The Best Laid Plans Of Mice and Men

Los Tres Amigos: Obama, Geithner, Orzag

Los Tres Amigos: Obama, Geithner, Orzag

The Obama Administration just handed Congress a $3.6 trillion budget.  The budget is one of the best ways of seeing what a President lays out as priorities and can be linked to many campaign promises.  While it demonstrates a vision, what remains after congress hacks through it tends to be a more reliable gauge of the direction since compromise will shortly rule the day.  I’m going to outline some of the major points and point you to some media coverage.  We’ll have to watch over time what gets sold out and haggled away.  That will really show the priorities and not just the posturing.

The overall tone of the budget shows a more activist government in the areas of health and education mostly paid for by families making over $250,000 a year, singles making more than $200,000 and various  business interests. The WSJ has the numbers here.

As expected, tax increases will rise for singles earning $200,000 and couples earning $250,000, beginning in 2011 — for a total windfall of $656 billion over 10 years. Income tax hikes would raise $339 billion alone. Limits on personal exemptions and itemized deductions would bring in another $180 billion. Higher capital gains rates would bring in $118 billion. The estate tax, scheduled to be repealed next year, would instead be preserved forever, with the value of estates over $3.5 million — $7 million for couples — taxed at 45%.

Businesses would be hit, too. The budget envisions reaping $210 billion over the next decade by limiting the ability of U.S.-based multinational companies to shield overseas profits from taxation. Another $24 billion would come from hedge fund and private equity managers, whose income would be taxed at income tax rates, not capital gains rates. Oil and gas companies would be hit particularly hard, with the repeal of multiple tax credits and deductions.

There is a shift away from the oil and gas industry reliance as well as removal of some of their tax privileges.  One of the more ambitious plans is that of an emissions trading program.  Under this scheme, the government will set a cap on the allowable amount of green house gases and businesses will have to buy permits if they want to pollute above their allotment.

In one of the budget’s most ambitious proposals, the president plans to cap the emissions of greenhouse gases, forcing polluters to purchase permits for emissions that would be slowly brought down to 14%  below 2005 levels by 2020 and 83% below 2005 levels by 2050. The sale of those permits, beginning in 2012, would reap $646 billion through 2019.

One of the most interesting things is the percentage of federal debt in relation to GDP.  It’s at an historic high unlike anything seen for a long time.  This is especially interesting coming after a “Fiscal Responsibility” Summit.   The deficit estimates are based on pretty optimistic numbers  which makes that summit look like even more of a marketing event

hats off to bb for this one ... WHOA!!!

hats off to bb for this one ... WHOA!!!

from the land of Oz.

The president blamed the nation’s economic travails on the administration that preceded him and on a nation that lost its bearings. His budget plan projects a federal deficit of $1.75 trillion for 2009, or 12.3% of the gross domestic product, a level not seen since 1942 as the U.S. plunged into World War II.

I’m still wondering if we’re going to be able to float all that debt. Again, however, these are preliminary numbers and I’m certain Congress will bargain them down and around to other places.  What the Administration compromises on will tell its true agenda.  Republicans and business interests are not likely to go quietly into the night on any of this.

There are additional funds for the already unpopular bailouts of the financial sector.   Members of the House are already hearing from their constituents on these items.  Look for the Senate to try to find some compromise here.

The budget sets aside an additional $250 billion to complete the president’s effort to rescue the financial markets and stabilize the banking sector. That would come on top of the $700 billion already allocated by Congress. And it is likely to grow. The budget makes clear that reserve would be used to leverage the purchase of toxic assets weighing down the banking sector’s books, $750 billion in asset purchases overall. That could mean a doubling of the original bailout in the end.

My guess is that additional funding will have to come from outside the budget process.  Banks, auto manufacturing, 3-blind-miceand many other business interests will undoubtedly be looking for bridge funding as the recession deepens.  States will also continue to run into trouble for several years as unemployment and unemployment benefits go up even after a recession bottoms.  There’s no accounting for this in the actual budget so my guess is they will have to adopt auxiliary bills which will make this year’s deficit estimate look small in comparison to what will really come in.

President Obama continues the Bush increases in Federal Spending on Education.  He looks to pull back the Student Loan program from the private sector.  This was a cost saving initiative that occurred during the Clinton years that has actually cost more money than it saved.  One of the most interest features is a plan to index Pell Grants to inflation while converting them to an automatic  “entitlement”  program. I’m not sure if this will pass Congressional approval.  My guess is that it will  not.

Spending and troops committed currently to the Iraq War appears to be transferred to the Afghanistan War.  Again, there will be increased military spending and troop deployment as was the pattern during the Bush years. This increase is an expansion in both troops sizes and other budget items.   This is still basically a budget on a war time footing.

The Defense Department would see a $20.4 billion boost in 2010, a 4% increase from this year, slowing its growth from the Bush years but securing personnel increases for the Army and Marine Corps. Mr. Obama will request an additional $75.5 billion for the wars in Iraq and Afghanistan for the rest of 2009 and another $130 billion for 2010, as he withdraws most combat troops from Iraq over 19 months but sends many of them to Afghanistan.

There is also major spending planned on a Health Care Program about which I’ve seen few details.  WAPO quoted an official saying something that led me to believe that everything is really negotiable at this point.

The health reform proposal, for example, “is the starting point of a conversation with Congress,” the official said. “We’re not going to go to Congress and say, ‘Here’s the plan.’ We’re starting a conversation and saying, ‘This is what we want to get done.’ “

This from the NYT:

“We must make it a priority to give every single American quality, affordable health care,” he said. “With this budget we are making a historic commit to comprehensive health-care reform.”
The officials said the increase in revenues, estimated at $318 billion over 10 years, would account for about half of a $634 billion “reserve fund” that Mr. Obama will set aside in his budget to address changes in the health care system. The other half would come from proposed cost savings in Medicare, Medicaid and other health programs.

One of the things that really worries me is the assumptions built into the budget concerning the economy.  Much like some of the criticisms of the Banking Stress Tests, it seems to be based on a pretty rosy scenario.  Again, this has incredible implications for the deficit and the ability to float additional treasuries for funding purposes.  It also tells me that perhaps this conversation is not going to be as realistic and straight forward as possible.

WASHINGTON (AFP) — President Barack Obama’s proposed budget unveiled Thursday projects an economic contraction of 1.2 percent in calendar 2009, a forecast calling for a surprisingly quick recovery from recession.

The budget forecast’s economic assumptions call for growth of 3.2 percent in 2010, an outcome more optimistic than seen by most private forecasters and the Congressional Budget Office.

The budget outline proposed to Congress anticipates an acceleration of growth to 4.0 percent in 2011 and 4.6 percent in 2012.

The assumptions are more optimistic than the projection of the CBO of a 2.2 percent decline in gross domestic product (GDP) in 2009 and 1.5 percent growth in 2010.

The outlook is also much rosier than the Blue-Chip Consensus forecast, an average of 50 private economists that foresees a 1.9 percent decline in 2009 and growth of 2.1 percent in 2010.

Cary Leahey, economist at Decision Economics, said the GDP projections “are too optimistic” compared with most forecasts.


2 Comments on “The Best Laid Plans Of Mice and Men”

  1. 1539days says:

    I have a question about something I heard about a while back. The US government has to raise its debt ceiling every year to allow it to issue even more bonds to finance debt. Does that process affect the interest rate of Treasury bonds or are they continuously moved by external forces and ratings?

    I wish you were Treasury Secretary. I don’t think Geithner could explain the concept of a store credit card.

  2. dakinikat says:

    Yes, it leads to a phenomenon called crowding out. Basically if you increase the supply of treasures, the price of those things go down and the yield goes up. That puts upward pressure on interest rates that every one pays because they compete for funds against consumers and businesses.