The Devil Is in the Deficits
By Peter Ferrara on 3.10.10 @ 6:08AM
Last week, the Congressional Budget Office (CBO) issued its long-term projections regarding President Obama's new budget proposal this year. Those projections show even higher Federal spending, deficits, and debt than Obama's budget confessed to just last month.
The CBO projects that President Obama's deficits would be $1.2 trillion higher over the next 10 years than estimated in Obama's budget released on February 1. Federal deficits over those 10 years would be almost $10 trillion ($9.761). National debt held by the public would double in just 4 years, from $5.8 trillion at the end of 2008 to $11.6 trillion at the end of 2012. It would almost quadruple to $20.3 trillion by 2020, $1.7 trillion more than Obama projected just last month.
That national debt in 2020, CBO further projects, will be 90% of GDP, which means the federal government will owe almost as much by then as our entire economy produces in a year. But it gets even worse. Total Gross Federal Debt, which includes such items as the debt held in the Social Security trust funds (real debt that will have to be paid in the future), would be over $27.5 trillion. That would be 122% of GDP.
That is well into the level at which national debt begins to sharply reduce economic growth for advanced, developed economies, according to a new economic study from Harvard University and the National Bureau of Economic based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstancesResearch, by Kenneth Rogoff and Carmen Reinhart. That study was "."
The study concludes that developed economies with debt to GDP over 90 percent suffer median economic growth roughly 1 percentage point lower, and average economic growth almost 4 percentage points lower. And they are talking here about total gross debt. With long run U.S. economic growth at 3% to 4%, this means long term economic stagnation for America. Indeed, the Rogoff-Reinhart study shows that from 1790 to 2009, when U.S. federal debt is over 90% of GDP, U.S. economic growth averages negative 2%, 5 to 6 percentage points less than otherwise.
Long Term Growth: For the Deficit
The annual deficit by 2020 would still be well over $1 trillion ($1.253) and rising, according to the new CBO figures. It is going to be very difficult by then, 10 years from now, to blame that deficit on George Bush. But Barack Obama and the Democrats will still be trying, for sure. It will be even more difficult, however, because President Obama's budgets will run up more debt over eight years than all other Presidents in American history -- from George Washington to George Bush -- combined, as Brian Riedl of the Heritage Foundation has shown.
Just for the record, the deficit for President Bush's last year in office, 2008, was $459 billion. The deficit for the last budget adopted by a Republican-controlled Congress, for fiscal 2007, was $161 billion. The deficit this year according to Obama's budget is $1.6 trillion. The question for President Obama, who was glad to take the office but not the responsibility, is not what he inherited, but what he did with what he inherited. And what he and Congressional Democrats did was turn a fiscal deficit into a fiscal and economic catastrophe for America.
By 2020, CBO projects that Obama's budget would have increased federal spending relative to the economy by almost one-fourth, shattering a settled, stable pattern since soon after World War II. Federal spending will have almost doubled by 2020 since Bush's last year, in nominal terms. CBO reports that President Obama's budget adds nearly $2 trillion to already out of control entitlement spending over the next 10 years, one-third of that due to his health care takeover scheme. Despite the assumed end to the wars in Iraq and Afghanistan, and a resulting $300 billion reduction in defense spending, and President Obama's much ballyhooed, supposed, discretionary spending freeze, his budget would increase federal discretionary spending by $500 billion over the next 10 years.
Moreover, CBO reports, net interest spending under Obama's budget would more than quadruple over the next 10 years, to $916 billion for 2020 alone. That is 27% more than we spend today for national defense, and 34% more than the defense spending Obama proposes for 2015. It is almost the same as what the Obama budget would spend on Medicare in 2020. That effectively adds another entitlement program the size of Medicare.
Because of all this runaway Obama spending, America will suffer the above deficits and debt even with $2 trillion in tax increases Obama proposes for the next 10 years, including $750 billion for his health care takeover.
The Rosy Scenario
But all of this should be considered a rosy scenario, compared to the harsh reality that is far more likely to result. Under President Obama's tax and budget policies, federal deficits and debt are certain to be higher than CBO projects.
The first reason for that is that CBO makes no allowance for the counterproductive economic effects of the comprehensive tax rate increases President Obama proposes for every major federal tax. President Obama would increase the top income tax rate by 13% to start. He would also phase out the personal exemption and limit maximum allowable itemized deductions for couples earning over $250,000 and singles earning over $200,000. He would also allow itemized deductions to be deducted only against the 28% rate for those paying higher rates. This would increase the effective top income tax rate by another 3 percentage points, to 42.6%, for a total top income tax rate increase of 22%. The President's budget would also increase the second highest income tax rate by 18% counting all of these increases.
The President's health proposal would also increase the HI payroll tax rate by 0.9 percentage points on upper income earners. Together with the above changes, that would effectively raise the top tax rate by 24.3%, and the second rate by 21%.
President Obama proposes as well to increase the capital gains tax rate by 33% to start. But his health care takeover bill would also extend the 2.9% Medicare payroll tax to capital gains, for a total capital gains tax rate increase of 53%. The same 53% rate increase would apply to corporate dividends, an income source for many retirees.
Moreover, the President would restore the death tax at a rate of 45%, another layer of taxation on capital income. He would also slam business with another $425 billion in tax increases, including the $90 billion bank tax, nearly $40 billion on oil, gas and coal producers, $122 billion to essentially double tax the foreign earnings of American companies, plus all the tax increases on business in the health takeover bill. And we have not even considered yet the cap and trade tax President Obama also supports, which would involve another $1 trillion to $2 trillion in increased taxes.
None of this is going to raise the revenue projected. Increasing tax rates reduces incentives for productive activity because producers are allowed to keep less of what they produce. So they produce less, and the tax rate increase raises less revenue than expected as a result. Double taxing the overseas earnings of American companies will result in less overseas earnings to tax, with some American companies transforming into foreign companies as a result, taking their earnings with them. Taxing businesses by $3,000 per uninsured worker will mean fewer jobs, and lower worker earnings to tax.
The CBO and the Joint Tax Committee (JTC) on which it relies for such revenue estimates take none of this into account in their revenue projections, and those projections are often way off as a result. For example, over the last 40 years every time capital gains tax rates have been increased, revenue has fallen. But CBO and JCT wrongly projected every time that revenue would rise as a result.
Less revenue than expected means federal deficits and the national debt will be even higher, which means interest payments will be even higher, which will increase the deficits and debt even more. Moreover, if interest rates on the national debt, growing to $20 trillion to $25 trillion and more, rise by more than the modest amounts CBO now projects, federal interest expenses for that debt will soar further, which will raise federal deficits and debt even more, in a Greek-like fiscal death spiral.
Then there is the health care takeover fiasco. House Republican Budget Chief Paul Ryan explains why under the true cost of the health takeover legislation the federal deficit will actually increase by $430 billion over 10 years, and $1.4 trillion over the 10 years after that. But there is something else enormous that even he does not take into account.
The health bill includes costly government subsidies for the purchase of health insurance by those who do not have employer-provided coverage, for families earning up to $88,000 per year. CBO assumes that only 30 million workers will receive these subsidies, with 162 million continuing to receive employer-provided coverage, and so not eligible for the subsidies. Employers who do not provide health insurance for their employees will have to pay a tax of $3,000 per worker under the currently pending Obama plan. But the average cost of employer-provided family health insurance is over $10,000 per year per worker. With premiums likely to rise substantially under Obamacare, many employers can be expected to drop their coverage and pay the $3,000 tax per worker instead. Those workers will then become eligible for the health insurance subsidies. The cost of Obamacare will soar as a result, and so will the deficits under the program.
What Do You Think a Stimulus Is?
Last week, Senate Majority Leader Harry Reid enlightened us as to the February unemployment report. "Today is a big day in America," he said. "Only 36,000 people lost their jobs today, which is really good" (emphasis in original).
More than two years after the recession officially began -- in December, 2007 -- to still be losing jobs is not really good. The average recession since World War II has been 10 months. The longest recession since World War II previously was 16 months. It now has been 27 months since the latest recession began.
The army of the officially unemployed is stuck at nearly 15 million Americans, with an unemployment rate of 9.7%. About 40% of those -- 6.1 million -- are now long term unemployed, out of work for 6 months or more. The unemployment rate for blacks is 15.8%, Hispanics 12.4%, and for teenagers, President Obama's base, 25%, aided by the soaring minimum wage.
The Bureau of Labor Statistics (BLS) reports, "The number of persons working part-time for economic reasons (sometimes referred to as involuntary part-time workers) increased from 8.3 million to 8.8 million in February, partially offsetting a large decrease in the prior month. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job."
Another 2.5 million Americans "were marginally attached to the labor force in February, an increase of 476,000 from a year earlier," the BLS adds. "These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months."
Adding all of this together leaves a total underemployment rate of 17.1%. That is not really good at any time, let alone 27 months after a recession began. But President Obama can't be bothered with that. He is busy with health care, adding one last crushing entitlement burden to the historic Democrat legacy, just before we repeal it in the sweeping fundamental reform of all the untouchable Democrat legacy entitlements in 2013. Obama's real legacy will be cratering the braindead Democrat party, which hasn't offered America a fundamentally new idea since the 1930s.
"What do you think a stimulus is?" President Obama laughed at the Republicans who objected to his almost $1 trillion stimulus bill last February, and the resulting soaring deficits. Obama was operating under the throwback Keynesian economics of the 1930s to 1970s, under which economic growth is stimulated by increased government spending, deficits and welfare. It didn't work in the 1930s, didn't work in the 1970s, and it hasn't worked now. But Obama was so deeply lost in his 30-year-old time tunnel that anything other than unreconstructed, retro, braindead Keynesianism was a joke.
The completely overlooked truth is that the soaring deficits that Obama says are Bush's fault are actually Obama's official economic recovery policy, Keynesian deficit spending. Nobody in the throwback, braindead, lamestream, Democrat talking point media has been able to figure this out. As Sarah Palin might say, "How is that retro Keynesian stuff working out for ya?"
In 2008, America thought we were electing a modern, forward-looking President advancing a new agenda of progress. Instead we get the failed Keynesian economics and make-work policies of the New Deal, and the stagnation economics of the 1970s. Instead of freeing us to go forward, he is desperate to take us back, to the socialized medicine he is so certain we should have had 75 years ago, to the union-run economy far-sighted thinkers thought was in our future in the 1930s, to the central planning bureaucracy that was the cutting edge dream of the turn of the century progressives (that would be the turn of the last century). It is all so retro.
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