Obama presented Congress with an agenda described as “breathtaking in its scope and ambition,” “gutsy,” or “bold and courageous”—by his supporters. Passing it won’t be easy, Obama admits, because “it represents a threat to the status quo.” But his enormous popularity might make it possible to get a big share of what he wants (Charles Babington, Associated Press 3/1/09).
Some analysts called the budget “almost radical,” and the U.S. Chamber of Commerce noted that “You don’t rebuild a house by blowing up its foundations.”
The budget assumes a deficit of $1.75 trillion this year, quadrupling that from the year before: that is 12.7% of the GDP. Federal outlays will balloon in 2009 to $4 trillion, or 27.7% of GDP, up from $3 trillion or 21% of GDP in 2008, and 20% in 2007 (“The Obama Revolution,” Wall St J 2/27/09).
To “reform health care” by vastly expanding insurance coverage, Obama proposes a $630 billion fund for a national insurance program to cover all Americans. This amount will just be “a start.” Costs are soon expected to exceed $1 trillion. Savings will be achieved by cutting payments to providers, reducing hospital admissions, and “promoting efficiency.”
The money will come from tax increases on “the rich”—for now defined as singles earning $200,000 or more, or couples earning $250,000 or more. High earners would also see limitations on personal exemptions and itemized deductions, including charitable contributions. The estate tax would be reinstated, and capital gains taxes increased. Revenue projections assume that taxpayer behavior will not change.
A key new source of revenue (“but don’t call it a ‘tax’!”) is an expected $78.7 billion from a cap-and-trade carbon emissions scheme, such as one recently rejected by the U.S. Senate, growing to more than $646 billion by 2019. In effect, this constitutes a very large tax increase on 100% of Americans.
Of the windfall, $15 billion/year is supposed to subsidize alternative energy—which can become relatively economical only if the cost of hydrocarbon fuels soars because of taxation, cap-and-trade, or EPA “Clean Air” regulations. The rest will help fund a promised $800 tax “rebate” or “credit” to people who pay little if any tax, creating a new constituency for keeping the current regime in power—and for “fighting global warming.” Recipients of this new entitlement may not notice that $800 is not nearly enough to offset a $4,000 loss in purchasing power owing to higher energy costs spread throughout the economy.
These revenue projections assume a robust market for carbon emissions permits. After peaking at nearly 30 euros ($38) in mid-2008, carbon dioxide traded at 9.95 euros ($12.60)/tonne on Feb 28 (AFP 3/1/09). Opposition to cap-and-trade schemes is building worldwide; it could bring down the Australian government (Business Spectator 3/2/09).
Until the Next Generation of Taxpayers Grows Up….
Secretary of State Hillary Clinton wrapped up her first overseas trip by urging China to continue buying U.S. debt, saying it would help jumpstart the flagging U.S. economy and stimulate the buying of Chinese imports. China is the top holder of U.S. Treasury bills, owning $696.2 billion worth in December, 2008. Its help is needed to finance the $787 billion stimulus package.
Clinton said that concern about the human rights situation in China should not be a distraction from the vital issues of the economy and climate change. A journalist reported seeing plainclothes police taking away some visitors attempting to enter a church where Clinton attended Sunday service (Britbart.com 2/22/09).
Is the U.S. Treasury Solvent?
Between January 2008 and January 2009, the M2 money supply increased from $7.3 trillion to $8.2 trillion, meaning that the Federal Reserve created $1 trillion out of thin air in one year. It has used this money to buy distressed assets. It claims that when the economy recovers it will sell the assets and retire the money before it causes runaway inflation. This assumes, of course, that somebody will want to buy these assets (Downsizer Dispatch 2/23/09).
The quality of the assets held by the Federal Reserve has deteriorated substantially, starting in August 2007, write Philip Baggus and Markus H. Schiml. The Fed’s leverage has increased from 22 to 50. This means that the Fed is insolvent if a mere 2% of its assets go into default.
In the “2008 Financial Report of the United States Government,” the Treasury wrote an obituary for the U.S. government, even before the “stimulus bill,” Secretary Geitner’s proposed TARP II, [and the proposed gutsy budget], states Craig Cantoni.
- The government debt held by the public will be 650% of GDP by 2080, compared to “only” 109% during World War II (Chart 2, p 2).
- The balance sheet (p 10) lists government assets of $1.9 trillion and liabilities of $12.1 trillion. The bonds of a corporation with such an unhealthy balance sheet would be rated as “junk.”
- The footnote to the balance sheet states that the unfunded liability of $49 trillion for Social Security and Medicare is not counted as a liability on the balance sheet.
- In an addendum entitled “Management’s Discussion and Analysis,” retirement benefits for veterans and civil servants increased from $90 billion to $550 billion from 2007 to 2008 (Table 1, p 3).
- The net operating cost of the federal government increased 266.3% from 2007 to 2008.
- A letter from the Government Accountability Office states that: “The material weaknesses discussed in our [audit] report continued to …. hinder the federal government from having reliable financial information to operate in an efficient and effective manner.” [Cantoni’s translation: “The government cooks the books.”]