"Obama Pushes Sweeping Change" (Wall Street Journal):
President Barack Obama delivered a $3.6 trillion budget blueprint to Congress Thursday that aims to "break from a troubled past," with expanded government activism, tax increases on affluent families and businesses, and spending cuts targeted at those he says profited from "an era of profound irresponsibility."
Obama has no standing to call anyone profoundly irresponsible when he's going to be running deficits far bigger than any Bush has run. Even if he's talking about private individuals, he's not quite right. People were responding to price signals, to low interest rates and rising net worth. Why save when your net worth is rising? A more technical, less moralistic account of the crisis would be more apt.
The budget blueprint for fiscal year 2010 is one of the most ambitious policy prescriptions in decades, a reordering of the federal government to provide national health care, shift the energy economy away from oil and gas, and boost the federal commitment to education.
One war would end, as troops leave Iraq, while another would ramp up in Afghanistan. To fund it all, families earning over $250,000 and a variety of businesses will pay a steep price, but Mr. Obama implored Americans to own up to the mistakes of the past while accepting profound sacrifices.
I can't figure out whether the price is really all that steep from this article. Taxes will rise on families earning over $250K: okay, but how much?
"We need to be honest with ourselves about what costs are being racked up, because that's how we'll come to grips with the hard choices that lie ahead," Mr. Obama said Thursday morning. "And there are some hard choices that lie ahead."
The president blamed the nation's economic travails on the administration that preceded him and on a nation that lost its bearings. His budget plan projects a federal deficit of $1.75 trillion for 2009, or 12.3% of the gross domestic product, a level not seen since 1942 as the U.S. plunged into World War II.
Reckless, reckless, reckless. And yet when you look at the individual programs, they seem sort of reasonable...
"This crisis is neither the result of a normal turn of the business cycle nor an accident of history," the president states in an opening message of the 134-page document. "We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C."
And Obama joined the Democrats in refusing to discuss Social Security reform and voting for huge agricultural subsidies. He was part of the problem. Also, this is too pessimistic. He's telling Americans that the prosperity of the Bush era was "irresponsible" and implying that it can't come back.
By 2013, the deficit would drop to $533 billion but begin to climb from there again as the heart of the Baby Boom begins drawing Social Security and Medicare benefits.
Unacceptable. We must reduce the long-term deficit. Nothing is as important as that.
The budget's introduction is likely to herald one of the fiercest political fights Washington has seen in years, waged on multiple fronts. Within minutes, Republicans were lambasting a document they called class warfare, designed to mire the nation in recession for years to come. Business lobbyists were girding for battle even before the budget's unveiling. Even Democrats are likely to blanch at cuts to agriculture and other programs that have been tried before – and have failed repeatedly.
The budget sets aside an additional $250 billion to complete the president's effort to rescue the financial markets and stabilize the banking sector. That would come on top of the $700 billion already allocated by Congress. And it is likely to grow. The budget makes clear that the reserve would be used to leverage the purchase of toxic assets weighing down the banking sector's books, $750 billion in asset purchases overall. That could mean a doubling of the original bailout in the end.
Very expensive and likely to backfire. Bailouts create complex moral hazard problems.
Mr. Obama proposes large increases in education funding, including indexing Pell Grants for higher education to inflation and converting the popular scholarship to an automatic "entitlement" program. High-speed rail would gain a $1 billion-a-year grant program, part of a larger effort to boost infrastructure spending even beyond the funds in his $787 billion stimulus plan.
College financing is a weird thing in America. As a college degree becomes an assumed part of normal life, it starts to seem an "entitlement." That's a subsidy to the college-educated classes at the expense of the non-college-attenders, but on the other hand it's meritocratic: people who have the brains and determination to attend college will be more likely to be able to do so, regardless of whether they come from a rich background. I don't know what to think about it. The high-speed rail program is $3 per year per American, a drop in the ocean-- and it sounds sort of cool.
The Defense Department would see a $20.4 billion boost in 2010, a 4% increase from this year, slowing its growth from the Bush years but securing personnel increases for the Army and Marine Corps. Mr. Obama will request an additional $75.5 billion for the wars in Iraq and Afghanistan for the rest of 2009 and another $130 billion for 2010, as he withdraws most combat troops from Iraq over 19 months but sends many of them to Afghanistan.
I'm skeptical about the Afghan campaign but he ran on it. Fair enough.
In one of the budget's most ambitious proposals, the president plans to cap the emissions of greenhouse gases, forcing polluters to purchase permits for emissions that would be slowly brought down to 14% below 2005 levels by 2020 and 83% below 2005 levels by 2050. The sale of those permits, beginning in 2012, would reap $646 billion through 2019. Of those revenues, $525.7 billion would be devoted to extending Mr. Obama's signature "Making Work Pay" $800 tax credit for working couples. Another $120 billion would go to clean energy technology.
Probably misguided in theory-- the greenhouse effect may or may not be occurring and may or may not be very harmful if it is, but in any case to cut GHG emissions enough to really influence it is too costly to contemplate, and our best bet is to ignore it and/or hope for other technological solutions, not to try to cut GHG emissions-- but okay in practice. With manufacturing melting away before our eyes, it shouldn't be hard to cut greenhouse gas emissions! And since you've got to tax something, it might as well be pollution. Presumably this will make life harder for US manufacturers and spur still more outsourcing to China and other developing countries. Which is fine I guess. Polluters will pass the tax on.
He acknowledged his $630 billion fund for a national health insurance program will not be enough to ensure access to health care for all Americans, but he said it will be a start.
This is the most crazy-unaffordable part of the bill. It doesn't say if he has a serious plan to actually control costs, so it seems safe to assume he doesn't, or not more than a token one. Spending really needs to go down, not up. Worst, while this is more than we can afford, he still calls it only "a start."
To finance his proposals, the president has clearly chosen winners and losers -- with the affluent heading the list of losers. In populist tones that reflect an anger he notably avoided on the campaign trail, Mr. Obama wrote, "Prudent investments in education, clean energy, health care, and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead… There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few."
How does he know the playing field is tilted? Maybe they're just that productive! Denigration of the country's great makers and doers will deter potential makers and doers from making and doing. The Median Voter Theorem explains why politicians always say the middle class deserves pity. It doesn't. The American middle class is extremely fortunate by any global or historical standard and politicians who encourage them to feel ingratitude and envy are unscrupulous.
That said, while the rhetoric is bad, the policy might be OK.
In that sense, the budget is payback. As expected, taxes will rise for singles earning $200,000 and couples earning $250,000, beginning in 2011 -- for a total windfall of $656 billion over 10 years. Income tax hikes would raise $339 billion alone. Limits on personal exemptions and itemized deductions would bring in another $180 billion. Higher capital gains rates would bring in $118 billion.
Bad! Chamley and Judd (1987) proved that the optimal rate of capital taxation is zero.
The estate tax, scheduled to be repealed next year, would instead be preserved, with the value of estates over $3.5 million -- $7 million for couples -- taxed at 45%.
Just keep the top marginal tax rate at or below where it was under the Clinton administration. The 1990s proved that rate doesn't prevent prosperity. Some tax hikes may be needed to bring the budget into balance.
Businesses would be hit, too. The budget envisions reaping $210 billion over the next decade by limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation.
Doesn't that just penalize companies for locating their headquarters in the US? I guess I don't really mind: it will create a lot of good jobs for citizens of the countries to which these companies relocate. Redistribution to foreigners. But it's probably stupid from the American point of view.
Another $24 billion would come from hedge fund and private equity managers, whose income would be taxed at income tax rates, not capital gains rates. Oil and gas companies would be hit particularly hard, with the repeal of multiple tax credits and deductions.
Fair enough, but won't this penalize production of US-made oil and gas and cause more imports? Just sayin'.
The federal government would take over most student lending.
Managed care companies would lose their subsidies for offering Medicare plans. Farmers with operating incomes over $500,000 would see their farm subsidies phased out. And cotton storage would no longer be financed by the federal government.
"There are times where you can afford to redecorate your house, and there are times where you need to focus on rebuilding its foundation," Mr. Obama said as he unveiled his plan. "Today we have to focus on foundations."
That self-flattery is pretty unwarranted. Focusing on the foundations is what Bush was doing with Social Security reform. None of this is all that fundamental. Policy-wise, though, I'd say that, plank by plank, this is the best we've seen from candidate or president Obama so far-- which is not saying much. There are some ideas here, even something like a coherent agenda, which if one puts to one side for the moment the deficit issue, might even be, on balance, slightly more good than bad.
Except that we can't put the deficit issue to one side, not for one moment. Running a deficit of 12.3% of GDP in sort-of-peacetime is very dangerous. The "era of profound irresponsibility" is now. And there's no prospect of us ever getting back in the black fiscally. One year of 12.3% deficits is bad enough, but most of this new spending is not temporary. And deficits, by absorbing capital that could have gone to private investment, and by creating expectations of higher future taxes, will likely suppress private investment and prevent recovery.
We should keep Obama's tax hikes and spending cuts (except capital gains) and throw out the rest. But more than that, we need a new long-run vision-- "focusing on the foundations," like Obama says he's doing but really isn't. We need to means-test Medicare, raise the retirement age, start progressive indexation, or even means-testing, of Social Security, give immigration amnesty and increase the number of H1-B and other visas.