Obama’s New Budget - He Just Doesn’t Get It!

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 22, 2011

IN THIS ISSUE:

1. 
Obama’s Rationale for Adding $9.4 Trillion to the National Debt

2.  Details on Adding Almost $9.4 Trillion to the National Debt

3.  New Tax Increases in Obama’s 10-Year Budget Forecast

4.  Conclusions – We Can’t Just Kick the Can Down the Road

Introduction

On Monday, February 14, President Obama unveiled his proposed federal budget for fiscal year 2012 which begins on October 1 of this year, along with projections for the next decade.  It is the largest 10-year spending proposal ever!  You would think that after the Democrats’ blowout in the mid-term elections and poll after poll showing that the American people want government to cut its runaway spending and deficits, Obama would have gotten the memo.  Obviously, he didn’t.

Obama’s new federal budget for 2012 calls for massive spending of another $3.73 trillion with a projected budget deficit of $1.1 trillion next year.  Obama’s annual budget proposal for the next 10 years would add another $9.4 trillion to the national debt, and even that may be optimistic.  [Note: you may hear or read estimates of $7.2 trillion, instead of $9.4 trillion, but $9.4 trillion is the “adjusted baseline” number from President Obama’s own website. See link below.]

If Obama’s economic projections are too optimistic, and I believe they are (ie – 4% GDP growth and no recessions in the next 10 years), then his budgets could add much more than $9.4 trillion to the national debt in the next decade.  They could conceivably almost double the national debt, which now stands at just over $14 trillion.

Now before you liberals in our audience start howling, you should note that I have criticized every annual federal budget proposal going back to Reagan’s second term, Bush 4I, Clinton, Bush 43 and Obama the last two years.  Why?  They were all too big at the time they were proposed!  Given that, my comments today are not partisan in nature.

What I will do today is examine President Obama’s budget request for fiscal 2012 and the next decade, as well as the latest budget proposal the Republicans have offered.  Unfortunately, no one on either side wants to tackle the really critical issue of entitlements.  Until and unless we get to that point, our national debt will continue to spiral out of control.  An even greater financial crisis is looming. The only question is when it arrives. 

Obama’s Rationale for Adding $9.4 Trillion to the National Debt

As noted above, I have routinely criticized these annual budget forecasts for decades in my newsletter and E-Letters.  Normally, I start out by giving you the details of the budget forecasts, and then I tell you why we should oppose them, and then I usually offer some opinions on why the presidents proposed them in the first place. 

Today, I’m going to go in reverse order.  I begin with some thoughts on what President Obama’s thinking may have been as he constructed a 10-year budget plan that would increase our $14.1 trillion national debt by at least another $9.4 trillion over the next decade, even though the public is screaming to cut federal spending and balance the budget. 

To say that most everyone was negatively surprised by Obama’s latest budget proposal is an understatement.  Liberals didn’t like it because Obama actually cut the budgets for some of their pet programs.  Just about everyone else worries that adding $9.4 trillion or more to the national debt will bankrupt the country and send us into a new, more severe financial crisis.

The mainstream media seemed a little surprised that Obama didn’t propose more spending cuts, but they quickly concluded that this budget forecast was just a “trial balloon,” just a starting point, and that Obama knew that the Congress would change it significantly.  Obama has a record of leaving the tough decisions to Congress, much as he did with ObamaCare and financial reform.  So the mainstream media quickly concluded that Obama’s latest budget proposal was not a problem.  No surprise there.

Most conservatives had a very different take: Oh, I see, Obama cuts very little spending, increases other spending, and he leaves it up to the Republicans to do the serious budget cutting – and he will use that to beat them up next year in the presidential campaign.  I do believe that this line of thinking had some role in Obama’s budget strategy.

But I also think there was more to it than merely pushing the Republicans into a tough spot.  By now, it should be clear to most everyone that Obama is a big government, big spending liberal.  In his heart, he believes (like Paul Krugman of the New York Times) that increasing spending and government debt is a good thing.  But follow me as I take it one step further.

A Gallup poll taken the week before Obama announced his 10-year budget proposal found that 68% of Americans disapprove of Obama’s handling of federal deficits, the highest disapproval rating ever recorded on this particular question.  Put differently, over two-thirds of Americans say they want federal spending cut, not increased. 

So, why then would Obama knowingly do this?  Why would he propose to further ratchet up the national debt and run the risk of an anti-Obama backlash in the presidential election of 2012?  I have a theory:  I think that Obama believes that there are a lot of Americans who say they want federal spending cuts, but only if it does not negatively affect them directly.  He may well believe that if significant budget cuts were to affect them personally, they would quickly change their minds (think Greece).

Put differently, according to my theory, President Obama was willing to gamble that a lot of conservatives and independents are not really serious about cutting federal spending and debt significantly, especially if it negatively affects them.  In his view, cutting spending significantly is just a cliché among conservatives that could be quickly abandoned. 

Obama also knows that there are tens of millions of Americans that are already on the government dole, so they won’t oppose any spending increases, no matter how large, as long as the checks keep coming. 

If Obama is right that many of those calling for budget cuts are not really serious, and his base will support him no matter how big the national debt gets, his latest monster budget proposal must have seemed like a winning strategy.  Plus, he gets the added bonus of making the Republicans look like the bad guys if they force some major spending cuts this year and next year.

My theory thus hinges on the assumption that President Obama is arrogant enough to believe that he knows more about how we think than we do.  Specifically, that most Americans would buckle and change their positions if federal spending cuts would negatively affect them personally.  If so, that explains why he would believe that his plan to add $9.4 trillion to the national debt won’t backfire on him next year.

Whether my theory is correct or not, something made Obama and his advisors feel confident that he could persuade Congress and the American people that adding $9.4 trillion to the national debt over the next 10 years is a good idea – even though 68% of Americans disapprove of his handling of federal deficits.

Given that, I wonder what President Obama must have thought when the public reaction to his budget was so overwhelmingly negative that he had to hastily schedule a press conference the very next day to defend his new budget.  “Irritated” might be the operative word!

In any event, the showdown will come in November 2012.  It remains to be seen who will win.  Obama has made his bet: much more government spending and deficits.  Likewise, it remains to be seen how the voters and taxpayers will bet.  Unfortunately, the GOP bench is weak, and voters’ memories are short.

Details on Adding $9.4 Trillion to the National Debt

You may agree or disagree with my theory about President Obama’s decision to add $9.4 trillion to the national debt over the next decade, and that is well and good.  After all, I could be wrong.  But the numbers in Obama’s budget forecast are crystal clear and eye-popping to say the least, despite what you may have read in the mainstream media.

But before we get into the details, I must tell you that the White House dropped another bombshell last week when it released its long-term deficit forecasts.  The White House Office of Budget & Management (OMB) announced that it now projects the federal budget deficit for fiscal 2011 will hit a record $1.65 trillion this year, up from the $1.41 trillion estimate just a few months ago.   

We are still over seven months away from the end of FY2011 which concludes at the end of September.  At the rate these Obama Administration estimates of the deficit for this year keep going up, we could be approaching a deficit of nearly $2 trillion for this year alone.  At that level, the bond markets could one day just collapse, but that is a topic for another day.

Here are the 10-year budget deficit projections in Obama’s forecast last week: 

2012 - $1.090 trillion 2017 - $890 billion
2013 - $846 billion 2018 - $891 billion
2014 - $770 billion 2019 - $960 billion
2015 - $841 billion 2020 - $1.045 trillion
2016 - $938 billion 2021 - $1.116 trillion

TOTAL - $9.387 TRILLION

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/tables.pdf
Scroll down to Table S-2 on Page 172 for the “adjusted baseline” deficits which provide a more realistic view of upcoming deficits.

Every president submits a budget forecast like the above every year, and I have criticized them for years.  But recognize that the deficit numbers above are all 2-3 times the average size during the George W. Bush Administration, which I also criticized roundly.  Bush’s largest annual budget deficit was $458.6 billion in his last year in office.

By comparison, President Obama ran a budget deficit of apprx. $1.3 trillion in FY2010 and according to the latest estimate, it will be $1.65 trillion for FY2011.  And Obama’s smallest annual budget deficit in the 10-year forecast above is a whopping $770 billion in FY2014.  And it goes back above $1 trillion in the last two years.

This is insane to most of us, but if my theory outlined above is correct, President Obama thinks this is the correct course to take for our country, based on the assumption that he believes he knows more about what we think than we do.

President Obama's new 2012 budget would actually add $8 billion to the projected deficit for next year because the bulk of the savings he will achieve through a freeze in many domestic programs would be devoted to increased spending in areas Obama considers priorities, such as education, clean energy and high-speed rail.

Obama's deficit commission last year made a host of painful recommendations including raising the Social Security retirement age and curbing benefit increases, eliminating or sharply scaling back popular tax breaks, reforming a financially unsound Medicare program and almost doubling the federal tax on gasoline.  The deficit commission’s recommendations were estimated to save $4 trillion over the next decade.

Yet Obama included none of these proposals in his new 10-year budget.  For the record, I never thought the deficit commission was anything more than a political sham, because I believed that President Obama would never take its recommendations seriously.  His latest 10-year budget proposal is evidence of that.  My theory above is sounding more and more correct.  Think about it.

New Tax Increases in Obama’s 10-Year Budget Forecast

As noted above, Obama’s new budget forecast boasts of some spending cuts, but as I have outlined, they are minimal.  What we don’t hear much about are the new tax increases that are included in the proposal.  Here is an overview of the tax and fee increases that the Obama Administration is referring to as “Other Revenue Changes and [Tax] Loophole Closers” that his new budget will create starting next year, if approved:

* Financial Crisis Responsibility Fee on banks - $30 billion
* Reinstate Superfund taxes - $20.8 billion
* Make Unemployment Insurance surtax permanent - $15 billion
* Repeal LIFO method of accounting - $52.8 billion
* Reform US international tax system - $129.2 billion
* Reform treatment of insurance companies/products - $7.6 billion
* Eliminate tax breaks for coal industry - $2.6 billion
* Eliminate oil and gas industry breaks - $43 billion
* Tax carried profits as ordinary income - $14.8 billion
* Improve business tax compliance - $8.7 billion

The total of what the White House calls "revenue changes and loophole closers" is actually only $356.4 billion over 10 years.  That number does not include raising the personal income tax rates for the top two brackets back to the level before the Bush tax cuts – to 35% and 39.6%, respectively, beginning in 2013, which is also part of Obama’s long-range budget proposal.

And I will make the following prediction as well: If anything like Obama’s latest 10-year budget projection is adopted, all of the Bush tax cuts will have to disappear.  Obama promises he will not raise taxes on the “middle class,” but he will have to in the end.  All of the Clinton-era tax rates will have to go back into place at some point.  This will mean that the Bush tax rates of 10% on the lowest income earners will go to 15%.  That’s a 50% tax increase on the lowest income earners.

As noted above, Obama's new budget would also raise almost $46 billion over 10 years by eliminating various tax breaks to oil, gas and coal companies.  Let me ask you a question: if tax breaks for oil, gas and coal companies go away, do you think for a moment that they will just live with lower profits?  No, those cost increases will be passed on to all of us through higher energy prices.

Obama knows this, and he is banking on it resulting in lower energy consumption which is good for the environment in his view.  But here again, he fails to consider (or doesn’t care) that higher energy costs disproportionately hurt the poor versus the “rich.”

And finally, some of you may be thinking I forgot to mention that Obama also proposed a five-year spending freeze on federal spending.  Yes, he did.  But you have to keep in mind that federal spending skyrocketed in the first two years of Obama’s presidency, all in the name of heading off another Great Depression.  And he promised at the time that those spending increases were only temporary.  Now he wants to freeze spending at those outrageous levels.

As an update, House Republicans passed a $1.2 trillion budget resolution last week aimed at avoiding a government shutdown on March 4 and funding the government through the end of this fiscal year on September 30.  The latest resolution includes $61 billion in budget cuts, defunds ObamaCare and prevents the EPA from regulating greenhouse gasses, among other things.  President Obama has vowed to veto it in the unlikely event that it passes the Democrat-controlled Senate.  The latest budget resolution once again failed to address entitlements.

Conclusions – We Can’t Just Kick the Can Down the Road

I could go on and on with examples of how the latest Obama 10-year budget proposal is a big spending farce, but you get the picture by now.   You may agree or disagree with my theory that President Obama does not believe Americans are serious about cutting federal spending and balancing the budget.  I think that is exactly what he believes, but he will never admit it.

At the end of the day, one important question is:  how will this affect the economic recovery and the investment markets?  Some can argue accurately that the US economy has come back fairly well from the financial crisis of 2008 and the worst recession since the Great Depression.  No doubt the stock markets have skyrocketed since March of 2009.  And the yields on Treasury securities remain near historical lows, despite the blip up late last year.

So are we to conclude that President Obama’s latest huge spending initiatives are benign?  Or that more big spending and higher deficits are needed to fuel the anemic economic recovery? I  don’t think so, and I’ll bet you don’t either.  In fact, I don’t think anyone but the far-left liberals sincerely believe that boosting the national debt by $9.4 trillion or more over the next 10 years is a good idea.

Today, US Treasury securities are still the most trusted asset around the world, thankfully.  But the day is coming, especially if Obama adds $9.4 trillion to the US national debt, when US debt may be shunned by the current Treasury debt holders, especially foreign governments that buy much of our debt.

When that happens, interest rates will move higher, most likely significantly, and that will spell doom for the US equity markets.  When will it happen?  I don’t presume to know, but I have to believe that the foreigners who buy our debt will be outraged if Congress gives Obama the authority to add $9.4 trillion, or even more, to our national debt over the next 10 years.

Finally, as noted above, President Obama’s latest 10-year budget forecast avoided any cuts in entitlement programs such as Social Security, Medicare, etc., even though he was willing to cut national defense by $78 billion in reductions to Pentagon spending over five years.  I think it is safe to assume that the Republicans in Congress will not cut entitlements either.

Yet the reality is that there is NO WAY to balance the federal budget without cutting entitlements.  Someone has to have the political guts to not only address this problem, but to do something about it.  But if Congress passes Obama’s 10-year budget, or anything remotely like it, that will merely be kicking the can down the road for another decade.

Frankly, I don’t believe the bond market is going to give us another decade of trillion-dollar deficits.  I’ll have more to say on this subject in the weeks and months to come.

Very best regards,

 

Gary D. Halbert

SPECIAL ARTICLES

Charles Krauthammer:  Obama’s Louis XV Federal Budget Proposal
[Remember, the real debt number is $9.4 trillion, not $7.2.]
http://www.washingtonpost.com/wp-dyn/content/article/2011/02/17/AR2011021705270.html

The Obama Budget – Willful Blindness
http://www.nationalreview.com/corner/259706/budget-yuval-levin

The President’s Budget Is Disastrous
http://www.theatlantic.com/business/archive/2011/02/time-to-get-serious-about-the-deficit/71246/

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