April 16, 2009
by Irwin Stelzer
Congress has now gone through the Obama budget with what passes for a fine-tooth comb on Capitol Hill. This meant several key Democrats rushing to the television cameras to say how frugal they were being — just before bailing out the presidential sea of red ink with a teaspoon, and provisionally giving Obama just about all he asked for. The President, who failed to wring a single pound or euro from his G20 colleagues to stimulate the world's economies, or get any meaningful support from his Nato allies for his Afghanistan surge, triumphed in absentia at home. Congress was more compliant than his European friends, although he will face a fight to get funding for the expanded effort in Afghanistan.
Budgets are more than numbers. They are statements of intent, of priorities. So to understand what Barack Obama has in mind for America, don't start by fussing with the numbers. Start with his theory that inside every crisis there is an opportunity. The crisis is the current recession; the opportunity within is the chance to convert America into a social democracy.
The leaders of the Democratic party have long wanted to have the federal government dominate the healthcare system, revamp what is already one of the world's most efficient energy systems, and extend its reach into an educational system that has historically been the preserve of state and local governments. No matter what you might think of each of those objectives, they have nothing to do with the current recession. They did not cause it, and changing any of them will not bring us out of the slump.
The President's economic advisers know that, and in private admit it. But they know, too, that the President is at the peak of his popularity, that control of both houses of Congress might not survive next year's mid-term elections, and that the crisis provides cover for spending big bucks on a liberal agenda. Now is their hour — simply sell these programmes as part of a needed stimulus.
So part of the President's budget funds programmes that he would have pursued even if he inherited an economy running at full throttle. The other part is indeed designed to stimulate the economy. Whether it is possible to turn an economy around with a programme of borrow-and-spend is a debate economists enjoy, mainly because there is no certain answer. Remember: Franklin Roosevelt's spending never did bring unemployment below double digits — it took the second world war to do that.
Now we come to the numbers, usually the boring part but in this case so staggering as to be interesting. According to the non-partisan Congressional Budget Office, the President's spending plans will produce deficits totalling $9.3 trillion over the next decade. And that's only if the economy starts growing again, soon and vigorously; if what the President calls his down payment of $634 billion on universal healthcare coverage doesn't turn out to be the $1.2 trillion that experts are predicting; if the increase in taxes on families earning more than $250,000 per year doesn't discourage small businesses from expanding; if... Well, you get the idea. Think $10 trillion plus.
This year's deficit will hit 13.1 per cent of GDP and next year's will still be 9.6 per cent, assuming a healthy recovery. Then more than 5 per cent as far ahead as the eye can see. Economists have a rule of thumb. If the deficit is less than 5 per cent of GDP, don't worry; if it's more, which it has been only once since the second world war (1983, 5.1 per cent), worry.
If the Obama budgets are enacted, we will have a much expanded, much more expensive and debt-ridden government — not just during this recession, but forever more. Obama's taxes on 'the rich' can't cover the costs of the new social democratic state. So the government will print money, which means inflation — the Latin American way of getting out from under an unsustainable debt burden.
But there is a ray of hope. A very top Obama adviser told me that there is an exit strategy. The Federal Reserve, which is pumping cash into the economy by buying up debt, will simply reverse the process, and withdraw cash. And Obama will strike a grand bargain with Congress to reduce spending on Medicaid, Medicare and Social Security. That means Republicans would agree to still higher taxes, and Democrats to cuts in benefits. Possible. Not probable, but possible.
Obama's critics have allowed themselves to be distracted by their distaste for his outsize budget deficits and massive interventions in the auto and financial services industries. Socialism, they say. Not a bit of it. Barack Obama did not tramp through the snows of Iowa and eat ethnic food to please the television cameras in order to end up personally guaranteeing Americans that he will have their tail pipes replaced if necessary. Or to fight with bankers about their compensation, or pick the hotels in which they would be permitted to entertain clients.
He did it to convert America into a social democracy on European lines. Smaller cars; more modest homes; faster trains; healthcare for all, managed by the government; an electric-supply system engineered according to government specifications; guaranteed college tuition with associated control over universities. And, necessarily, higher taxes — at first on 'the rich', then on the middle class, in a massive effort to transfer control of the nation's income from those who earned it to government bureaucrats.
In short, Obama is taking very seriously his self-description as a 'transformative' president. Lincolnesque. Rooseveltian. His stimulus programme is important to him only because he must get the economy moving if he is to retain his political clout and win another term, by the end of which the government will be controlling an increasing portion of the nation's output and wealth. After two terms, that will be a permanent change.
More ominous, he wants to extend the power of government in ways that will change the nature of America's system of governance. If AIG has contracts with its employees that the President finds offensive, abrogate the contracts or confiscate their proceeds. If banks find regulation so onerous that they want to return money borrowed from the government, warn them that if they do, they might be declared insolvent. If financial institutions and, eventually, other firms don't meet government standards of compensation and lending, authorise the Treasury to take them over. And if workers don't vote to have trade unions represent them, take away the secret ballot and force them to express a preference in the presence of union organisers.
Unlike many conservatives, I was not unhappy when Obama defeated my candidate John McCain. Reforms of the capitalist system are needed, and greater weight paid to considerations of fairness. But I did not imagine that our new President would take as his model economies that have failed for decades to grow at a sufficient rate to provide jobs for all their citizens. He is determined to do just that. I am afraid, very afraid.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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