An Economy Built to Crash

President Obama delivers budget remarks at Northern Virginia Community College.

by James A. Bacon

President Obama has a catchy new slogan. He wants a budget that will create an economy “built to last,” evoking the best-selling book of the same name that explored the secrets of exceptional, long-lasting corporations.

Unfortunately, Obama’s budget, if ever enacted, would more likely create an economy that’s “built to crash.” In essence, his formula is this: Raise taxes on the rich. Instead of using the revenue for deficit reduction, he will use it to expand government “job creating” initiatives. Evidently, the geniuses in the White House, despite having presided over the weakest economic expansion since the Great Depression, still believe they can do a better job of allocating the nation’s wealth than the people who got rich by actually creating the wealth.

One way to gauge the effectiveness of Obama’s interventionist policies is to compare the Office of Management and Budget real (inflation-adjusted), year-to-year growth assumptions embedded in Obama’s four budget documents. In nearly every instance, the result of Obama’s policies has been an economy that has under-performed expectations by a wide margin.
Particularly instructive are the results for Fiscal Year 2011, which Obama assumed early in his administration would grow a robust 4.0%. But succeeding budgetary assumptions downgraded growth expectations to less than half that rate, to 1.8%, over three years. Likewise, the OMB has lowered growth assumptions for fiscal 2012 and 2013.

But in the out years of 2015 and 2016, the fiscal forecasts get rosier than before on the basis of no known evidence or logic. Whereas the Obamanauts had assumed early in the administration that robust economic growth would taper off in five or six years as the business cycle matured, such realistic thinking has largely disappeared. Now, for growth assumptions to prove accurate, one of the weakest business expansions in U.S. history will have to morph into one of the longest lasting. Good luck with that.

Moreover, the optimistic growth numbers coincide with the expiration of the Bush-era tax cuts for the “rich” — millionaires, billionaires… and households making more than $250,000 a year. The projections are predicated on the beliefs that (a) taxing the rich at a higher rate will not induce them to shift more of their wealth into non-taxable assets, and (b) that unburdening the rich of their unjust share of the nation’s wealth will have no deliterious effects upon job creation and economic growth, with the result that (c) economic growth will continue unimpeded.

Both suppositions are, I believe, incorrect, although I am fully aware that I will not persuade anyone who does not want to be persuaded. All one can do is wait a few years, look back and see who was right and wrong… which I fully intend to do.

If my analysis continues to prove correct, then budget deficits will greatly exceed the $7 trillion in Obama’s forecast over the next decade. Barring a seismic shift in spending patterns, the tax structure or economic growth rates, the United States will continue to rack up $1 trillion-a-year deficits for the foreseeable future. Inevitably, the United States will endure a financial crisis, either defaulting outright on its debt or engaging in its moral equivalent, the engineering of hyper-inflation. Either way, an economic catastrophe — a crash — will ensue, devastating job creation, tax revenues and the social safety net. That day is still years off, and Obama always can hope that the calamity will not take place on his watch. But it will come. Indeed, there is likely no reversing it now, regardless of which party controls Congress and the White House.

For the record… There are two glimmers of light in the proposed 2013 budget. First, Obama continues to cut military spending and to reformulate a strategic doctrine aligned with smaller military resources. That is something that Republicans and conservatives are not willing to do, yet must be accomplished if there is any hope to balance the budget. Second, he actually proposes cuts to farm subsidies. Of course, farmers are doing better than most of the rest of us, so it’s high time they get off the dole. The proposed cuts are more of a no-brainer than an act of budgetary courage. But the solons in Washington typically quail before the farm lobby, so any sign of fiscal discipline, meager though it may be, should be celebrated.

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15 responses to “An Economy Built to Crash”

  1. here’s the problem. It’s EASY to ATTACK …ANY budget proposal.

    What I WANT TO SEE is an alternative proposal from those who oppose this budget.

    I’m tired of the attack mentality these days.

    in this case – the opposing party is basically using this as yet another anti-Obama “opportunity” but they are short of details of what they would do.

    Since they have the House – they …COULD actually propose a different budget.

    we are in a bad place these days because the opponents have no solutions only attacks….

    finally… WHERE did the STRUCTURAL DEFICIT come from ?

    did Obama CREATE the STRUCTURAL deficit? What has he – personally done to increase it?

    The biggest part of govt is salaries and if you take DOD, the VA, and Homeland Security – those 3 are 6 times bigger than ALL the other govt agencies CoMBINED.

    Now what would you cut ? I want to see an alternative budget with the cuts before I listen to one word of the attacks on this one.

    put up or stifle it.

  2. Larry, you’re missing the point. I’m not attacking the budget proposal. (In fact, I said a couple of good things about it.) I’m attacking the fantasy economic growth projections that understate the long-term budgetary damage it will inflict.

    Do the Republicans have an answer? I doubt it. We’re too far gone. We’re running out of fiscal options running room. Boomergeddon is coming. The only question is how long it takes to get here.

    I am hoping that Virginia legislators take notice and do everything they can to bullet proof Virginia’s budget. If we fail to take proper precautions, the s***storm will wipe us out, too.

  3. As for what I would do with the federal government, I refer you to “Boomergeddon.” Whack discretionary spending. Whack defense. Reform entitlements. Restructure the tax code to bring in extra revenue, reduce tax rates and stimulate economic growth.

  4. All good points. Regarding your last comment James, which I think succinctly states the solution (but not the means to the solution), wouldn’t Simpson-Bowles have done all that? I think that if the Republicans hadn’t gotten bogged down in their own post-2010 rhetoric, it might have had a chance last summer (my view). My suggestion is that we all get past the rhetoric and ask our legislators to get behind the Bowles Simpson proposals.

    1. I agree, Simpson-Bowles is about as close as anything we’ve seen to a viable, bipartisan plan. It’s pretty clear to me that neither side is willing to give. Both Rs and Ds are looking for the balance of power to shift in the next election. Which means nothing will get done. If we get more divided government, it’ll time to buy that cabin in the woods and stock on on canned food.

  5. re: ” ) I’m attacking the fantasy economic growth projections that understate the long-term budgetary damage it will inflict.”

    but that’s yet another attack without a alternate proposal.

    re: ” wouldn’t Simpson-Bowles have done all that?”

    yes.. and there are others

    I want to see an alternative proposal instead of cherry-picking attacks on the budget itself or some of the growth projections.

    I’m tired of the attack-only modes.

    if someone thinks the Obama budget is bad, wrong, evil, idiotic, moronic..

    FINE – give me one that is not.

    you cannot win an issue by attacking only what you do not like.

    this is what the GOP does now days and this is why, in part, the Congress has a 10% approval.

    we need to get off our duffs and propose alternatives. … or we just need to admit that we have none or work work for them ..and in that case.. why should I listen to you much less vote for you?

  6. They already have the solution. They are going to print more money. The debt ceiling is over 16 trillion and growing. It has to.

    Because the debt is expected to exceed it before the November elections. And before things are done, the debt will be over 24 trillion.
    That’s been the plan all along. It’s why you can’t buy a can of soup without puking on the price. Better pick out your third world retirement home now before everyone else does.

    1. D – It might be better for the good ole USA (and the rest of us) if you left now. With your view of the USA that shouldn’t be so hard? R

      1. Oh no, not my view. It’s bernanke and geithner’s view. It’s Obama’s view as well because his federal agencies have forecasted trillions more in deficits until 2020 or later. The dollar in your wallet decreases in value each time the Fed starts up their printer. Which is why a trip to the grocery store is now mostly to people watch instead of actually buying anything. Same goes on in the malls, especially when people are using their credit cards to buy overpriced food in the grocery. With incomes stagnant the best course of action is to move where your dollar goes farther. I’ve already picked my spots out and will be moving soon enough.

  7. well.. I still demur.

    the opposition does not like Obama’s proposal. They point out in excruciating it’s flaw and shortcomings.

    It may well deserve many if not much of the criticism.

    but what is wrong with the opposition putting forth a principled alternative?

    If they did that – would that not directly challenge the one they opposed and even given the GOP challengers something to run on besides just attacking what they oppose?

    Jim said they BOTH are ” doing” it.

    no… Obama DID put a budget on the table – and the opposition has not,

    it’s the same problem with ObamaCare. The opposition hates it but they have no alternative that they support as a party.

    How can you move forward on these issues if the basic process is for one side to propose and the other side to oppose?

    It was not that long ago that the opposition would provide their vision of what they wanted to do … and sometimes the two sides would then sit down and fine out what they could agree on even if they could not agree on everything.

    My view is whether you are a DEm or a GOP or a conservative or a liberal – you have a responsibility to support something yourself rather than just oppose the opposing sides proposal.

  8. DJRippert Avatar

    The government has doubled its level of spending as a percent of GDP since 1950.

    Ron Paul, a Republican, has proposed a plan top cut government spending by $1T.

    It seems to me that Rep. Paul’s plan ought to be considered.

  9. Ron Paul’s plan got 7 votes from his Republican colleagues.

    Let me make sure that people understand what I am saying.

    there is ONE budget proposal from Obama even though there might be a nuber of different “ideas” from other Dems. It is ONE proposal that is going to be put through the legislative process.

    and it is this one proposal that the GOP is hammering for everything from irresponsibility to bad breath.

    I’m asking WHAT single Alternative has the GOP got behind?

    Because so far – I do not see a serious alternative that lays out in Chapter and Verse what they would cut that they support – as a Party THEIR budget proposal.

    the current environment is one where every individual opponent has a cudgel and whacks away at the Prez proposal but they have none they they support.

    Oh..they have “ideas” sure enough but WHERE is the budget they support?

    Jim says that we have to wait until the next election where one side or the other will hopefully take both houses and the Presidency and than show down the throat of the opposition party their party-supported budget.

    but what is the likelihood that we’re going to get a one-party rules all govt?

    and even if we did – what kind of sense does it make from a governance perspective for a country to never agree on a budget?

    our country is broke and in my view in no small part because of the way that campaign money works.

    We citizens are pawns in a governance culture war. (culture is a wrong word…help me find the right one).

  10. DJRippert Avatar

    Now, Obama claims that he didn’t know the recession would be as bad as it has turned out to be …

    Perhaps the president should read Bacon’s Rebellion. The fact that all recent recessions have had elongated “U shaped” recoveries has been widely chronicled here. The cumulative bad effects of the deficit have been widely chronicled here.

    So, is Obama just mis-informed or is he a con man making up excuses to get re-elected?

  11. DJRippert Avatar

    “our country is broke and in my view in no small part because of the way that campaign money works.”.

    I could not agree more.

    However, asking the Supreme Court to legislate is not the answer. The answer is to amend the Constitution to draw a bright line between the rights held by people and the rights held by corporations and labor unions.

    Is there even one politician willing to support this and get it started?

    Is there one member of the Virginia General Assembly willing to say that the US Congress should put forth an amendment but, if they won’t, then the state legislatures will exercise their constitutional power and do so?

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