Putting out a federal budget is not a task anyone undertakes to make friends. Given that the American populace wants a balanced budget without having to seriously cut defense, health care or Social Security (which is to say, anywhere that might actually help balance the budget), it is impossible to put out a document that will make anybody happy, let alone everybody.
Yet the Obama Administration’s new budget can still be fairly criticized as a lousy effort, lacking in any sort of unifying economic vision for either restoring fiscal discipline or revving up the economy.
Instead, there is a half-hearted $350 billion attempt at stimulus combined with an equally anemic attempt at reining in the deficit, which will remain at over $1 trillion annually even under the plan’s rather optimistic projections, which gives the impression that Obama is a Keynesian guided by deficit worries, which is a bit like a Catholic being worried if he’s keeping kosher or not.
If there is anything resembling a guiding principle, it is the vague notion about “fairness” being a guiding principle of this document, especially shown in the “Buffett Rule”, which aims to ensure that those earning more than $1 million annually are paying at least 30 percent of their income in taxes. There are additional populist measures that cut subsidies to energy companies and raise taxes on capital gains.
Increasing taxes on the very wealthy may very well be the fairest thing to do, the debate on that is certainly not closed. What it is not, though, is a way to help the economy. The “fairness” planks in the new tax code may all feel satisfying to a population struggling to make ends meet, but we should not be deceived into thinking that they are ways to help the economy.
Introductory economics students can tell you that increasing taxes will lead to less production. Empirical data appears to back up theory on this point. The 1997 cut in the federal tax on capital gains was so successful that it managed to actually increase government revenue from capital gains.
This leads into another central problem with the budget, namely that the targets for deficit reduction are reliant on economic growth of at least 3 percent for the next few years annually, rising to 4.1 percent by 2015. A lovely idea, but 3 percent growth is higher than the government’s own forecast of 2.7 percent for the year under the most optimistic scenario outlined by the Federal Reserve-a scenario that does not assume the huge tax hikes of the Obama budget. Perhaps the laws of economics work differently in the White House and increasing taxes increases growth as well.
If the federal budget is ever to be brought into line, the cuts would have to seriously fall on entitlements, which is to say Social Security, Medicare and Medicaid. However, Obama, knowing just as well as everyone else that cuts to any of these programs are politically explosive, decided to entirely avoid the issue. Reducing the number of days in the week that the Postal Service delivers mail is a good idea, but minor changes like that are never going to make a real dent in the federal debt.
Senate Minority Leader Mitch McConnell derided the document as “a campaign document” and although I rarely say this, Mitch McConnell is right. Of course, the Republicans will probably put on some fiscal showboating of their own in the coming weeks when they release their own budget, so let’s not give Sen. McConnell too much credit. My hope is that our parties will then put aside their campaign literature and actually lay out some sort of vision for this country. While that may or may not happen, one can say with certainty that we haven’t heard the last of this issue yet.