Like a young, aggressive poker player, President Obama seems to have pushed in all his chips on his budget. The size of the gamble is nearly unprecedented because the pot holds the nation’s economic future for at least a generation.
There is agreement across the political spectrum that the president’s budget represents a fundamental restructuring of the U.S. economy. Nowhere is this more evident than in the area of energy and the environment.
The president plans to impose and allocate a trillion-plus dollars worth of resources over the next 10 years. Perhaps the starkest direct effect will be the allocation of resources away from conventional energies like oil and gas towards clean energy technologies.
The plan includes $140 billion in active investment in clean energy, a $646 billion cap-and-trade program to control and reduce emissions, and large tax increases on conventional energy companies.
Given that all clean technologies produce energy at much higher per unit costs than conventional sources, the result of the president’s plan will clearly be higher energy prices and at least the potential for serious competitive challenges in energy-intense industries.
The president also proposes a $630 billion fund (10 years) to finance expansion of state-based health insurance. The administration has referred to the fund as a “down payment” on future additional programs designed to move the country to universal state health coverage. Other countries have gone down that path, and their experience is not encouraging.
Large new spending is also proposed in education, foreign affairs, transportation, and a number of other areas. Not surprisingly, the plan includes higher taxes meant to pay for these new programs. The top two income tax rates will be increased, capital gains taxes will be increased, the estate tax will be preserved, itemized deductions will be capped at 28 percent, and taxes on multinational firms will be increased.
The president’s fiscal gamble, however, doesn’t stop at more spending, regulation, and taxes on upper-income Americans.
The plan calls for a budget deficit of $1.75 trillion this year compared to a $455 billion deficit in 2008. If the rosy economic assumptions underpinning the fiscal projections in the budget turn out to be true, with the internal savings promised in the budget, and if all the temporary spending included in the stimulus bill actually ends up being temporary, then the president will increase the amount of debt held by the public from $5.8 trillion (2008) to $15.4 trillion in 2019.
The likely outcome, however, is that most of the assumptions underpinning the president’s budget will turn out overly optimistic.
The administration will fail to restrain spending, and the so-called temporary stimulus spending will largely become permanent, resulting in much larger deficits and debt accumulation than promised. The scale of deficits, and thus accumulated debt being envisioned, mean that future taxes on the middle-class will be inevitable unless the plan results in nearly unprecedented economic growth.
Unfortunately, there is no historical or current example of a country moving towards state direction of investment and capital, coupled with higher levels of income redistribution, which has resulted in higher rates of economic growth.
And we need to understand the risks being assumed by the president and his administration. They are playing with other people’s money.
Unlike private endeavor, where individuals and firms risk private savings and their labor, the president is risking our money, our kids’ future, and our economic prosperity.
If he’s wrong on energy, health care, education, or how taxes influence incentives, or the myriad other areas he proposes to radically transform, it is not the president who will bear the brunt of the costs. Rather it is taxpayers, indeed all citizens, who will pay a heavy price now and in the future.
Jason Clemens is the director of research at the San Francisco-based Pacific Research Institute (www.pacificresearch.org).