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March 2012 - Volume 17, Number 1

   

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The Approaching Fiscal Armageddon

by John Hendrickson

Someday, a President, if he is to save the country from bankruptcy and its people from ruin, must make the old fight over again, and this time the battle will be waged against desperate disadvantages. Against him will be arrayed the largest, strongest, and most formidably entrenched army of interested government spenders, wasters, and patronage- dispensing politicians the world has yet known.
Charles G. Dawes[1]

 

President Barack Obama recently proposed a new budget of $3.8 trillion, which includes tax increases as well as additional economic stimulus money. The budget proposal calls for “$350 billion in short-term stimulus spending, $475 billion for the highway program and $1.5 trillion in tax increases.”[2] The Administration argues that this budget proposal will reduce the deficit by $4 trillion along with starting to put the nation on a path of fiscal restoration, while continuing the economic recovery. The national debt currently stands at over $15 trillion-and the nation is currently running trillion dollar deficits. Although it has been over 1,000 days since the Congress has passed a budget it is uncertain that a compromise will occur over a budget because of the stark philosophical differences between Republicans and President Obama and the Democrats. Nevertheless policymakers must seriously address the fiscal crisis that is facing the nation. The economy is still in a fragile recovery and the economic storm clouds over Europe may cross the Atlantic to create another recession. In order to resolve the fiscal crisis policymakers must reduce spending, and that is the only solution to avoid further economic decline.

 

Writing recently in Forbes, Peter Ferrara, who serves as Director of Entitlement and Budget Policy for the Heartland Institute and is a former Reagan administration official, argued that President Obama’s budget proposal reflects the same government-centered policies:

 

In other words, in plain English, what drives economic recovery and growth is government spending. And Obama follows through on that in his new budget, with federal spending for 2012 projected to total $3.795 trillion, an increase of over 27 percent during his first term alone, up another $193 billion from the last year. In fact, the President’s own proposed budget projects federal spending to soar by 2022 to $5.820 trillion, the highest government spending in world history. Over the next ten years, federal spending, with all of President Obama’s talk about spending cuts, will total $47 trillion.[3]

 

Rich Lowry, editor of National Review, wrote that President Obama also “wants to chase the new spending with almost $2 trillion in new taxes — higher taxes on income, on dividends, on capital gains, and on sundry other targets.”[4] The Wall Street Journal noted some of the tax increases in the budget proposal:

 

Tax rates will rise as follows: capital gains to 30 percent from 15 percent today; dividends to 30 percent from 15 percent; the estate tax to 45 percent from 35 percent, and don’t forget the end to the temporary payroll tax cut that Mr. Obama is making such an issue of now. He only wants it to last for another ten months.[5]

 

President Obama’s budget largely reflects his class warfare view of taxation that the wealthy should “pay their fair share” as symbolized by the “Buffet Rule,” but it is still unclear on what percentage of taxation is considered a “fair share.” In an editorial, Investor’s Business Daily noted that “the proposed new ‘Buffet Tax’ will hit wealthy Americans with a marginal tax rate of 90 percent or higher.”[6] Investor’s Business Daily argued that in “all told, it raises taxes from the historic average of 18.3 percent of GDP to 20.1 percent.”[7] “Tax wise, this is a disastrous budget — one that sets the U.S. on a course for a decade of stagnation, meager job gains, and little or no real income growth,” argued Investor’s Business Daily.

 

The economic recovery of the nation will not be helped by the continued policies of the current Administration. The level of debt being accumulated by the United States must be controlled and entitlement programs must be reformed in order to not only preserve them, but also avoid a European-style social welfare collapse. As Peter Ferrara stated:

 

Those four consecutive years of trillion dollar deficits under President Obama, the only trillion dollar deficits in world history, added a total of $5.33 trillion to the national debt held by the public in President Obama’s one term in office alone. Obama’s own budget projects the national debt held by the public to total $11.6 trillion for 2012, double the national debt of $5.8 trillion in 2008! Consequently, by Election Day 2012, Obama will have doubled the national debt, in just one term of office. In that one term, he added as much to the national debt as all prior Presidents, from George Washington to George Bush, combined. By 2020, Obama’s own budget projects that national debt held by the public to total nearly $20 trillion! That would be the highest national debt in world history.[8]

 

The national economy is still in a weak recovery from the "Great Recession," and even though the unemployment rate is falling, currently at 8.3 percent, the number is actually higher because of those people who have stopped looking for work or are only employed part-time. With this taken into consideration it is estimated that the unemployment rate is at a much higher rate of 15 percent.[9] In addition to the economic uncertainty, many Americans have become dependent upon the government for assistance. “More than 67.3 million Americans rely on assistance from Washington for everything from food, shelter, and clothing to college tuition and health care,” stated Ed Feulner, President of the Heritage Foundation.[10]

 

It is clear that in order to not only revive the national economy, but also to avoid a disastrous fiscal crisis, policymakers will have to cut spending. The problem is a spending problem and not a revenue problem. Representative Paul Ryan (R-WI), who is chair of the House Budget Committee, will unveil in March the GOP budget proposal, which will be much different than President Obama’s. This battle over government spending is between two philosophies of government, but it is important that constitutional limited-government policies return or the republic will continue to decline. Only by returning to sound constitutional policies will the nation be able to begin to reverse course.

Endnotes:

[1]Charles G. Dawes, quoted by Ronald and Allis Radosh, in “Time for Another Harding? How a much-derided Republican president actually succeeded in cutting the budget and fixing the economy,” The Weekly Standard, October 24, 2011, p. 22.
[2]Dave Boyer, “Obama unveils fiscal 2013 budget proposal,” The Washington Times, February 13, 2012, <http://www.washingtontimes.com/news/2012/feb/13/obama-unveils-fiscal-2013-budget-proposal/> accessed on February 14, 2012.
[3]Peter Ferrara, “Obama’s Budget: The Decline and Fall of the American Economy,” Forbes, February 16, 2012, <http://www.forbes.com/sites/peterferrara/2012/02/16/obamas-budget-the-decline-and-fall-of-the-american-economy/> accessed on February 17, 2012.
[4]Rich Lowry, “Spend, tax, Repeat,” National Review Online, February 14, 2012, <http://www.nationalreview.com/articles/290990/spend-tax-repeat-rich-lowry> accessed on February 15, 2012.
[5]The Wall Street Journal, “The Amazing Obama Budget,” February 14, 2012, <http://online.wsj.com/article/SB10001424052970204883304577221342883636060.html> accessed on February 14, 2012.
[6]Investor’s Business Daily, “Obama’s budget raises taxes on all, not just the rich,” February 14, 2012, <http://news.investors.com/Article/601205/201202141851/obama-budget-includes-tax-hikes-on-all.htm> accessed on February 15, 2012.
[7]Ibid.
[8]Ferrara.
[9]Aparna Mathur and Matt Jensen, “Tracking the unreported (15.6%) unemployed,” Real Clear Markets, January 4, 2012, <http://www.realclearmarkets.com/articles/2012/01/04/tracking_the_unreported_156_unemployed_99440.html> accessed on January 4, 2012.
[10]Ed Feulner, “A nation of takers: Government policy is making welfare more profitable than work,” The Washington Times, February 13, 2012,
< http://www.washingtontimes.com/news/2012/feb/13/a-nation-of-takers/> accessed on February 14, 2012.

 

John Hendrickson is a Research Analyst with Public Interest Institute.


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