The Happy Arab News Service

Saturday, March 14, 2009

Born to Spend

Last updated: March 14, 2009

February 27, 2009

It starts getting boring...

FOR a man who is likely to run a budget deficit in excess of 12% of GDP this year, Barack Obama can do a surprisingly good impression of a fiscal hawk. Just days after signing into law a huge $787 billion fiscal stimulus, he kicked off a “summit” of congressional leaders, administration officials and policy wonks by warning of “another crisis down the road as our interest payments rise, our obligations come due”.

Source: The Economist

One can only be wondering why the Economist does not get tired of repeating the same stuff whenever Obama and his team come up with another plan or declaration of intentions. The same things can be said just about everything coming from Obama and his administration. It's full of bombastic declarations, it's very vague in details, it's not clear who is going to pay for this. I don't even mention this "everybody needs to make sacrifices" routine. I think every single American these days can recite this catchphrase even if waken up in the middle of the night. The evidence of such sacrifices is not scarce, it's non existent and these words are repeated only because for some reason Obama extremely likes to incorporate them into his speeches. It's a figure of speech and is not meant to be understood literally. We have been already through it all when the treasury finally came up with its much trumpeted plan to fix the financial system. Analysts could not even say so much about the plan, because there was nothing in it. We are probably going to be repeatedly put through this routine until the end of the presidential term and the Economist can safely save its article and just reprint it as it is whenever Obama decides to share with us his grandiose visions in the future.

The same goes about the much celebrated in the media shift to green energy which is pretty much meaningless until this administration decides to put in place the long overdue gas tax. And this Obama has no intention to do. In fact, he made it clear in the most clear terms possible. It may be true that Obama has just started and critics should keep their criticisms to themselves for the time being. However, the general pattern of this administration seems to be already very clear and easy to define. It's based on collecting and recycling just about every single "wish well feel good" Don Quixote style project ever suggested in the congress and the media. And these come together with a very deficient understanding of how to make them reality or how much making them reality may cost.

March 14, 2009

Born to Spend

The Economist was lately growing increasingly critical of Obama's economic plans even though it remains still largely sympathetic to the president it endorsed over GWB John McCain during the elections. Calling Obama's budget proposals "wishful, and dangerous, thinking", the Economist finds Obama's thinking deeply flawed on several accounts.

Sadly, these plans are deeply flawed. First, Mr Obama’s budget forecasts that the economy will shrink 1.2% this year then grow by an average of 4% over the following four years. It might if the economy were to follow a conventional path back to full employment. But this is not a conventional recession. The unprecedented damage to household balance sheets could well result in anaemic economic growth for years, significantly undermining the president’s revenue projections. The economic outlook continues to darken and the stockmarket has already tumbled to 12-year lows. Mr Obama may either have to renege on his promise to slash the deficit to 3% of GDP in 2013 from more than 12% now, rein in his spending promises or raise taxes more.

Source: The Economist

The Economist then busts another pillar on which Obama is basing his spending programs, that one is about shifting taxation from the middle class onto the richest 2%. The crisis has already wiped out fortunes and is set to continue decimating this part of the taxation base, leaving Obama noble projects with nothing to stand upon. "Tell it as it is," says the Economist - everybody will have to pay for a bigger government, the bulk of taxpayers will have to bear an increased burden of a massive health reform and other projects.

A question many would ask themselves at this point is how Obama is thinking to bridge the enormous gap between his grandiose visions and the miserable state of US economy and finances. But as obvious from the passage just quoted, Obama is not preoccupied so much with the gap due to his extraordinary optimism regarding the future of US economy. Another thing that stands out clear is that though Obama is generously throwing around calls on everybody to make painful sacrifices, he does not really think that anybody will have to do it, except for the richest 2%. In fact, the amazing thing about all this is that Obama seems to be quite serious in hoping both to implement his massive and costly social and green initiatives and to ease taxation burden for 98% of Americans at the same time. So how come?

Here we come to what may be the central tenet of Obama's thinking and visions and one that may define the style and approach of his administration to the end of its term. It's hard to explain the logic that drives these visions and programs, unless one assumes that Obama somehow believes that spending in itself creates revenues by means of something the style of the Keynesian multiplicator. This may explain the enthusiasm with which this administration is devising its stimulus programs and reforms without hesitating to get the country indebted up to its neck by trillions of dollars. It's not hesitating because it believes that every dollar borrowed and reinvested into American economy will generate several more in return boosting tax revenues and creating jobs.

Obama seems to be generally thinking that spending is good and much of the stimulus package is designed to do just this: to encourage Americans to spend more by cutting taxes. However, Americans, heavily indebted after years of binge consuming and no saving, appear to have a different idea of what to do with that income they still have. Saving rates went up dramatically since the beginning of the crisis as people are both bracing themselves for more to come and try to live in a more sensible way. On this Obama seems to be out of step with the rest of the country despite all popularity he still enjoys. A significant part of the tax cuts may end by simply being saved and the money may end up going full circle without achieving anything besides American government getting indebted even more.

This is also why Obama is so stubbornly opposing any form of tax increase on the middle class. Even introducing gas tax by means of a tax swap is anathema to this administration (even though such a tax swap can only benefit American taxpayers). The top 2% don't spend enough, that's why it's imperative to move taxation burden onto them, leaving the middle class with more disposable income to spend and so keep things ticking. For Obama, this is more than an issue of social justice. Well wishing and noble ideas are good economically, so he seems to believe. The Economist might be wondering where all economic growth expected by Obama will come from to allow him to go on with his spending, but for Obama the whole thing works just the other way round - the economy will grow by 4% next year because Obama is spending.

Another concept that this administration is entertaining itself with also points to its extraordinary faith in state and private spending as a magic wand capable of removing all ills. This one is about creating green jobs. Undoubtedly investing into alternative energies will create green jobs, but green industries are generally not held to be very labor intensive. Rechanneling investment into such sectors means taking it from somewhere where it could create more jobs, so the net effect of such investment in terms of jobs creation may be even negative. This is not to say that encouraging shift to low carbon economy is a wrong idea, but it may become one, and even a dangerous one, if there is not enough awareness of economic and social costs involved in doing this. And as it looks now such awareness is virtually non existent in the current administration.

Anyway, the defining reflex pattern of this administration seems to be all about spending. It's the end and a means to achieve the end at the same time. Keeping this in mind may happen to be helpful in anticipating and understanding this administration's next moves.

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Proclaimed un monstruooo muy monstruoso at 4:07 PM