Tuesday, May 12, 2009

Bankrupt Obama

The nation's financial future looks bleak. The Obama budget included huge deficits but even those were based on some unlikely projections. The first one is that the economy would turn around during the Summer and take off by Fall. That has not started yet, no matter how many "green sprouts" are visible. Instead, the government ran a deficit in April for the first time in 26 years. At best, we will see a recovery late in the year or early next year.

There are several factors slowing the recovery. We may not have bottomed out yet. After months of news stories about the return of the Great Depression, it is unlikely that people will rush out to borrow and spend like they had been. In fact, Obama has said that we should not return to those ways (except in the short run when the economy needs it). All of this adds up to a recovery that is more likely to be a swoosh than a "V".

Obama is likely to have trouble with his new taxes, also. The biggest one, the carbon trading scheme known as Cap and Trade is is serious trouble and is unlikely to pass as Obama desired. Cap and Trade served a double purpose. It is supposed to reduce CO2 emissions and to raise revenue.

The big budget-breaker is going to be Obama's universal health care. The President met with health care leaders yesterday and announced that they would control costs. This has been met with universal skepticism. Event the New York Times thinks that results are unlikely.

If history is a guide, their commitments may not produce the promised savings. Their proposals are vague — promising, for example, to reduce both "overuse and underuse of health care." None of the proposals are enforceable, and none of the savings are guaranteed. Without such a guarantee, budget rules would normally prevent Congress from using the savings to pay for new initiatives to cover the uninsured. At this point, cost control is little more than a shared aspiration.

The Senate is considering new tax hikes to pay for health care. This will probably slow economic growth even more.

Currently the deficit is unsustainable. For every $1.00 spent in 2009, the government will borrow $0.45. A big chunk of this is stimulus spending which is supposedly a one-time deal. Even so, a budgetary time bomb is about to go off in the form of Social Security and Medicare.

Since its founding, Social Security has run a surplus. In theory, this surplus has been invested. The reality is that the investment was in government bonds. This was a means of laundering the money. The government would write itself an IOU then spend the surplus. By using a "unified budget," this disguised how large the deficit really is. Every administration has done this going back generations.

This worked as long as the pool of workers was greater than the pool of retired. That time is nearing its end. Within seven years the Social Security administration is going to start cashing in those bonds it holds. This means that general fund money will be diverted to redeeming the bonds which means higher deficits. Medicare is in worse shape. It will start needing money this year and will be insolvent in 2017.

People, mainly Republicans, have warned for years that this day was coming but politicians were reluctant to do anything. The day of reckoning is nearly here and the Obama administration's response is to create a new entitlement on top of the ones we cannot afford (following the Bush administration which added an expensive Medicare drug benefit).

At this rate, the country will be bankrupt before the end of Obama's first term.

2 comments:

Jeff said...

Congress, mainly Republicans, have been the driving force thru most of the last 50 years in RAIDING the SS surplus.

Reagan's Star Wars billions for nothing, Savings and Loan bailout, deregulation of businesses, banks and the stock markets were mainly Republican ideas.

Finally G Bush's trillions for Iraq and tax cuts for the rich and a drug benefit that gave billions to drug companies--that's where the money went.

I've been watching this for 35 yrs and hearing the same arguments mostly from the very people who voted for the Republicans who raped the system every chance they got.

Mark said...

Jeff,

There is a gap in your logic. You can't "raid" the SS surplus. From the beginning, it was set up to automatically feed into the general fund leaving behind a trail of IOUs. Both parties used this to cover their spending.

There was an interesting chart in USA Today earlier this year. It showed spending and deficits over the last three decades. It turns out that spending increased on a straight line until the Bush (43) administration. Reagan, Bush (41) and Clinton all increased spending at the same rate. It made a noticeable jump under Bush (43) BUT the jump projected under Obama's budget plans were an order of magnitude greater. Let's say that spending had been growing at a 30 degree angle (I'm eyeballing it) and jumped to a 35 degree angle under Bush. Obama plans on pushing this up to a 60 degree angle - far above any increases in the last 40 years.