President Obama's budget deficit taskforce is clever politics but poor leadership.
Instead of drafting a responsible budget, he seeks to force Republicans to endorse wasteful spending and higher taxes, or be cast as obstructionists.
President Bush was no model of austerity. He inherited a $263 billion surplus from Bill Clinton. By fiscal 2007, the year before the Great Recession, the deficit was $161 billion.
Bush's foolishnesses started with unnecessary increases in farm subsidies and ended with a TARP that bailed out the banks without imposing needed reforms.
Bush and a Democratic Congress instigated economic collapse by appeasing China on trade, neglecting the cost of imported oil and permitting Americans to borrow profligately to finance a resulting trade deficit exceeding $700 billion.
Wall Street financiers and Main Street banks happily perpetuated the fantasy that Americans could consume more than they produced by recycling money borrowed abroad to Americans. who offered as collateral overvalued homes and shopping malls
The credit bubble burst, property values sank, banks failed, and economic calamity followed.
Mr. Obama inherited a mess but he has not handled it well.
The TARP and two stimulus packages pushed federal deficits to $1.4 trillion in 2009 and a projected $1.6 trillion for 2010.
The TARP funds put a temporary hole in Washington's finances. As money went to the banks, those were recorded as expenditures, and as banks repay, those are tallied as revenues.
President Obama asked Congress to fashion a stimulus package creating temporary tax cuts and spending increases to jump start the economy.
With the economy recovering, the budget deficit should recede back to its 2007 level-adjusting for inflation and growth, something in the range of $215 billion in 2014.
Assuming 3 percent GDP growth in 2010 and 4 percent after that, Obama's budget projects deficits greater than $900 billion in 2014, if nothing is done, and greater than $700 billion, if Congress approves new taxes on the rich and freezes some discretionary spending.
How did the federal government go from a structural deficit of $215 billion before the recession to $900 billion afterwards?
Congressional Democrats and Obama used the recession as an excuse to increase entitlements, pay off supporters and finance pet projects under the guise of emergency measures.
Now, Obama proposes an 18 member panel, which will have 6 or 7 Republicans, to fix things. Unless the Republicans go along with big tax hikes for the middle class, no solutions will be possible.
Most economists believe Obama's growth economic assumptions are too optimistic and deficits will be bigger than projected.
Stronger growth requires fixing the huge trade deficit and broken banks. But Obama lacks what it takes to embrace policies that would reduce gasoline use, compel China to revalue its currency and otherwise stop subsidizing exports, and require New York financiers to behave responsibly.
It is up to the president to fashion a budget and sound economic policies, not boot responsibility to a commission.
The least Obama could do is offer a budget that made as much sense as George Bush in 2007.
Read Full Article »