama has lost much Independent, and virtually all Republican support, and has lower approval than any elected 20th century president at comparable points. Finally, while slightly more Americans have overall faith in Obama, 45% have no confidence in him, an increase since his January inauguration.
Americans especially disapprove of Obama’s costly proposal to generate at least $646 billion in “climate revenues” through 2019—from a “cap and trade” tax for every ton of carbon emitted. These expenses would be dispersed throughout the economy, falling on every consumer large and small. Within ten years they would make “climate revenues” the 6th largest federal revenue stream after individual and corporate income taxes, Social Security and Medicare payroll, and excise taxes. Of that, Obama proposes redistributing $15 billion annually to subsidize alternative fuel and $65 billion to subsidize workers who frequently pay no income taxes.
Worst of all, this proposed “climate tax” wealth redistribution mechanism results from a bogus global warming theory completely debunked scientifically. Human activity generates only 4% of atmospheric carbon, which totals only 2% of the vast global oceanic carbon sink, according to Resource and Environmental Geology Professor Tom Segalstad at University of Oslo. Moreover, atmospheric carbon emissions linger only five to six years—before the calcium-rich oceans absorb them, he says.
Nor will Treasury Secretary Thomas Geithner’s proposed new financial regulations—including new capital requirements for the largest 10 banks, increased Federal Reserve Board economic risk monitors, tightened bank regulatory oversight and stricter control over inter-bank money flow—outweigh the mass of negative budgetary factors. The U.S. stock and bond markets last week booed Obama with several consecutive days of decline. Even Federal Reserve Chairman Ben Bernanke is now on the defensive: In a CBS 60 Minutes interview aired Sunday March 15, Bernanke claimed the economy will recover, albeit not until the financial markets and banks stabilize. That gave small comfort to Americans who have lost roughly 50% of their wealth since November 2007.
Yet the vast majority of world leaders at the January World Economic Forum in Davos, Switzerland were stuck in what Harvard economics professor Niall Ferguson labels a “Great Repression,” that is, deeply anxious yet “fundamentally in denial about the nature and magnitude of the problem.” They reflexively reach for “dog-eared copies of John Maynard Keynes’  General Theory,” an economic theory prescribing heavy government spending to offset market instability in periods of high unemployment. And they almost universally prescribed issuing more debt to cure a global economic crisis caused by—an overabundance of easy credit and debt.
This fundamentally delusional mindset trusts that “a crisis of debt can be solved by creating more debt.” Yet, the West’s harsh repressed reality, Ferguson observes, is its current “crisis of excessive indebtedness”—-overly leveraged households, corporations and governments, alike. Average U.S. household debt is now 141% of disposable income (that is, income after taxes); in the U.K. it’s 177%. Some of the best known U.S. and European banks have overextended balance sheet debt to “forty, sixty or even a hundred times the size of their capital.” In short, they’re largely under water. Meanwhile, the U.S. federal budget deficit could easily hit 10% of GDP in 2009, Ferguson believes, and the CBO grossly underestimates the ultimate impact of that U.S. national debt explosion.
The only obvious solution, Ferguson correctly opines, is less debt, not more. Two methods ostensibly exist to reduce that debt—artificially inflating the U.S. dollar or renegotiating the debt. The first option is not currently feasible. While most economists eye inflationary pressure, deflation has already significantly eroded prices—and with them, opportunity to print enough money to escape a crisis this big. In the last quarter of 2008, deflation cut the consumer price index by a seasonally adjusted 12.7% per annum. The only remaining solution is restructuring. Bank shareholders must face their losses; bondholders must exchange debt for stock—at a negotiated discount—and governments must re-capitalize financial institutions after writing down their assets.
In the 19th century, Ferguson concludes, governments repeatedly exchanged higher-yielding bonds for lower-yielding securities. Bonds yielding 5% were swapped for 3% bonds, for example, without a whiff of default. Thus, homes could be refinanced, banks recapitalized and privatized, and the U.S. economy reset.
But time is wasting. Obama should quickly take Ferguson’s dark warning seriously to heart: “If we are still waiting for Keynes to save us when Davos roles around next year, it may well be too late.” Otherwise, his popularity is sure to plummet to unheard of lows.
Alyssa A. Lappen, a freelance investigative journalist, is a former senior fellow of the American Center for Democracy, former senior editor of Institutional Investor, Working Woman and Corporate Finance and former associate editor of Forbes. Her work has also appeared in FrontPage Magazine, the Washington Examiner, Washington Times, Pajamas Media, American Thinker, Human Events, Right Side News, Midstream and Revue Politique. Her website is http://www.alyssaalappen.org/
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