Obama Budget: My Two Cents

An email from a reader (who voted for W. Bush twice...oops...then Obama):
"...I’m getting very scared...Guy one day talks about fiscal responsibility and then the next comes out with a $3.6 trillion budget with tax increases and reduction in tax deductibles (ie mortgage interest). From what I read its only on on +$250k so I am not in full panic mode, yet

I don’t know enough about the nationalizing health care so I am relying on your blog for guidance (like you’ve been doing). Anytime gov’t gets involved it’s going to never work..

I can tell you aren’t fully in his corner either with this budget"

TW: Chill baby (to channel Mike Steele...that guy appears to be a goof, but the best they have at the RNC these days).

Re taxes- the budget has nothing Obama has not discussed for two year, he is raising marginal rates on those earning over $250K. In the mean time he fixes AMT instead of performing the cynical patches like had been done for years previously. As this NYT piece points out many folks earning $200-400K may in fact end up with only very small increases in total tax as the higher marginal rates will be offset by the elimination of their AMT obligations.
http://www.nytimes.com/2009/02/28/your-money/28money.html?scp=2&sq=amt&st=cse

Regardless, Obama is merely partially restoring some of the taxes back to pre 2001 levels. The capital gains tax is set to go up to 20% from 15% but is would still be lower than the pre 2001 25%. We have a progressive tax system (at the federal level at least), it had become less progressive, Obama rightly restores some of the progressivity.

Finally, Americans react like Pavlovian dogs to any perceived tax increase. The Republicans have exploited this for their electoral gain for years, no one likes taxes but at some point fiscal responsibility demands it.

Re the health care- I will leave that to separate posts (remember we have the key word search available down and to the right). But small business owners and managers should be encouraged by a POTUS that seeks to create a health care system that does not force smaller businesses to either provide poor health plans or expensive ones to their employees. Health care MUST be addressed, the Republicans offer platitudes ("privatize, privatize, privatize") without ever defining what that actually means. Health care is very different than shopping for groceries or a new set of tires.

Re my support of the budget- I support it much more than not. Obama's creation of a baseline budget more reflective of reality (i.e. fixing AMT, not hiding the costs of war etc.) is great. Attacking health care and the tax changes. We have to understand the following equation:

GDP= C+I+G+X

C= private consumption, I=private investment, G= government spending and X= net exports

Private consumption is going down as it must, all of the excessive mortgage debt, extra cars, boats, big vacations that characterize American profligacy feed into "C". Private consumption may decline by 10% or more. Private investment "I" follows "C", the last thing we need or will get in a declining "C" environment in more investment in say new plant capacity. Net exports may not worsen as lower oil prices help but will be offset by the collapse of international demand.
That leaves "G". We either supplement "C and I" with G (temporarily!!!) in order to stabilize GDP or alternatively go down the path of the "end of worlders"(kooks) or the "lets blow up the system in order to fix it"(Ron Paul, Jim Rogers etc.). Those in favor of the latter are willing to take a risk I am not. Blowing up the system would create an environment in which the Hitlers, Stalins etc. become more attractive. Furthermore, note most of the LBUW crowd think everyone (Bush, Clinton, Obama, Bernanke, Greenstein) is wrong except them, they have no effective real world models to which to point only ideology and theory.

While it is counter intuitive at a certain level, the massive contraction in private debt must be offset partially by government debt lest the "paradox of thrift" (whereby everyone tries to save simultaneously) kicks in with a vengeance leading to a death spiral of deflation and demand contraction.

Finally, where could Obama improve in my biased, ignorant opinion. The upper cut by which he could really knock out his opposition would be more concrete policies on where he will restore fiscal balance once the Great Recession/Mini Depression passes. If Obama does, then the Republican attack machine has its guts ripped out on the "big government" meme.

Where to do so easier said than done but:
1) Social Security- phase in lower indexing of benefit growth, this overtime would save hundreds of billions and eventually trillion plus.
2) Medicare/Medicaid- introduce some means testing and continue to aggressively push reform. At some point either costs per unit of care or the units of care must be reduced.
3) Defense- fight the urge to increase deployments to Afghanistan and avoid new ones (e.g. Iran) 4) Everything else- while "capping" spending on everything else only impacts roughly 15% of the federal budget, it is great politics, so do it BHO (again once the current Recession passes).