Hey, Big Spender

The prime minister will be meeting with a president who has decided on the most radical recasting of America’s priorities since Franklin Roosevelt’s New Deal, or at least since Lyndon Johnson launched his Great Society programs in 1965, indeed, “the boldest social democratic manifesto ever issued by a US president”, according to columnist Charles Krauthammer. This should be of interest not only to Americans, but to the rest of the world, which cannot but be affected by a major change in the structure of the U.S. economy.

I leave to others a tramp through the details, and concentrate on the socioeconomic consequences of Barack Obama’s exercise in resource allocation.

The most notable feature of the budget is its fundamental reordering of the role of government. In the fiscal year starting in October Obama wants to spend a ten-year total of $630 billion for a down-payment on a government takeover of the health care system, green the nation’s energy economy, make college education an entitlement and otherwise heavily involve the federal government in an education system that until now has been under the control of local and state governments.

That is why spending aimed at getting the economy out of its rut is the least significant aspect of this budget, although the one watched most closely by the media and investors concerned with the short-term performance of the economy. The president dismisses the notion that we are in the grips of a normal downturn in the business cycle. “We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies’ executive suites to the seats of power in Washington, D.C.” Which is why Obama titled the budget document, “A New Era of Responsibility”. What is responsible about a budget that projects deficits rising from $459 billion to $1,752 billion in the first year of Obama’s budget, and remaining at $712 billion as far ahead as 2019, when the economy will be growing, is not clear.

This flow of red ink will persist despite a massive increase in taxes–$1.4 trillion over ten years. The bulk of that increase is to come from two sources: the rich, and polluters. Those the president calls “the wealthy and well-connected”, a group he feels received too large a portion of the nation’s income and wealth during the boom years, will pay more. In fact, a taxpayer does not have to be either particularly wealthy or well-connected to serve as Obama’s ATM machine. Singles earning $200,00 per year, and couples earning $250,000–hardly the bonus-grabbing bankers that have fallen from favor–will lose the benefits of the Bush tax cuts: top marginal rates will go from 35 percent to 39.6 percent, which will hit small businesses that are taxed at individuals’ rates. Allowable deductions for charitable contributions and mortgage interest payments will decline, better-off seniors will pay more for Medicare prescription drugs, estate taxes will rise, and profits of hedge fund managers will be taxed as ordinary income (39.6 percent rate) rather than capital gains (15 percent rate).

Economists are debating the effect of these increases, with conservatives arguing that they will reduce incentives to start new businesses. But economic arguments matter less to Obama than his own notions of fairness, of the need to tackle what he calls “a growing imbalance of accumulating wealth and closing doors to the middle class.” Which is why he favors raising capital gains taxes even if that were to result in a decline in tax revenues, and why he is calling for a massive transfer of wealth from upper- and not-so-upper income families and businesses to what Obama calls 95 percent of Americans, whose taxes he claims will be lowered and whose benefits will be increased.

But even those lower earners will be hit by new taxes, but taxes that are hidden from view. The proposed cap-and-trade system, aimed at reducing greenhouse gas emissions, will require businesses to pay some $645 billion for pollution permits in 2012-2019. That cost will for the most part be passed on to consumers, most of them unrich, in the form of higher prices–for which they will blame their electric utilities and other companies, rather than the president.

A final feature worth noting is that this budget brings out of retirement that old favorite, Rosy Scenario. The revenue estimates assume that the economy, which the government reported on Friday had declined at an annual rate of 6.2 percent in the final quarter of last year, will grow at a rate of 3.2 percent next year and over 4 percent in 2011, 2012 and 2013. It assumes that the powerful farm lobby will allow Congress to end subsidies to agribusinesses, and that military spending can be cut without imperiling national security. Most crucially, it assumes that a spendthrift congress will change its ways to please the president, and that what appears to the Obama team as $2 trillion of waste will not be the pork on which congress thrives, and to which it is addicted.

Even more important, the underlying assumption of this budget is that the world will be willing to buy a rising flood of Treasury IOUs. China, already worried about its excessive pile of dollar assets and a declining dollar, will have to swallow hard and keep buying if the Obama budget has any hope of being viable. Hillary Clinton knows that Obama’s budget could not survive a decision by the Chinese regime to give the next sale of Treasury IOUs a pass, and so kept her objections to China’s civil rights record more or less to herself when she visited.

Understand: Some features of the Obama plan make sense. The deductibility of mortgage interest distorts investment flows, directing too much money to housing, as Margaret Thatcher realized. Taxing pollution makes sense, although imperfections and volatility in permit markets makes cap-and-trade a flawed means of reducing carbon emissions. Profits from the operation of hedge funds more closely resemble income than capital gains, and should be taxed as such. And estate taxes fall on the undeserving winners of the sperm lottery.

But these virtues are more than offset by the more radical features of Obama’s plan: spending at levels previously though unimaginable, deficits as far ahead as the eye can see, a significant redistribution of the nation’s income from wealth creators to dependents on the state, government takeovers of significant sectors of the economy, more regulation of almost every business.

R.I.P. the notion that Obama, who campaigned on the left, would govern from the center.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).