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A Big, Fat Failure

Obama's budget makes a bad situation worse.

Apr 6, 2009, Vol. 14, No. 28 • By MATTHEW CONTINETTI
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Well, it's about time. The Beltway is waking up to the realities of President Obama's budget plan, which taxes, spends, and borrows as far as the eye can see. The president's vast new commitments in the areas of health care, energy, and education have already spooked small-government Republicans and the foreign investors who help finance America's public debt. Now even some Democrats are beginning to realize that the president's fiscal policies are unsustainable in the long--and maybe medium--run. What took them so long?

The realities of the modern global economy require government to play a substantial role in ensuring the national and economic security of the people. Americans aren't going to dismantle the welfare state. Social Security, Medicare, and Medicaid are--like the Pentagon--here to stay. The task, then, is to ensure that those programs are sensibly structured and financed, and compatible with robust economic growth. And on this score, Obama's budget is a big, fat failure.

It's true, as he so often reminds us, that Obama inherited a public debt that had doubled to 40 percent of GDP from 20 percent, and an economy in the midst of a deep recession. But Obama proposes to take a bad situation and make it much worse.

It was pretty much inevitable that government would pick up the pieces of the financial crisis and its aftermath. A stimulus bill and some form of bank bailout were going to be facts of life. And tax revenues are plunging thanks to the recession. So the federal government's balance sheet was always going to deteriorate in 2009. The problem is that Obama's policies would move us from deterioration to disaster. The national debt Obama gripes about? His budget will double it to 80 percent of GDP in 2019. Whatever that is, it's not "a new era of responsibility."

The debt burden, moreover, is likely to increase as tax hikes weigh down the economy. Obama's budget brings rates up to Clinton-era levels. But those rates probably will be raised even more to service a growing debt and pay for new spending. And don't forget the added levies that will hit us if Obama has his way. There could be taxes on employer-provided health benefits, the indirect tax of a carbon cap-and-trade scheme, an increase of the payroll-tax cap, and maybe a national Value Added Tax.

Nor will Obama's resistance to free trade encourage economic recovery. The president, remember, signed a stimulus bill that included protectionist "Buy American" provisions. When Congress killed off a pilot program to allow Mexican trucks into the United States, Obama acquiesced in an apparent violation of NAFTA. (The Mexicans have retaliated, imposing duties on some American exports.) The president has done nothing to advance through Congress the already-negotiated bilateral trade agreements with Colombia and South Korea. Recently Obama's energy secretary spoke of imposing a "carbon tariff" on foreign polluters. Plenty of congressional Democrats would like to impose tariffs on Chinese products. All this, even though bringing the global trading system to a halt is the surest way to turn our recession into a depression.

"It is going to be an impossible task for us to balance the budget," Obama said the other day, "if we're not taking on rising health care costs." He's right, but the budget exhibits a strange understanding of cost control. Whatever savings you get from preventive medicine and electronic medical records pales in comparison to the projected growth in Medicare spending. But Obama hasn't given any sign that he's about to tame Medicare or change its faulty reimbursement mechanisms.

Obama isn't going to lower prices by having consumers bear more costs directly and introducing competition in open markets. Quite the contrary. His budget expands government health insurance subsidies and may even introduce a Medicare-like public health insurance option available to all Americans. If Obama tried to run a business with this sort of accounting, it wouldn't be long before he had to ask Secretary Geithner for a bailout. Absent the economic growth his budget will squelch, the only ways out of the fiscal hole Obama is digging are massive tax increases, defaults and devaluation, and inflation. If you think today's news is bad, just wait.