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Can America Afford Obama’s Vision?

Michael Redbourn — Mon, 06 Apr 2009 06:49:43 +0000

President Obama’s vision of what America ought to look like in the future, would hugely raise government spending on health care, energy and education, and taxpayers would have to foot the bill for a larger, more intrusive government.

His $3.6 trillion debt proposal isn’t simply a bunch of numbers and tables however, but it’s the basis of his underlying philosophy. He believes that throwing staggering amounts of money at schools, hospitals and environmentally friendly industries, will also lay the foundation for the next economic boom.

Do his figures add up?

The Budget Office forecast is for a 10-year cumulative deficit of $9.3 trillion which is $2.3 trillion higher than the administration’s estimate, and it predicts that the government would spend an average of 23.7% of its GDP yearly, while only receiving 18.4% of GDP in revenue during the same period.

What would that mean?

It would mean yearly federal deficits averaging 5.3% of GDP and a budget gap of about $1.2 trillion by the year 2019.

What does Obama have to say on the subject?

“We cannot and will not sustain deficits like these without end.”

It is not surprising then, that many Conservatives who envision a totally different society are in growing opposition to Obama’s plans. They mostly envisage prosperous and thrifty two-parent families who pay for their own health and auto insurance, and an economy in which a middle-class family’s tax burden is so low that there is money left over to save for education and retirement.

The Republicans are not the only ones that are showing mounting concern however, and Senator Kent Conrad, who is chairman of the Senate Budget Committee, recently expressed his skepticism about making the president’s “Making Work Pay” tax break, a permanent one.

Obama’s proposed tax plan would phase out at family incomes of $190,000 or more and carry a 10-year cost of $537 billion, and he has also requested an additional minimum of $234 billion in individual, and $100 billion in business-breaks on top of the initial one.

Obama’s highly ambitious agenda, which includes healthcare expansion, new spending on clean energy and education, and a cap-and-trade system (a cap and trade system is a market-based approach to controlling pollution that allows corporations or national governments to trade emissions allowances under an overall cap, or limit, on those emissions. to combat global warming) has also caused many others to express their concerns too.

U.S. Representative Richard Neal, Democrat of Massachusetts, who is a longtime member of the House Ways and Means Committee said, “I think the reality is going to settle in that we are going to have to pull back on something”.

James Horney, who is the director of federal fiscal policy at the Center on Budget and Policy Priorities said, “Over the longer term, the federal government is going to need more revenue than Obama is proposing and anybody who has looked at the problem and doesn’t have ideological blinders on reaches that conclusion”.

Will taxes have to go up if Obama’s plans are passed?

Robert Reischauer, former director of the Congressional Budget Office says, “The unvarnished truth is that as we move forward over the next five to 10 years, we are going to have to raise taxes across the board or significantly cut back programs which affect the middle class and the lower class”, and Bob Bixby, who is executive director of the Concord Coalition said, “One of the mistakes Obama is making is saying nobody under $250,000 is going to be affected. The deficit is just too big, and you can’t get it all from families earning more than $250,000. Taxes are going to have to go up at some point!.

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U.S. GDP Shrank BY 6.2% In The Fourth Quarter

Michael Redbourn — Sat, 28 Feb 2009 05:55:00 +0000

Latest reports show that America’s GDP (Gross Domestic Product) shrank my 6.2% in the last quarter which was not only worse than government projections but made it the biggest drop since 1982, and separate figures showed further drops in consumer confidence and business activity.

GDP had been predicted to fall by 3.8 in the last quarter and the 2.4% adjustment was close to five times the size of the average adjustment.

Consumer spending dropped by a 4.3% annual rate last quarter which was the worst since 1980 and it fell at a 3.8% pace during the previous three months making it the first time that purchases dropped by more than 3% in successive quarters since record-keeping began in 1947.

The U.S. economy expanded by a meager 1.1% during 2008 helped by exports and government tax rebates during the first six months which offset the huge slump in consumer spending that took place in the following six months.

Companies trimmed their inventories by a $19.9 billion annual rate during the last quarter instead of expanding them by $6.2 billion as had been predicted, and business purchases of new equipment fell by 29% which was the biggest reduction since 1958.

White House Press Secretary Robert Gibbs said, “The GDP figure denotes that the economy continued to deteriorate throughout the quarter and that acceleration got even greater”, and ‘Fed Chairman’ Ben S. Bernanke said earlier this week that, ” the U.S. economy is in a severe contraction” and added that, “the recession may last into 2010 unless policy makers can stabilize the financial system.

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Could The Stimulus Package Backfire?

Michael Redbourn — Mon, 05 Jan 2009 06:57:37 +0000

According to various reports Obama’s intended stimulus package will be enormous and most experts believe the U.S. budget deficit will soon exceed 1.3 trillion.

How big is that?

It’s about 9% of the country’s GDP (gross domestic product) and to put it into even better perspective Ronald Regan’s record breaking amount was 6% of GDP!

The big question is though, what plans does the incoming administration have apart from a huge stimulus package which if used alone could well make a bad situation much worse?

Economists, for the most part divide the U.S. economy into four parts.

1) Consumer spending

2) Investment into business and housing

3) Government spending

4) Net exports

Consumer spending is at an all time low; housing construction has collapsed and businesses are afraid to invest; and the incoming government is set to prime the pumps with massive amounts of money.

So export-led growth would seem the way to go but the problem with that is that many other countries such as China need that too, and they can produce goods at a much lower cost than America can.

What is the huge stimulus package that’s waiting in the wings supposed to do?

In essence, it’s simply to buy time with the thinking being that by propping up production and boosting employment and pubic confidence in the short-term that Americans will have time to repay their debts after which they will hopefully go back to higher spending. They’ll buy houses again, meaning that home construction will restart, bringing with it heightened business investment.

So what are the possible pitfalls?

1) IHS Global Insight predicts that unemployment will peak at 9.2 percent in early 2010.

2) Right now investors have rushed to buy long-term treasuries because they fear inflation, but the interest rates are so abysmally low that they will most likely seek any better alternative the moment it appears. The government’s response would of course be, to raise interest rates!

3) Rapid and huge rises in the federal debt might well cause a new lack of confidence that would in turn prolong the problems.

4) And finally, added to all the other problems will be the retiring baby-boomers and the huge strain that they will put on the economy.

Right now there is growing controversy over whether or not FDRs stimulus actually helped or hindered recovery from the Great Depression with many economists now saying that he lengthened it by several years.

For better or worse it is clear however that America is going to get a huge stimulus package but what Americans and the world will soon need to know is what the follow up plans are – if there are any at this juncture.

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