President Obama has hit two low-mark budget firsts....
First, his State of the Union budget was rejected 97-0 by the Senate. The Senate also then rejected the Ryan Plan put forth by Wisconsin House Budget Chairman Paul Ryan, 57-40, with 5 GOP votes against the plan. The President's budget did not even get a single vote from his own party.
Then, his April 13 speech attacking Paul Ryan, which included budget proposals that could not be "scored" by the Congressional Budget Office, elicited a devastating response from CBO chief Douglas Elmendorf: "We don't estimate speeches." Under questioning by Ryan Elmendorf added: “We need much more specificity than was provided in that speech. The President's response in the midst of a spectacularly anemic mini-recovery is: "We can't simply cut our way to prosperity."
Now add on the 33rd consecutive monthly deficit run up by the federal government, triple the previous record (normally, even in deficit years the government has one or more black-ink months). A look at the federal deficit charts shows that the total FY2009, 2010 & 2011 number to date is $4TR, with likely three more months of red ink, as recovery seems to have stalled. (Technically, nine months of FY2008 are on Obama's watch, which would put him at around $5TR, but at least part of that came before his policies had a chance to worsen things.) Putting today's monster deficits into historical perspective, the years since the fall 2008 financial meltdown have seen deficits top 10 percent of GDP for only the fourth time in American history. The three earlier times were during wars: the Civil War, World War I & World War II.
Putting the President's ideas in perspective is Charles Krauthammer, who calculates that the $3B annual corporate jet tax break Obama wants eliminated in a budget deal--a break buried in Obama's own 2009 stimulus bill--would cover one annual Obama deficit (average = $1.5 TR) in 5,000 years. Let's see, the Great Pyramids of Egypt are 4,600 years old....
True, G. W. Bush pushed through a similar accelerated depreciation provision in 2002, to stimulate business investment in jets after 9/11. But Obama chose to revive it, and now demonizes the break, as if he can blame Bush alone for the idea. Obama has, at times, stated flatly that in a recession taxes should not be raised:
“We have not proposed a tax hike for the wealthy that would take effect in the middle of a recession. Even the proposals that have come out of Congress – which by the way were different from the proposals I put forward – still wouldn’t kick in until after the recession was over. So he’s absolutely right, the last thing you want to do is raise taxes in the middle of a recession because that would just suck up – take more demand out of the economy and put business further in a hole.”
AEI President Arthur Brooks flags another key metric: what mixture of tax & spending changes have proven most successful in the past:
On average, failed attempts to close budget gaps relied 53 percent on tax increases and 47 percent on spending cuts. Successful consolidations averaged 85 percent spending cuts and 15 percent tax increases. Some of the most successful financial comebacks—like Finland’s in the late 1990s—involved more than 100 percent spending cuts, so that taxes could be lowered. The spending cuts by the successful countries centered on entitlements and government personnel.
Brooks also notes how skewed towards taxing the wealthy the current tax code is, and its implcations as to calls for more redistribution:
As you ponder this question, remember the facts: The wealthiest 5 percent of Americans already account for 59 percent of federal income taxes. Nearly half of our citizens pay no federal income taxes at all—yet two-thirds of us believe that everybody should at least pay something, even if just to remind ourselves that government isn’t free. The Tax Foundation reports that the percentage of Americans who are net takers from the tax system is nearing 70 percent.
In last year’s outlook, which was alarming enough, the CBO projected that our national debt would be 91 percent of GDP in 2021. The agency now says debt will be 101 percent of GDP in 2021—that is, a decade from now our debt will be larger than our economy, and still growing quickly. By 2030, CBO projects debt will top 150 percent of the economy, and by 2037 it will be 200 percent and growing. At that point, the federal government would be spending almost a tenth of the nation’s GDP on interest payments alone, up from 1 percent today.
No nation could prosper under such a massive burden of debt. The CBO is notoriously understated in drawing conclusions from the figures it provides, but last week’s report brims with barely restrained panic.
Alarming as the raw figures are, the report notes, its projections “do not include the harmful effects that rising debt would have on economic growth and interest rates. If those effects were taken into account, projected debt would increase even faster.” “Rising debt,” moreover, “would increasingly restrict policymakers’ ability to use tax and spending policies to respond to unexpected challenges, such as economic downturns or financial crises.”
CBO offers two projection scenarios: an extended baseline strategy reflecting what current law requires, and an alternative forecast that incorporates current policies, one that CBO deems more realistic. As the chart on p. 3 of the full summary shows, the first scenario essentially flat-lines through 2035 the share of the government's debt held by the public, at today's 75 percent of GDP. The more realistic scenario has the public share of government debt crossing 100 percent by 2021 and attaining about 185 percent of GDP by 2035.
Put this into perspective: economists estimate that as publicly-held government debt crosses 90 percent of GDP, which under the realistic CBO scenario comes in 2017 the country reaches a point of irreversible fiscal disintegration; it is too late to reverse course. By way of comparison, Greece today is at 150 percent of GDP worth of government debt held by the public, and is finished (bailouts will fail).
Policy ace Peter Ferrara assesses the CBO numbers, and finds bad news galore: He notes that tax rate disincentives will, in CBO's view, exacerbate future deficits:
Later in the report, CBO emphasizes its glaring omission: “The budget projections in most of this report also omit the impact that different effective marginal tax rates would have on people’s incentives to work and save.”
CBO projects that taking these effects into account would reduce real GNP by 2% to 6% by 2025, and 7% to 18% by 2035. In today’s terms, a 2% to 6% loss of GNP would be roughly $300 billion to $900 billion in lost output, and a 7% to 18% shortfall would be $1.05 trillion to $2.7 trillion in output losses.
Ferrara also debunks the notion that ObamaCare will reduce future deficits. He sees many employers dropping health care coverage, thus greatly expanding those who apply for ObamaCare benefits, a Medicare & Medicaid system that will become more insolvent. A WSJ ObamaCare editorial offers more bad news about the plan's future tax hikes.
Worse, top Bush 43 economic adviser Larry Lindsey notes that if traditional market interest rates of 5.7 percent prevailed instead of today's artificial 2.5 percent rate, some $5 TRILLION would be added to the national debt over a decade, thus dwarfing any imaginable bipartisan deal on budget savings. He adds more grim news: each percentage point of lower economic growth in one year adds $750B to the national debt over a decade; Obama's 4-plus percent growth numbers are laughably high, adding at least another $4 TR to the hole. Lindsey notes that the full $700B over ten years that Obama's soak-the-rich tax hikes aim to raise are a pittance compared to the above numbers.
All this comes when capital flows are running against America, creating an "investment gap" that will constrain economic growth. And this after a "stimulus" that created temporary jobs that, as estimated by the Council of Economic Advisers, cost $278,000 per job.
Add to that the ever-persuasive Mort Zuckerman showing that the unemployment number that everyone fixates on understates America's jobs misery:
Don't pay too much attention to the headline unemployment rate of 9.1 percent. It is scary enough, but it is a gloss on the reality. These numbers do not include the millions who have stopped looking for a job or who are working part time but would work full time if a position were available. And they count only those people who have actively applied for a job within the last four weeks.
Include those others and the real number is a nasty 16 percent. The 16 percent includes 8.5 million part-timers who want to work full time (which is double the historical norm) and those who have applied for a job within the last six months, including many of the long-term unemployed. And this 16 percent does not take into account the discouraged workers who have left the labor force. The fact is that the longer duration of six months is the more relevant testing period since the mean duration of unemployment is now 39.7 weeks, an increase from 37.1 weeks in February. [See a slide show of the 10 cities with highest real income.]
The inescapable bottom line is an unprecedented slack in the U.S. labor market. Labor's share of national income has fallen to the lowest level in modern history, down to 57.5 percent in the first quarter as compared to 59.8 percent when the so-called recovery began. This reflects not only the 7 million fewer workers but the fact that wages for part-time workers now average $19,000—less than half the median income.
Zuckerman notes that nobody is on strike, which in the past was a commonplace contributor to total unemployment. He adds:
We are nowhere near the old normal. Throughout this fragile recovery, over 90 percent of the growth in output has come from productivity gains. But typically at this stage of the cycle, labor has already taken over from productivity as the major contributor of growth. That is why we generally saw nonfarm payroll gains exceeding 300,000 per month with relative ease. This time we have recouped only 17 percent of the job losses 23 months after the recession began, as compared to 207 percent of the jobs lost from previous recessions (with the exception of 2001). There is no comfort either in two leading indicators of employment, with no growth in the workweek or in factory overtime.
Clearly, the Great American Job Machine is breaking down, and roadside assistance is not on the horizon. In the second half of this year (and thereafter?), we will be without the monetary and fiscal steroids. Nor does anyone know what will happen to long-term interest rates when the Federal Reserve ends its $600 billion quantitative easing support of the capital markets. Inventory levels are at their highest since September 2006; new order bookings are at the lowest levels since September 2009. Since home equity has long been the largest asset on the balance sheet of the average American family, all home owners are suffering from housing prices that have, on average, declined 33 percent (compare that to the Great Depression drop of 31 percent).
And the economy continues to stall, with consumer spending in May at its lowest level in 20 months. What Michael Barone calls a "profoundly aloof" President has detached himself from substantive public policy debates, focused solely upon his re-election campaign. Political guru Larry Sabato cautions that trends matter more than raw numbers in how economic conditions affect Presidential elections, so Obama is not definitely toast. That noted, with the latest unemployment number up a tenth to 9.2 percent, and only 18,000 jobs created--roughly one-tenth of the number needed to match workforce population increases--the trend continues to run against The One. Just how bad the unemployment numbers are--far worse than the one-tenth uptick suggests--is revealed in this posting by a prominent money & politics columnist. Commentary Blog's Peter Wehner adds more depressing detail--there was, he writes, not one single piece of good news in the latest jobless figures.
Add to all this fallout from The One's 2009 stimulus bill. Blogger Mickey Kaus showed how union priorities drastically curtailed shovel-ready projects, due to the 1931 Davis-Bacon Act wage-inflating rules.
So we have the complete collapse of the administration's budget plans. And what next? Easy: Democrats threaten to use the "Washington Monument ploy": allow a default, then close down popular government programs--benefits for veterans, Social Security, Medicare. This is what Bill Clinton did in 1995's showdown, when the government did close. President Clinton, exercising his executive discretion, literally closed down the Washington Monument, enraging the public against the GOP Congress, which had trumpeted the shutdown as a form of budget discipline.
Unless the GOP prepares for this ploy they face the risk of a catastrophic loss of political support from independent voters. To counter the Washington Monument ploy the GOP House should pass a bill calling for specific cuts in less popular, less needed government programs. That will create a public record and perhaps shift blame towards the president if he follows through with the ploy.
One creative idea floated recently is that the public debt clause of the Fourteenth Amendment requires the government to disregard the debt ceiling--i.e., the government cannot default, because default itself is unconstitutional. Liberal constitutional-law icon Laurence Tribe slays that intellectual dragon. Tribe's arguments are concise but sophisticated, and rather than presume to summarize I commend LFTC readers to read his superb op-ed, which features near the end this great quotation from a Supreme Court Justice John M. Harlan II (served 1955 - 1971): “[T]he Constitution is not a panacea for every blot upon the public welfare.”
Ending on a positive note, historian Walter Russell Mead sees America better positioned than China or Europe to prosper in the 21st century.
Bottom Line. The GOP must beware of being outmaneuvered in the PR battle, while not totally abandoning its principles. It might have to accept a short-term tax hike that expires in 2013, pledging to not renew it if the GOP takes the White House in November 2012. Tax hikes, which Democrats want, will further dampen economic growth in the next 18 months, thus aiding a GOP retaking of the White House. If the Democrats wish to commit political suicide, let them. It beats a default that kills GOP chances of winning. Only a GOP victory in 2012 bids fair to give the US a chance to recover from its perilous fiscal predicament.
Letter from the Capitol, LFTC, Economy, Conservative Politics