Sunday Times (London)
March 28, 2010
by Irwin Stelzer
The fiscal train wreck is happening sooner than we thought, a leading bond-market trader says. The passage of the healthcare bill has focused investor attention on the runaway deficit. The deficit, which was about 3% of GDP in President George Bush’s final year, is now exceeding 10%. (All numbers rounded and all data taken from the non-partisan Congressional Budget Office.) Government debt has gone from 40% of GDP when Bush left the White House to 63% and will hit 90% by 2020. That’s the level at which new studies show that debt begins to reduce growth and jobs.
Unfortunately, the situation is even worse than reported figures suggest. For one thing, the accounting tricks used to get the healthcare bill through Congress made it seem a deficit-reducer. It isn’t.
Ask this: how can the government increase the number of insured people by 30m, with half needing annual subsidies of $6,000 per family, and lower spending? Answer: it can’t. Most dispassionate observers are estimating that the new law will add $1 trillion to the nation’s $8 trillion debt, and that the government’s unfunded liabilities — its promises of future pension and other payments — come to somewhere between $60 trillion and $75 trillion over the next several decades. Even without those obligations, the government now has $14 trillion in liabilities against only $2.7 trillion in assets. Bring in the receivers.
Well, no. We are not dealing with a private-sector company, but with the American government, which differs from an ordinary company in two crucial ways: it can levy taxes, and it can print money. President Barack Obama knows that. He knows, too, that if he is to pursue his ideological commitment to “transform” America he has to ignore calls for fiscal responsibility, and such potential roadblocks as the opposition of the vast majority of the American people to his takeover of the healthcare sector, some 18% of the American economy.
His fiscal plan is to raise taxes; his political calculation is that once Americans receive the benefits of his healthcare “reforms” they will come to love them and rank him with Franklin Roosevelt in their pantheon of heroes.
If along the way several congressmen who were pressed to give him their votes lose their seats, well, c’est la guerre.
Next on the president’s list is the financial-services sector, where somewhat different reform bills have already been crafted by leaders in the House of Representatives and the Senate, and must be merged. There is little doubt that the president will get most of what he wants — more and in some instances better regulation of banks, procedures for winding down bust banks without huge taxpayer bailouts, consumer protection, control of bankers’ compensation systems. Anger at bankers’ role in creating the financial meltdown means that Congress will give the president much of what he wants. Not a bad thing.
On to energy and education, both on Obama’s “transformation” list. Congressional reluctance to give the president the cap-and-trade legislation he wants is no longer an obstacle to his plans to confront climate change. The Environmental Protection Agency already has wide powers to reduce carbon emissions, and the president has shown in the healthcare fight that voter opposition cannot deflect him from his drive to change America. He will do by rule what he cannot get from the votes of the people’s representatives.
Education reform will come next. The opponents — the teachers’ unions — might huff and puff but they are unprepared to switch their allegiance to the Republicans. And they sympathise with the president’s plan to increase minority access to advanced classes until now filled on the basis of merit.
When the transformation of America is complete the country will have been moved in the direction of the European social welfare state. Families earning more than about $250,000 (£170,000) will have their marginal income-tax rate increased from 35% to 39.4% when the Bush tax cuts are allowed to lapse, and capital gains taxes will rise from 15% to 20%. In addition, the healthcare bill levies a hospital tax of about 1% of income, and 3.8% on some portions of their incomes, including interest, dividends and short-term capital gains.
But revenues from these taxes won’t begin to make a dent in future deficits, which the Congressional Budget Office estimates will still exceed an unsustainable 5% of GDP as far ahead as 2020. Which is why the president’s commission on fiscal reform will probably recommend adoption of a European-style value-added tax (Vat).
A 3% levy would bring in $300 billion a year — $280 billion if food is exempted. Throw in inflation of about 4% a year — the number the International Monetary Fund’s economists are now recommending as a target to replace the 2% most central banks are using — and the deficit might just become manageable.
But America would have been transformed. Government will be more intrusive. The healthcare bill provides for 16,500 new tax inspectors to make sure that every American has health insurance or has paid a fine that by 2016 will come to $2,085 or 2.5% of income, whichever is higher. Emissions from not only coal plants but lawnmowers will be regulated. Standards by which schools will be judged, once set locally, will include federal rules mandating preferential treatment of minorities.
Incomes will have been redistributed. The incomes of families earning more than $250,000 and of middle-income families will be taxed more heavily to fund programmes for lower-income groups. And, if the president has his way, and persuades Congress to grant legal status to the 13m illegal immigrants now in the country, the ethnic and cultural mix of the citizenry will have been changed. That would cost about $30 billion for the healthcare entitlements of this new group but, in the great scheme of things, Obama thinks this will be a small price to pay (it is, after all, not his money) for completing the transformation of America.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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