Can we devise a cohesive fiscal and monetary plan that both stimulates the economy and puts the US on sound footing going forward?
A successful plan must address the following:
Since there is apparently no appetite for cuts in discretionary government spending, there must be a combination of tax hikes and defense cuts that funds the old pre-crisis budgets of the Bush years. Fortunately, solutions for these deficits are already in place. First, all of the Bush tax cuts must expire (not just for the wealthy) and we should return to Clinton-era tax policies. If the Republicans wanted Americans to keep those tax cuts then they should have spent less when they were in power (and that goes for Pelosi and Reid, who have been approving the budgets since 2006 and didn't object to spending increases in earlier years). Secondly, we must cut costs in Iraq and Afghanistan and scale back our presence in both countries. Fortunately, the combination of restoring Clinton's tax policies and cutting our war expenses in half would have just about balanced Bush's budget back in 2006-2007 (at the peak of the economic cycle).
That is the good news- there are measures in place to handle the pre-crisis Bush deficits and spending.
The bad news is that this leaves us with some gaping holes
1) The TARP, son of TARP, the homeowner and the auto bailouts. Essentially the crisis expenditures
2) The stimulus bill
3) The 8% spending increase in the recent supplemental budget passed by Pelosi/Reid
4) All of Obama's new spending ideas
5) Fixes for social security and medicare
What we need is a grand bargain combining fiscal and monetary policy.
1) Use the expiring tax cuts and declining war expenses to fund Bush's spending increases.
2) The Fed should monetize the debt (i.e. print money rather than issuing bonds) to cover the cost of the TARP and other crisis bailouts and also for any of the stimulus expenditures happening in 2009 and 2010 (this is much less than $787 billion). This would generate at least $2 trillion in monetary stimulus (so a little less than 20% of the economy). This would create a fall in the dollar and a short-term boost for inflation, but it must be a one-off event. Any future returns on TARP money (in the unlikely event our bank preferred shares ever get paid off) should go toward debt repayment.
3) Any new expenditures for 2009 and beyond must be fully funded with tax hikes.
If Obama wants to increase entitlements or add tax cuts beyond those temporary ones in the stimulus he will need to raise new tax revenues to pay for them. His proposed income tax changes raise less revenue on a net basis than the simple expiration of Bush's tax cuts, and the revenues from the expiration of those cuts are already spoken for- they need to be used to reduce the Bush deficit.
Obama's budget strategy can be summarized as follows:
Spend like a European but fund it like a Californian.
In other words, increase entitlement and public sector spending in an aggressive and recurring way, but attempt to fund it narrowly on the volatile, cyclical and mobile earnings of a very few.
We know the California funding model doesn't work. Combining a shaky, proven to fail funding model with the very expensive European social democratic spending model courts disaster.
The European social democratic model runs at a deficit in good times despite taxing almost everybody for everything and despite failing to address their demographic time bomb of retiring boomers and fewer young taxpayers. There is no country anywhere that has successfully funded this model only on the very rich. In fact, there is no major country anywhere that is successfully funding this model even when taxing the poor and middle class much more heavily than in the US. Resource-rich countries with tiny populations like Norway and Canada run social democratic systems that are well-funded, but the US isn't that type of country and even in Canada and Norway the middle class pays higher taxes than in the US in return for those higher benefits.
Nice speech, but what the heck does it have to do with the current crisis?
The stimulus package and now Obama's budget are essentially re-hashes of decades old Democrat wish lists. There is precious little sign of any new ideas customized to our current predicament. Does anyone believe his priorities would be any different if the economy was doing well? The crisis only comes into play as an excuse to jam the old playbook through bigger and faster. This is not genius nor is it the change we've been waiting for. We could have elected Hubert Humphrey or Walter Mondale to do this if they were still around.....then at least we'd have the benefit of their experience and humility. The stock market sees through this- Obama offers no real solutions to our current economic problems and yet with certainty business owners know that Obama's "Mondale plan" means they need to plan for higher taxes, more regulation and the government picking favorites.
OK, I get it. Obama wants to move us toward a more European system of higher taxes and more government entitlements and intervention. Well, that model already exists. How is it doing? Hasn't Obama realized that Europe is in crisis just as we are? The UK has had a social democratic orgy of expanded benefits and spending for a decade, largely unfunded, in keeping with current Keynesian fashion. Obama's plan may be different than Bush's but is very much like Gordon Brown's and there is no evidence that it averts or resolves the type of crisis we face today.
It is interesting that Obama is "going European" at a time when most analysts have concluded that Europe's system of entitlements is unsustainable. Replacing our current unsustainable system of overconsumption, deficit spending and unfunded entitlements with another proven unsustainable system is madness. Now some say that Europe is actually worse off than the US because their demographics are horrible (fewer young taxpayers to pay for entitlement-sucking geezers) and their taxes are already about as broad and as high as they can go. However, there is an area where the Europeans have an advantage- they are savers. In 20 or 30 years time when they realize that the promised government benefits aren't really there, well at least they have a nest egg to fall back on.
Americans need to remake our society to be less consumption oriented while at the same time providing incentives for business creation and employment. Instead, Obama brings only old ideas proven to fail and promises more government benefits with the lie that someone else will pay. We are going to end up in the same boat as Europe: higher sin taxes, higher gas and carbon taxes, cap and trade, a Federal VAT, high income taxes, crushing regulation and permanently high unemployment. Everyone will pay through the nose, just as they do in Europe- not just the top 5%. The question is- what will we get for our money? I've lived in Gordon Brown's Britain and I can tell you the return on taxpayer investment is extremely poor, and in the future will be even worse: fewer benefits and massive tax hikes (or national bankruptcy). On a 10 year view some of Obama's plans may not look bad, but they'll be underfunded like every other entitlements program on the planet. Out 20 to 30 years we will face disaster- similar to our current problem with Medicare except bigger. The Dems have a solution for that, though, the same one used in Europe: deny people the benefits promised, the same benefits they paid dearly for over decades.
There is a better solution. We need to take responsibility for our own future expenses, rather than paying government to provide for us but fail. We need politicians who can speak the truth to the American people
1) Healthcare is expensive- it must be paid for and saved for by consumers. There is no free lunch.
2) Retirement is expensive- it must be paid for and saved for by consumers. There is no free lunch.
Savings for healthcare and retirement must come FIRST, and then we consume out of anything that is left over. Yes, that means smaller houses, cheaper cars, fewer clothes and no more $4 coffees. We need to transform ourselves from consumers to savers and investors. This also means a smaller trade deficit and less cancerous smog coming our way from Chinese factories and coal plants. Rather the social democratic European solutions (which has failed in the current crisis and is unsustainable within a 30 year time frame) Obama should look to places like Singapore and Chile.
The government should force everyone to save 20% of their income for retirement and healthcare. The forced savings would be put into government bonds and annuities based on government bond yields. In addition, everyone must purchase catastrophic healthcare insurance for themselves as well as a consumable/every day plan to cover their children. Businesses that currently buy insurance for employees would convert those funds to salary. The government would subsidize those who cannot afford the cost of a high deductible policy or provide a very basic HMO-type policy for those unable to work. Social Security, Medicare and Medicaid would be eliminated over time. Social Security would be replaced by a means-tested welfare plan for seniors offering food stamps, small monthly stipends and senior housing vouchers (designed to pay for the cost of living in cheap areas of the country like the Deep South, agricultural midwest and the rust belt). Rather than selling its cars to old Americans, Detroit may house old Americans.
Even with a plan like this we would need to raise income taxes for all tax payers (while eliminating payroll taxes). I also support raising capital gains taxes to the same level as income taxes. There is no reason why speculation and investment should be taxed less than work. The stock market bubble, private equity bubble and real estate bubble were fed in part by generous capital gains tax treatment. Higher capital gains taxes will also eliminate the massive subsidy we extend to plutocrats like Gates and Buffet. Currently, they donate to charities appreciated stock that they've never paid a cent of taxes on and use this to eliminate their income tax liabilities. Working people earn money, pay taxes on their earnings and then get those taxes back if they donate to charity. The plutocrats get deductions on funds they've never paid taxes on, and their donations are more often used to fund foundations that distribute precious little of that donated money annually, serving more as vehicles to employ the plutocrats family and friends and buy political influence. This insanity has to stop.
At the same time, corporate income taxes should be eliminated, killing the old "double taxation" argument, and replaced with a VAT (with deductions for US-sourced labor and material inputs). This will stimulate exports and US-based hiring. Rather than borrow failed European ideas on entitlements, Obama should borrow the successful mercantile aspects of European VAT tax policies.
The US needs to emerge from this crisis as the location of choice for global business. We need to change our focus and become a country populated by savers, investors and prudent consumers. We need to take responsibility for our own future expenses and have a government that rewards hard work, savings and employment. Obama's "Mondale plan" converting us to a European social democracy does nothing to address the crisis or our over-consuming and speculative ways. Instead, it just shows that Obama would prefer us to be sitting in the current crisis looking more like Gordon Brown's Britain than Bush's America. Thanks, but I want no part of that sort of change.