04 March 2009

Obama #3: Out-of-Control Spending

The Objectivist
Democrats Gone Wild: Obama and the Democrats Have a Spending Orgy
Dunkirk-Fredonia Observer
March 2, 2009

Critics of President Obama and the Democrats in Congress made three predictions: they would push government spending through the roof, jack up taxes, and damage the economy in the process. The critics were right about the first and the second is clearly in the works. The jury is still out on the third, although things do not look good.

President Obama and the Congress are engaged in a spending orgy. On the heels of its $787B stimulus bill (actually around $1.2 trillion once interest costs are added), the House passed a $410B omnibus spending bill that covered 9 of the 12 federal categories. When the two are combined, the spending increases per department are astounding. According to the Wall Street Journal, here are a few of the increases when compared to 2008. The first number is the additional dollars and the second the percentage increase: Energy & Water ($46.7 billion, 151%), Transportation/Housing and Urban Development ($68 billion, 139%), Labor/Health and Human Services ($131.8 billion, 91%), Interior ($11.9 billion, 45%), and Agriculture ($8 billion, 45%). The percentage of federal spending as a share of the GDP is heading up to 28% from 21% at the end of the Bush administration.

Obama and company are gearing up to spend a lot more. The spending plan authorizes but does not yet spend $634 billion over the next ten years to extend health coverage to the 46 million who are uninsured and to subsidize the premiums of others who already have insurance. This figure probably underestimates how much this will cost. USA Today points out that one firm estimated that Obama’s plan would cost around $1 trillion. It also authorizes but does not spend another $750 billion for further bailouts. Clearly, this is just the beginning. Even on defense, where one would expect the Democrats to cut, they propose to increase spending by 4%.

This spending is the height of irresponsibility. The deficit in 2009 will be 12.3% of the Gross Domestic Product ($1.8 trillion), nearly four times larger than in the last year of the spendthrift Bush administration (3.2% of GDP and $460 billion). Nor is this a one-time shot. The Obama administration predicts that in 2010 the deficit will be $1.2 trillion (8% of the GDP). Given that this is based on economic models that are more optimistic than those of private economists, the 2010 figure likely underestimates it. The added spending will become the baseline for spending in years to come, thereby ensuring that the government will siphon out more and more of our wealth.

As one would expect of the professional politicians, the budget includes massive pork-barrel spending. The taxpayer watchdog group, Taxpayers for Common Sense, asserts that the omnibus bill includes around 8,600 earmarks costing $7.7 billion. When he signs this, President Obama will break yet another campaign promise, this time his promise not to sign bills loaded up with earmarks.

Obama and his merry band of spenders plan to pay in part for the spending by soaking the rich. Obama’s proposal slams the top 5% of taxpayers, specifically individuals making more than $200,000 and couples making more than $250,000. Their tax rates will rise roughly from 35% to 39.6% (a 13% increase). They would also be assaulted with limits on itemized deductions and a massive rise in capital gains and dividend taxes. The Wall Street Journal estimates that the increase will raise their effective rate to 42% (a 20% increase). Nor will this soak-the-rich approach stop the bleeding. The Journal points out that using 2006 figures, even if the government confiscated 100% of all income above $500,000 this would only yield $1.3 trillion. This figure ignores the recent loss in stock-market wealth and in any case barely covers the 2010 deficit.

As a side note, the golden-goose rich already pay far more than their share. Using 2006 IRS data, the most recent available, the richest 1% made 22% of U.S. income and paid 39.9% of income-tax revenue. The top 5% paid 60% of personal income tax and the top 10% paid 71%. I defy anyone to explain why this is just or fair.

Before you smile at the thought of the rich being squeezed, note that you too are on the menu. According to the Tax Foundation, reverting back to the higher Clinton-era rates on the two highest-income-tax brackets will hit 45-55% of small businesses. Obama also plans higher fees for companies drilling on federal land and $600 billion in carbon taxes. These taxes will be passed on to consumers, thereby acting as a silent tax. They’ll swamp the tax rebate ($400 for an individual, $800 for a couple). Worse yet, because the rebate is not accompanied by a decrease in income-tax rates, the rebates will be taxed as income. That is, the government will claw back part of checks. In addition, the looming problems with Social Security and Medicare will exacerbate all of the debt- and tax-related problems.

It is not yet clear how the economy will respond to massive growth in debt-fueled government spending. The initial response is not good. The stock market (S&P 500) has dropped over 30% since the day that Obama was elected. To the extent that this reflects disinvestment in American corporations, trouble is on the horizon.

President Obama is well on his way to producing a seismic shift in the United States. Specifically, his attempt to vastly expand government, run up the debt to do so, and jack up taxes to pay for some of the expansion is indeed real change. Whether this will harm the economy has yet to be seen, but the initial indication is scary.

1 comment:

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