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Thursday, April 14, 2011

Where Two Paths Diverge...

Here is the truth about the future: We are living on borrowed money and borrowed time. These deficits hike interest rates, clobber exports, stunt investment, kill jobs, undermine growth, cheat our kids, and shrink our future. 
- Walter Mondale, Democratic Presidential nominee, July 19, 1984 Democratic National Convention
Today, President Obama acknowledged reality.  Just two months ago, he submitted a 10 year budget that said and did nothing to lower our deficit in the near term.  Unusual as it is for a President to scrap his own plan, Obama was forced to present a new plan due to the reasoned response to Paul Ryan's The Path to Prosperity and it's acceptance as a serious proposal.  His choice was to either allow the Republicans to direct the narrative or attempt to offer a competing vision on how to accomplish the same goals.
Despite acknowledging reality today, the President chose to offer a 12 year plan that will do little other than make it seem he is doing something.  Talk of commissions, defense cuts and future year triggers means that he has no intention of changing his current spending plans.  Instead, he offered numerous tax increases as his planned "spending cuts".  His new approach sounds like his old approach and brings to mind another failed liberal politician.  
“If Dukakis is elected, he would act next year as he acted last week: trim here and there, but then take a frequent flyer to the last resort [new taxes]. He would accelerate rather than break the spending urge in Congress.”
- William Safire
New York Times
Americans have come to the realization that the status quo is not sustainable.  In Ryan's plan, the Republicans have offered a real plan that will seek to balance the budget over the long term by overhauling our taxcode to make it fairer and making changes to Medicare and Medicaid now in order to make these programs sustainable.  In responding to the Republicans 2012 budget proposal, Obama has chosen to champion a course that would make Michael Dukakis proud by pledging to tax our way to prosperity. 

For all the faults with the President's plan, the greatest is that he attempts to hijack the narrative with a falsehood.  The only real spending cuts he offers are tax increases.  As I'm sure many of you have heard, we don't have a revenue problem, we have a spending problem.  In using an Orwellian nomenclature of calling a tax increase, a "spending cut", Obama seeks to confuse the issue.

In the 1990's a combination of events led to a few years of budget surpluses.  Following the fall of the Soviet Union, National Defense was downsized to cash in on the Peace Dividend.  After being elected, Bill Clinton raised taxes on an expanding economy and then two years later, a Republican congress began reigning in discretionary spending.  Looking at the chart, we can see spending increased back to 20% of GDP following 9/11 and was held there until Nancy Pelosi and the Democrats regained control of Congress.  From there, spending took an immediate upswing.  Under Obama, this spending has been made worse.

Deficits are expected to increase in a recession as revenues decrease, which did happen in 2008.  But by shifting our spending baseline in such an extreme way, Obama has accelerated our impending demise.  The truth is that with or without our current increases in discretionary spending, our spending will soon drive us into a hole that threatens to swallow us.

The President's response to raise taxes while leaving entitlements untouched will only delay by a few years the inevitable.  Soon our entire revenue stream will be spent on entitlements.

Raising tax revenues from the historic level of 18% of GDP will only offer us, at best, a temporary respite.  Of course, raising tax rates has no guarantee of increasing revenue.   As Larry Kudlow writes at National Review,
Of course, the president’s formula of estimating higher revenues to lower the deficit is completely wrong. The reality is that higher tax rates will slow the economy, inhibit new start-up companies, penalize investors, and may very well lose revenues and increase the deficit.
It is questionable what raising tax rates will do to our economy.  What is not questionable is what will happen to our debt if we do not address the real source of our future troubles.

No amount of tax increases will ever be able to manage debt of this size.  Any plan that does not seek to alter or amend Medicare spending is not a serious plan.  Today, our entitlement spending is 58% of our spending.  Add in interest payments and we're now over 75%.  National defense and discretionary spending are left with only 1/4 of our budget.  In the past, our defense spending was close to half of all spending.  Today it sits at 20% and the President looks to cut if further.
While he presents us with cuts from a declining slice of the pie, he makes no offer to deal with the programs that will soon make up the entire pie.  What happens then?  Imagine a government shutdown that never ends.

As I have tried to make clear, we cannot ignore the real driver of our budget deficit.  It's the huge twinkie in the room.  Last week's budget showdown over spending cuts in our non-defense discretionary spending is chump change compared to the real issue - entitlements.
That's a big twinkie and it will continue to grow no matter how high taxes are raised. 

In 2008, a very liberal Senator Barack Obama ran as a centrist, promising to cut the budget, not raise taxes on the middle class and be pragmatic and do what works.  Now, when his leadership has been challenged to a large degree by Rep. Ryan, a very liberal President Obama showed us his true colors - tax and spend.  His proposal will soak the rich while cutting defense in order to keep spending more on "investments".

40 years ago, Medicare, Medicaid & Social Security spending was 4% of GDP.  Today it is 10%.  In another 40 years, it is projected to be at 18% - the historical average for tax revenues.  At that point, we have no other money left for defense, interest payments or running the government.  Then, or even sooner, those programs, along with a whole host of other government spending will be cut or eliminated - unless we make changes now.

In choosing to confront Ryan's Path to Prosperity, the President, instead chose to offer up a European vision for a Path to Austerity.  As the two paths diverge, the choice is clear.

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