What I have done this week is to reprint some of the most interesting articles I have read over the last week. Each of the four articles below makes some excellent points and offers perspectives you may not have considered.
The first two articles are from well-known writers that have come to agree that we are headed for another financial crisis if President Obama continues his plan to double the national debt over the next decade. I trust you will find their perspectives on this critical issue very insightful (and alarming).
The third article is from Larry Kudlow, well-known economist and host of CNBC's The Kudlow Report, who argues that Obama's latest plan to use TARP money to bail out homeowners who are about to default is just plain wrong and unfair to those lower and middle class families who are working extra hard to make their mortgage payments. I agree.
The final article is a column by George Will of ABC News' This Week. As you may know, Obama plans to take up immigration reform very soon. After all, he needs a huge block of new voters since he has infuriated tens of millions of Americans with the ramming of healthcare reform down our throats. George Will makes a brilliant suggestion for how to solve the illegal immigration problem once and for all that I'll bet you haven't thought of.
Planting the Seeds of Disaster
by Robert Samuelson
WASHINGTON -- When historians recount the momentous events of recent weeks, they will note a curious coincidence. On March 15, Moody's Investors Service -- the bond rating agency -- published a paper warning that the exploding U.S. government debt could cause a downgrade of Treasury bonds. Just six days later, the House of Representatives passed President Obama's health care legislation costing $900 billion or so over a decade and worsening an already-bleak budget outlook.
Let's be clear. A "budget crisis" is not some minor accounting exercise. It's a wrenching political, social and economic upheaval. Large deficits and rising debt -- the accumulation of past deficits -- spook investors, leading to higher interest rates on government loans. The higher rates expand the budget deficit and further unnerve investors. To reverse this calamitous cycle, the government has to cut spending deeply or raise taxes sharply. Lower spending and higher taxes in turn depress the economy and lead to higher unemployment. Not pretty.
Greece is now experiencing such a crisis. Until recently, conventional wisdom held that only developing countries -- managed ineptly -- were candidates for true budget crises. No more. Most wealthy societies with aging populations, including the United States, face big gaps between their spending promises and their tax bases. No one in Congress could be unaware of this.
Two weeks before the House vote, the Congressional Budget Office (CBO) released its estimate of Obama's budget, including its health care program. From 2011 to 2020, the cumulative deficit is almost $10 trillion. Adding 2009 and 2010, the total rises to $12.7 trillion. In 2020, the projected annual deficit is $1.25 trillion, equal to 5.6 percent of the economy (gross domestic product). That assumes economic recovery, with unemployment at 5 percent. Spending is almost 30 percent higher than taxes. Total debt held by the public rises from 40 percent of GDP in 2008 to 90 percent in 2020, close to its post-World War II peak.
To criticisms, Obama supporters make two arguments. First, the CBO says the plan reduces the deficit by $138 billion over a decade. Second, the legislation contains measures (an expert panel to curb Medicare spending, emphasis on "comparative effectiveness research") to control health spending. These rejoinders are self-serving and unconvincing.
Suppose the CBO estimate is correct. So? The $138 billion saving is about 1 percent of the projected $12.7 trillion deficit from 2009 to 2020. If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits -- not finance new spending. Obama's behavior resembles a highly indebted family's taking an expensive round-the-world trip because it claims to have found ways to pay for it. It's self-indulgent and reckless.
But the CBO estimate is misleading, because it must embody the law's many unrealistic assumptions and gimmicks. Benefits are phased in "so that the first 10 years of (higher) revenue would be used to pay for only six years of spending (increases)," ex-CBO director Douglas Holtz-Eakin wrote in The New York Times. Holtz-Eakin also noted the $70 billion of premiums for a new program of long-term care that reduce present deficits but will be paid out in benefits later. Then there's the "doc fix" -- higher Medicare reimbursements under separate legislation that would cost about $200 billion over a decade.
Proposals to control health spending face restrictions that virtually ensure failure. Consider the "Independent Payment Advisory Board" aimed at Medicare. "The Board is prohibited from submitting proposals that would ration care, increase revenues or change benefits, eligibility or Medicare beneficiary cost sharing," says a summary by the Henry J. Kaiser Family Foundation. What's left? Similarly, findings from "comparative effectiveness research" -- intended to identify ineffective care -- "may not be construed as mandates, guidelines or recommendations for payment, coverage or treatment." What's the point then?
So Obama is flirting with a future budget crisis. Moody's emphasizes two warning signs: rising debt and loss of confidence that government will deal with it. Obama fulfills both. The parallels with the recent financial crisis are striking. Bankers and rating agencies engaged in wishful thinking to rationalize self-interest. Obama does the same. No one can tell when or whether a crisis will come. There is no magic tipping point. But Obama is raising the chances.
Robert J. Samuelsonis a contributing editor of Newsweek and The Washington Post where he has written about business and economic issues since 1977. His columns appear in both publications. His articles also appear in the Los Angeles Times, The Boston Globe, and other influential newspapers.
No comments:
Post a Comment