In his press conference last Tuesday, Barack Obama said that America must reject the "borrow and spend" policies of the past in favor of a strategy of "save and invest." Sounds good. So why is Obama proposing to borrow and spend more than any president in the history of the republic? Already in the first 45 days of his administration, the federal government has authorized more debt spending than Ronald Reagan did in eight years in office.
Then last week the Democrats' own Congressional Budget Office found that the ten-year deficits of the Obama plan will be about $2.3 trillion higher than the $6.97 trillion the White House is projecting. This is the policy of the party that was swept back into power in 2006 and 2008 promising a return to an era of fiscal responsibility.
Welcome to the Obama doctrine. It is built on the high stakes economic gamble that the public and the bond markets will tolerate trillions of dollars of borrowing to pay for massive expansions in government spending on popular income transfer programs. The corollary to this doctrine is that the left will create a political imperative to jack up tax rates to pay for higher spending commitments made today.
But the news on the red ink front is much worse than the president or even the CBO's budget report suggests. If all of Obama's "transformational" policy objectives--from global warming taxes to universal health care to doubling the Department of Energy's budget--are enacted, the debt is likely to increase from about 40 percent of GDP today to close to 100 percent of GDP by 2018. The ten-year debt is likely to be at least $6 trillion higher--or more than one-half trillion of higher deficits a year from now until forever--than the Obama budget projects.
These are uncharted levels of debt for the United States--though not for such high-flying nations as Argentina, Bolivia, and Mexico. This hemorrhaging of U.S. government debt will be happening at precisely the time when, in a rational world, the government would be running surpluses, in anticipation of the retirement of some 80 million baby boomers who will soon collect multiple trillions of dollars of government benefits from Medicare and Social Security.
There are three ways that the Obama administration is understating the spending and debt levels embedded in the president's budget policies.
First, Obama uses highly optimistic assumptions on how fast the economy is going to grow and how many jobs are going to be created over the next five years. I've worked in a presidential budget office before. Believe me: If you manipulate the economic assumptions on unemployment and GDP growth, you can make the budget deficit in the future be whatever you want it to be. You can even, as Obama claims to do, magically cut a deficit in half without cutting a single program. From 2010-13, the head of the OMB, Peter Orszag, predicts that the U.S. economy will grow at a 4 percent annual pace, when the blue chip-economic forecast is closer to 2.7 percent. Of the 51 blue chip-economic forecasters, the OMB's forecast is more optimistic than all but two.
Liberals used to lampoon Ronald Reagan's budgets--sometimes with merit--for relying on a "rosy economic scenario," but even the Gipper's sunny optimism never led to economic predictions that departed so radically from independent forecasts. It turns out that about 75 percent of the celebrated halving of the deficit that Obama claims in his budget is purely a result of an irrationally exuberant economic model that almost no one believes is very likely. The Republicans on the Senate Budget Committee recalculated the OMB budget deficit assuming the average blue chip-economic forecast. It found that the Obama deficit will be $2.2 trillion higher over ten years.
Next is the hard-to-swallow assumption in the budget that all of the new spending in the $800 billion democratic "stimulus" bill that Obama signed in February will expire after 2011. "We are supposed to believe," says Paul Ryan, the ranking House Republican on the Budget Committee, that "Nancy Pelosi, Charlie Rangel, Henry Waxman, and Ted Kennedy are going to allow spending for programs ranging from education for disabled kids, to Pell Grants, to Head Start, to child nutrition programs to fall off a cliff two years from now." Not likely. When Ryan asked the Congressional Budget Office what happens if the spending for about two dozen of the most politically popular programs is continued, not cancelled, the CBO reported back that the deficit and federal outlays would be $3.27 trillion higher over the next ten years.
Finally, there is the crown jewel of the Obama-Pelosi-Reid domestic agenda: universal health care. This is at the top of the "to do" list of the Obama administration and is unlikely to get pulled back or postponed, as the president made clear in his press conference. Obama has not been specific about what plan he favors or about how much a national health care system will cost, but his budget allocates a $634 billion "placeholder" for that purpose. The consensus opinion, though, is that the lowest possible cost of universal health care is $1.2 trillion, with many estimating closer to $1.5 trillion. So team Obama is off by roughly $600 billion over ten years to cover all of America's uninsured. Obama says he will find ways to reduce health care costs at the same time, and I wish him well, but this is a promise that every president since Jimmy Carter has made and failed to keep.
Incidentally, almost all analysts also believe that the Obama price tag for his global warming program is too low. Jason Furman, the deputy director of the president's National Economic Council, says the cost is likely to be "two to three times higher" than the $646 billion estimate in the president's budget. Most independent analyses agree with Furman's figure. But we will leave this out of our calculations for now, because the debt and spending numbers are ruinous enough without them.
Here are the unhappy totals: the debt is $6 trillion higher from 2010 to 2019 than Obama's forecast. In no single year over the next decade, even when counting the Social Security trust fund surpluses, does the budget deficit fall below $800 billion. The interest on the national debt rises to $850 billion a year by the middle of the next decade, which will be the largest single expenditure item in the budget--eight times more than we now spend on education and four times more than we spend on homeland security. Federal spending remains well over 25 percent of GDP and in some years creeps closer to 28 percent of GDP under the Obama budget, which ironically enough is entitled "A New Era of Responsibility."
We are closing in on stagnant Western European levels of government intrusion into the economy. That economic model, by the way, which the left in the United States openly wants to emulate, has created half the jobs that the United States has over the past two decades and generated half the growth rates. Is it any wonder that the Chinese want an extra guarantee on U.S. Treasury debt and say it might be time for a new reserve currency?
I have never been a fear monger when it comes to deficits and debt. If the economy grows faster than the debt, as occurred in the 1980s and 1990s then the nation's burden of financing government borrowing becomes smaller over time. Incurring debt is legitimate, moreover, if the borrowing is paying for future prosperity. The 1980s deficits were probably one of the highest-return investments in American history. We bought a victory over the Evil Empire in the Cold War and borrowed to finance reductions in tax rates that launched America's greatest ever period of wealth and prosperity: 1982-2007. The national debt grew by about $6 trillion while U.S. net wealth grew by $40 trillion. A pretty good trade.
This debt we are now incurring is paying for windmills, unemployment benefits, new cars for federal employees, weatherizing homes, high-speed trains to nowhere, and the like. It buys almost nothing of long-term economic benefit. Most of the money that has been borrowed since September 2008 has been used to bail out irresponsible borrowers, failed financial institutions and car companies, and for expansions of welfare programs. The three biggest areas of government expenditure increases sought by the Obama budget are education, energy, and health care. Any unbiased assessment of the return on investment--to use an Obama term--for these programs would find dismally low payoffs for taxpayers. Government programs are the only things in the world that when they yield failing results, we reward them with more money.
Some five years ago Tom -Daschle and many other leading liberals cursed George W. Bush as "the most fiscally irresponsible president in history." He may have been. But he isn't anymore.
Stephen Moore is senior economics writer for the Wall Street Journal editorial page and coauthor of The End of Prosperity.