Ruminations, February 1, 2015
Obama’s budget: good, bad and ugly
On Monday, President Barack Obama will release his proposed almost $4 trillion budget for the coming fiscal year. It has parts that everyone can love and hate.
The debt. The national debt is growing (at this writing, it is over $18.1 trillion). At current rates, we are paying $118 billion in interest a year, and interest rates will go up in the future. So far, both Republicans and Democrats are concerned but don’t seem overly worried. Should they be worried? Yes.
If we look at the economic picture, the U.S. seems to be a safe haven for investors worldwide – the dollar has been getting stronger and stronger so no worries there — or are there? To paraphrase Winston Churchill – the United States has the most precarious economic system in the world – except for all the other. The European Union seems to be heading into recession and the stability of the euro is in question; China – which has always been somewhat secretive about its economic picture — is facing a declining economy and a cloudy banking picture, and sits atop a mountain of U.S. debt; Japan is beginning its third decade of economic stagnation is beginning to implement a quantitative easing program that has delivered questionable results when tried elsewhere; Russia, under sanctions, has seen the value of its currency halve in the past year; Brazil’s inflation rate went to 6.75 percent last month prompting the central bank to raise interest rates to over 12 percent. By comparison, the United States does look good – but only in comparison.
So, what about the debt? We seem to be managing it reasonably well so far. Why should we be worried? Because of the unknown unknowns. On September 10, 2001, virtually no one was worried about a terrorist attack that, besides costing 3,000 lives, destroyed the World Trade Center. The financial damage to the U.S. was considerable – not only in damage to the financial industry and the physical buildings but it led to military incursions in the Middle East. The resulting fiscal actions were financed by increased debt.
In late 2007, virtually no one foresaw the financial meltdown of the United States and the Great Recession. The bailouts, the Troubled Asset Relief Program (TARP) and programs to ameliorate financial hardships cost us trillions.
Is there another disaster looming ahead? We hope not but if one occurs and if it will cost additional trillions to resolve the problem, are there people willing to loan us the money? At what interest rate? Will these folks look at the U.S and say that it seems that every few years the U.S. gets itself in a trillion dollar mess?
We hope that there will be no future catastrophes on the scale of September 11 or the Great Recession but it would be prudent to prepare for a financial emergency. And the surest way is to substantially reduce the debt.
Increased taxes and decreased spending. Obama’s tax increases will generate some $320 billion, the White House estimates – about 0.07 percent of the budget. At the same time, Obama has proposed closing some unspecified tax loopholes.
Republicans have already said that the increased taxes don’t stand a chance. Ignoring the specifics, they have a point but so does Obama. Taxes – any taxes – slow economic growth. But we need a government and some federal spending to support it and the logical place for the government to get revenue is from taxes. It’s a tradeoff.
While some of us might believe that it would be nice if we could reduce the debt by cutting spending, that’s just not possible. Others might think it nice to believe that it would be nice to keep all federal programs and reduce the debt by increasing taxes. But there is not enough income to generate taxes to substantially reduce the debt while maintaining a growing economy.
The solution is a judicious balance between real spending reductions and tax increases.
Obama’s tax policy. Tax policy, aimed at reducing the debt, should be targeted at raising revenue not at fairness. However, given our current tax structure, there is no doubt that tax increases will be unevenly felt. As President Kennedy said. “There is always inequity in life.” While Obama claims that his tax program would be targeted at helping the middle class, the Tax Policy Center (sponsored by left-of-center think tanks) disputed that.
Nonetheless, Obama is covering new ground in some of his tax proposals. One is a wealth tax. This had been proposed by French President Francois Hollande early in his administration and then withdrawn. Obama proposed a 0.07 percent tax on U.S. financial companies with assets in excess $50 billion. Of course, there is a difference between Hollande’s proposal and Obama’s; Hollande’s applied to individuals.
Another area where Obama is treading new ground is in his proposal to tax corporations 14 percent on their accumulated offshore profits. A clever idea, but one has to wonder if Obama is really serious about this since this will no doubt be challenged in courts and take years to resolve.
The good. Obama is proposing some new taxes. Whether they are targeted correctly or not, it is in the right direction.
The bad. Only vague references to closing loopholes is referenced. In a sense, that is reduced spending but indirectly. In earlier statements, Obama had offered to include a chained consumer price index to reduce social security and other benefit increases but removed it. But Obama says it’s still on the table, depending on what the Republicans offer.
The ugly. The negotiations between Congress and the White House.
Quote without comment
(Quote often misattributed to Winston Churchill) Bernard F. Hillenbrand, Executive Director, National Association of Counties, at a hearing before the subcommittee on Housing of the Committee on Banking and Currency: June 8, 1970: “… you can depend on Americans to do the right thing when they have exhausted every other possibility.”