Barack's Battle Royale

by John M. Curtis
(310) 204-8700

Copyright March 1, 2009
All Rights Reserved.                    

            Barely passing his life-saving $787 billion recovery plan, President Barack Obama threw down the gauntlet pushing a $3.55 trillion budget, hiking the deficit to $1.75 trillion.  With the deficit half the size of the total federal budget, Barack’s ambitious spending plans got a lot more difficult, arguing that it’s what the voters wanted.  While he told a national audience Feb. 22 that all must sacrifice, the White House showed no penchant for compromise on what amounts to staggering government spending, not seen since Presidents Franklin D. Roosevelt’s New Deal or Lyndon B. Johnson’s Great Society.  At a time of stunning bank failures, Obama decided to cut subsidies to farmers, increase taxes on corporate polluters, raise taxes on the wealthy and overhaul the nation’s beleaguered health care system.  Obama calls his budget one of the future but some see it as a nightmare.

            White House Office of Management and Budget Director Peter Oszag promised to cut the ballooning federal deficit in two by the end of Barack’s first term.  He’s calculating an average Gross Domestic Produce growth rate of 4%.  Today’s growth rate hit negative 6%, far from what’s needed to close the growing gap between government income and expenses.  “I realize that passing this budget won’t be easy,” said Obama, because it “represents a threat to the status quo in Washington.  Actually, budget deficits are the “status quo,” questioning the very real possibility that Barack’s spending plans would explode an already intolerable deficit.  Orszag believes the economy’s health stems from overhauling a dysfunctional health care system.  While health care certainly needs some work, today’s financial meltdown is far more related to banks’ risky stock market investing.

            Banking lobbyists pressured Congress in 1999 to jump on stock market bubble, ending the 1933 Glass-Steagall Act that formed the Federal Deposit Insurance Corporation and prohibited banks for stock market investing.  Nearly 60 years after Glass-Steagall, banks failed again for exactly the same reason:  Risky stock market investing.  So-called “derivatives” or sliced-and-diced collateralized mortgage obligations went bust when the real estate bubble burst, leaving them essentially worthless.  Financial institutions at home and abroad suffered devastating losses, causing the recent run-on-the-bank that evaporated banks’ liquidity.  Today’s banking insolvency, preventing credit from flowing to businesses and consumers, has prevented economic recovery.  No one thinks Orszag’s rosy income projections can happen without robust consumer spending.

            Liberal groups hailed Obama’s budget after eight years of President George W. Bush.  “We’re struck with ho bold and courageous a budget it is,” said James Horney of the liberal Center on Budget and Policy Priorities, excited by Barack’s new proposals but worried that he’ll encounter too much resistance.  While Bush is remembered most for the Iraq War and deteriorated economy, Obama doesn’t want to be known for exploding deficits.  Given the state of the economy, winning concessions on his economy recovery plan was a necessary first start.  Instead to expecting everything at once, the budget should reflect the need to reduce the deficit and control government spending.  There’s absolutely no reason to threaten cash-strapped businesses for caps on greenhouse gasses when that could wait until the economy recovers.  Health care reform isn’t, as Orzag insists, critical to the banking crisis.

            Most economists believe budget deficits threaten economic recovery by forcing the government to compete for cash in private capital markets.  Past deficits have pushed up interest rates, causing inflation in the financial sector.  With federal deficits now running nearly 12% of GDP, there a real threat to economic recovery.  Past economic cycles—including former President Bill Clinton’s—relied on asset “bubbles” to reduce deficits.  Clinton’s budget went into surplus because of the dot-com bubble, boosting the Dow from 5,000 in 1995 to 12,750 in March 2000.  More that doubling the Dow in five years boosted government’s tax revenues, erasing deficits, balancing the budget and eventually creating surpluses.  Without another asset bubble, it’s highly doubtful Obama can make up today’s record deficits.  Only by scaling back spending can Barack expect to reduce the skyrocketing shortfall.

            Obama’s main goal should be to fix the nation’s disabled banking system, making credit to worthy consumers and businesses available again.  Only by improving the nation’s cash-flow can the White House expect to improve GDP.  Pushing now for national health care, caps on greenhouse gasses and other costly programs must get in line behind urgent priorities.  No one knows how much cash it will take to stabilize U.S. financial markets.  One thing’s for sure:  No other priority—no matter how worthy—can take precedence over fixing the U.S. economy.  With all the new spending, Orszag can’t be serious about cutting the deficit in two by 2012.  Obama “appears to move in exactly the wrong direction.  More taxes, heavy-handed regulations, and command-and-control government will not hasten recovery. . . . You don’t build a house by blowing up its foundation,” said the U.S. Chamber of Commerce,” concerned that too much government spending could hurt the recovery.

John M. Curtis writes politically neutral commentary analysing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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