Update: New York Times is catching up to our analysis:
The economy is spiraling down at an accelerating pace, threatening to undermine the Obama administration’s spending plans, which anticipate vigorous rates of growth in years to come.
A sense of disconnect between the projections by the White House and the grim realities of everyday American life was enhanced on Friday, as the Commerce Department gave a harsher assessment for the last three months of 2008. In place of an initial estimate that the economy contracted at an annualized rate of 3.8 percent — already abysmal — the government said that the pace of decline was actually 6.2 percent, making it the worst quarter since 1982.
We thought there was a financial crisis. We heard something about a near depression or a bad recession or something like that. You would never know there is an economic crisis by the latest Obama publication.
We do know Obama released an 134 page “budget overview” yesterday which experience tells us will differ from the actual submitted budget to be published in April. But there has been so much hubbub about the Obama “budget overview” we decided to provide a brief “budget overview” overview.
Before proceeding with our “budget overview” overview, today is Chelsea Clinton’s 29th Birthday – here is a lovely picture of a Chelsea’s lovely presidential mother, taken this past Tuesday.
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One of our criticisms of Obama’s economic “plans” which is shared by many is that the “plans” are really an uncoordinated mess which do not relate to other Obama “plans” and certainly have not been explained fully.
We, thus far, do know that Obama’s “budget overview” unfortunately maintains the practice of offsetting the deficit with money reserved for future retirees. As a result, its estimates for future revenue and deficits are optimistic, even quixotic. We also know that the deficit is projected to rise steadily as the economy grows, instead of shrinking as it did in the 1990s.
To understand what an intelligent explanation of economic plans looks like we need look no further than Bill Clinton’s Address Before A Joint Session Of Congress in February 1993 (the equivalent of this past Tuesday’s Obama prattle) and Franklin Roosevelt’s First Fireside Chat on “The Banking Crisis”.
Both Clinton and Roosevelt were inspirational as well as detailed and explained how the solutions to the complex pieces of the economic puzzle were related. After listening to either discourse the American people knew where they were headed under the leadership of these respective presidents.
With Obama all we hear is lots of hopey words, a lot of “fill in the blank slate”, but little explanation of what all the plans for the economy actually are. This past week we were subjected to a four hour “fiscal responsibility summit” which left more questions than answers and next week we will be subjected to a “health care summit”. This week we were additionally subjected to a prime time speech and the “budget overview” release along with several other big speeches which lead to more confusion instead of enlightenment. We suspect the confusion is intentionally generated.
One word we have heard repeatedly from the Obama press corps is how “honest” he is in the budget overview. “Honest” was the word drummed into the willing White House press corps by Obama flacks apparently. Obama boasts that he includes items such as the Iraq war in the budget that Bush dumped into “emergency” appropriations and thus he is “honest”. It is true that Obama is budgeting war costs, but how “honest” is the Obama budget overview? Are the Obama projections realistic?
Some gimmicks in the Obama budget are thoroughly familiar. The administration assumes the economy will rebound faster than most other economists. But maybe these White House projections are more optimistic, you say, because they account for the effects of the recently passed stimulus bill. No dice: When I asked an administration aide if any forecasters had updated their economic outlook based on the stimulus bill, I was told that private-sector forecasts had already anticipated the stimulus’s effects.
Assuming a growing economy allows administration number crunchers to assume more tax revenues, which means a smaller deficit. This helps Obama make the bold claim that he will cut the deficit in half by the end of his term. Proving that he’s fiscally serious helps the president counter worries about the billions and billions that are going out the door to bail out homeowners, bankers, automakers, insurers and anyone else I may have overlooked.
Obama claims that he’s found $2 trillion in savings over the next 10 years. To achieve some of that savings, he inflates what’s known as the baseline—the metric against which the costs of policy changes are measured. [snip]
In this manner, the Obama administration pretends that some of the Bush tax cuts are going to affect the budget years after they are set to expire. It also assumes higher Medicare physician payments than projected under current law requirements. The same is true with the accounting for the Iraq war. The baseline assumes the war will be funded at high levels for the next 10 years, even though Obama is planning to bring 100,000 troops home in the next 19 months.
By tweaking the baseline, an administration gets credit for deficit reduction without having to make the hard choices necessary to really tame the budget—which Obama says is a key goal of his administration.
President Barack Obama’s ambitious goal of cutting the federal deficit in half relies on a perfect – some might say improbable – convergence of factors: a recovered economy, a tax boost for the rich and success in easing foreign entanglements.
In calling for a deficit of about $530 billion in four years, Obama has established a marker by which to measure his first-term performance as president. The dollar figure could be his albatross or his badge of success. [snip]
For Obama, the challenge is clear: He will have to increase spending on health care and energy if he wants to accomplish the policy overhaul he promised during his campaign, yet he also needs to cut spending elsewhere and increase revenue to meet his deficit goal. [snip]
For him to succeed, the economy will have to meet current forecasts that it will begin to turn around gradually during the second half of the year. Even so, Obama might still have to seek billions more to help rescue the beleaguered financial sector.
Administration officials say Obama will also achieve budget reductions through lower spending on the war in Iraq. However, it is unclear how much of those savings he will then devote to Afghanistan, where he already has agreed to boost troop strength. [snip]
“A lot of things have to go right between now and then,” Mark Zandi, chief economist for Moody’s Economy.com, said in an interview before he addressed the White House summit. “The policy response to the crisis has to work for the budget to stick to the script.”
Barack Obama in his budget overview exhumes the cadaver of Rosie Scenario. The Obama “budget overview” is a mirror of the old “trickle down economics” of Ronald Reagan. In the Obama version of “trickle down” the American government can spend more on more things and yet reduce the deficit. Many Dimocrats deride those who care about deficits and debt as “deficit hawks”. The derided “deficit hawks” have been proven right about the dangers of debt in the private sector – but of course there is still mockery associated with showing concern about public, government, debt.
Obama says he’s concerned about deficits:
Obama’s target would place the deficit at about 3 percent of gross domestic product. The GDP is a measure of a country’s economic activity and many economists say deficits during a stable economy should amount to no more than 2 to 2.5 percent. At $1.5 trillion, the deficit would hit a whopping 10.6 percent of GDP this year.[snip]
Obama’s 3 percent goal would still only lower deficits to ranges similar to those under Bush.
The Economist thinks Obama should also worry about the debt, deficits, and a longer than Obama anticipates recession:
A longer recession or long-term stagnation pose two distinct fiscal risks. First, Mr Obama will be (rightly) reluctant to raise taxes and tempted to extend parts of the stimulus package if unemployment is not dropping by 2010. Premature fiscal tightening, after all, could lengthen the recession, as Japan learned in the 1990s.
Second, a longer recession makes it harder for America to grow out of its debt burden as it, and other countries, have done at previous debt peaks. Because of stagnating output and declining prices, Japan’s nominal GDP in 2005 was smaller than in 1996, contributing mightily to a climb in that country’s net debt from 29% of GDP to 85% (it will reach 98% this year). One worrying parallel for America is that its nominal GDP will probably decline this year for the first time since 1949 (the administration optimistically sees it creeping up by 0.1%)
So Mr Obama’s 3% deficit target may be much harder to reach than he thinks; and it may not be tough enough anyway. Using reasonable policy assumptions, Alan Auerbach of the University of California at Berkeley, and William Gale of the Brookings Institution, think the deficit will bottom out near 5% of GDP in 2013 then climb to almost 6% by 2019, while debt continues to rise as a share of GDP. That is before the government has to deal with the full impact of the surge in health and pension entitlement costs. The academics reckon higher taxes or lower spending equal to a staggering 8% of GDP a year are necessary to contain those costs and stabilise the long-run debt.
An L.A. Times editorial adds, If not for $1.5 trillion in projected savings on the wars and nearly $650 billion in new levies on emissions, Obama’s proposal wouldn’t make a dent in the deficit. And even with those controversial elements, his budget still leaves half of the deficit-cutting job undone.
Americans need to know what Obama plans in regards to stabilizing banks and restructuring the finance system BEFORE considering budgets or taxes or new or better programs. Was it our imagination that there was a major economic crisis that needed to be addressed immediately?
Americans via their government need to address growing income inequality and act to achieve Universal health care – but first we need to know if there will be banks or financial institutions and/or what kind of financial institutions – and what the price will be to the depleted national treasury.
For months CitiGroup has been mocked as CitiMorgue – today that once robust bank is dependent on even more government money for its continued existence. Where is the always promised, never delivered, Obama economic plan? Has anyone see Tim Geithner lately?
Americans who say “Show me the
money plan” are not unreasonable. This morning the still leaderless Commerce Department released a report stating The economy contracted at a staggering 6.2 percent pace at the end of 2008, the worst showing in a quarter-century, as consumers and businesses ratcheted back spending, plunging the country deeper into recession. This 6.2 percent decline was much worse than the estimated 3.8 percent drop which had earlier been estimated.
Even with the benefit of hindsight the government is surprised at how bad the economic drop was, yet Obama wants Americans to believe in fairy tale future numbers. What happens if Obama is wrong and the turnaround does not start in the middle of this year? What happens if the the economy gets worse?
Looking ahead, economists predict consumers and businesses will keep cutting back spending, making the first six months of this year especially rocky. [snip]
The faster downhill slide in the final quarter of last year came as the financial crisis — the worst since the 1930s — intensified. [snip]
Fallout from the housing collapse spread to other areas. Builders cut spending on commercial construction projects by 21.1 percent, the most since the first quarter of 1975. Home builders slashed spending at a 22.2 percent pace, the most since the start of 2008.
A sharper drop in U.S. exports also factored into the weaker fourth-quarter performance. Economic troubles overseas are sapping demand for domestic goods and services. [snip]
Fed Chairman Ben Bernanke earlier this week told Congress that the economy is suffering a “severe contraction” and is likely to keep shrinking in the fix six months of this year. But he planted a seed of hope that the recession might end his year if the government managed to prop up the shaky banking system.
Even in the best-case scenario that the recession ends this year and an economic recovery happens next year, unemployment is likely to keep rising.
After all the bailouts (which we wisely opposed) and all the Federal Reserve transfers the finance sector as well as car manufacturers are still asking for more money. Bloomberg News outlined the yelps for money and the “budget overview”:
President Barack Obama’s first budget request would provide as much as $750 billion in new aid to the financial industry, as well as overhaul the U.S. health-care system and launch a program to cut carbon-dioxide emissions. [snip]
The official, speaking on condition of anonymity, said the White House hasn’t decided whether the $750 billion in additional aid to the financial industry will be needed. He said it will be put in the budget as a “placeholder.”
The official said the aid would appear in the budget as about $250 billion because the rules require policy makers to record the plan’s net cost to taxpayers. The government anticipates it would eventually recoup some, though not all, of the money expended to help financial companies.
The funds would come on top of the $700 billion rescue package approved last October by Congress.
The biggest deficit since World War II and we wonder why we might not even have banks!
A very big deficit to add to an already huge debt.
That is equal to 12.3 percent of U.S. gross domestic product — the largest share since 1945 when the country ran a shortfall of 21.5 percent of GDP.
Dimocrats and even some real Democrats are happy that the latest travesty from Obama is a mirror image of the Bush budgets. These Dimocrats are happy because now it is “our side” that is getting the goods. It is “our side” that gets the loot. It is our side acting irresponsibly and depending on money from a possibly hostile but surely a competitor, China.
Democrats must know that there are negative effects to even well intentioned initiatives. For instance “tax the rich” ignores the negative effects on charitable tax deductions. Taxes on businesses, particularly “carbon” taxes dubbed “cap-and-trade” designed to “slow” global warming will be passed on to consumers. The stated goal is for “low-income” customers of utility companies to get some of the money raised from the “carbon” revenue raiser but the middle class will be left in the cold. The “carbon” tax will raise hundreds of billions a year from businesses and those hundreds of billions are sure to be passed on to bitter Americans.
In the heartland of America—places where they cling to their guns and their religion—they burn coal. Lots of coal. If Obama and the Democrats push this plan, a regional war will erupt. It will be ugly and it won’t shape up along party lines.
Farm subsidies will be protected no matter what Obama dreams. “Tax the rich” schemes on upper income deductions for home mortgage interest as well as caps on itemized deductions for state and local taxes will be opposed too – by Democrats. “A dagger aimed right at the heart of New York” is how Senator Schumer characterized a similar proposal by George W. Bush.
Plans to do away with or limit the deductibility of state taxes have been proposed—and rejected—under the last three Republican presidents. [snip]
In 1990, President George H.W. Bush proposed capping the deduction for state and local taxes at $10,000, an initiative similar to Obama’s plan. School boards and business warned of “devastating consequences for state and local governments throughout the Northeast,” according to a New York Times article from that year. Local officials said their ability to raise revenue through property taxes would be hurt, and the plan died.
Clueless Obama should call Chuck (on Wednesday Schumer left the White House unhappy) and ask him about the Reagan years:
Schumer used apocalyptic terms to describe the consequences of killing the deduction. “This is a dagger aimed right at the heart of New York,” he warned. “We have to stop it dead in its tracks, with no compromises…. We should be against all forms of double taxation.”
Inceased rates of income inequality must be addressed. But “tax the rich” is not the home run some Dimocrats think it is.
And just as Franklin D. Roosevelt’s tax increases on the wealthy followed a stock market crash, which had already depressed their incomes, Mr. Obama’s proposals — if they become law — would too. The combination has the potential to reverse a significant portion of the inequality trends of the last few decades.
But for the country to repeat the post-World War II pattern, the incomes of most families would also have to begin rising at a faster rate than they have since the 1970s. That outcome remains deeply uncertain. Economists who study economic growth say the American economy is unlikely to grow nearly as fast in coming years as in the 1950s and ’60s.
Americans need answers to how Obama “plans” relate one to the other.
We will have to wait and see if Obama keeps to his promise to finally return to pay-as-you-go rules which require tax cuts or increases in federal beneifts to programs such as Medicare be paid for with tax increases or spending reductions.
The stimulus law includes language preventing the alternative minimum tax from raising levies on millions of middle-class families this year. If the pay-as-you-go rules were applied to that tax provision, it would have forced Obama and Congress to find $70 billion in savings to pay for it – an exercise none of them would have enjoyed.
The Times of London editorialized on the latest from inexperienced Obama:
It is a political commonplace that you campaign in poetry and govern in prose. But the sound of Mr Obama’s prose has begun to jangle. “Now is the time,” he said lulling his congressional audience, “to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity.” The trouble is that this wasn’t the first time that Mr Obama told Americans that “it’s time to act”. Nobody doubts that now, in the teeth of the cruellest economic crisis in decades, it is time to act. But the world is still not clear what actions Mr Obama plans to take. What unnerves it even more is that when he has acted, his judgment has not always matched the sturdiness of his campaign rhetoric, let alone its slick, skilful execution. He has been ambushed in traps too often of his own making. [snip]
Mr Obama’s has also been bruised by his inexperience with the ways of Wall Street. The President assiduously, and unwisely, stoked expectations for his Treasury Secretary’s bank rescue plan. When the plan that Tim Geithner eventually unveiled turned out to be so lacking in details that, in Wall Street’s eyes, it had as much substance as fog, stock markets duly plunged.
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We’ll comment on the Obama health care plans after Monday’s “health care summit”. Health care advocates will surely watchdog the fine print on the final Obama budget. It is always wise to wait and see what Obama actually does rather than what he says.
We will comment on the health care component later but it does not bode well that there is no Health and Human Services Secretary, Ted Kennedy on his death beach, and the money supposedly for health care reform will come from a dagger aimed at high tax states.
Today the stock market has capped another horrible month and is apparently about to drop below 7,000. In a recession higher costs will be imposed on businesses which will then impose those costs on consumers.
There are many worthy items we all have wish lists about. But right now the economy has a wish list too: a plan for rescue.
The economy needs a clearly explained and accepted practical plan for economic recovery and sustained growth.
This past Tuesday the nation, wrapped in sweaters, listened to Obama give a speech.
Mary Todd Michelle Obama had no sweater on. Indeed Mary Todd Michelle adorned herself in a sleeveless dress. A sleeveless dress – in February. Americans are turning down the thermostats because they cannot afford to heat their homes properly – yet on TV they see the Obama’s – one sleeveless and both clueless.