The fiscal train wreck is happening sooner than we thought, a leading bond market trader says. Which is why investors are now telling the U.S. government it will have to pay more to borrow money. Not as much more as Greece, but enough to constitute a shot across the Obama bow by what we call the bond vigilantes, investors who try to punish governments that splash too much red ink across national ledgers.
The passage of the health care bill has focussed investor attention on the runaway deficit situation, and its long-term consequences. The deficit, which ran to around 3 percent of GDP in George W. Bush’s final year, is now exceeding 10 percent. (Mercy dictates rounding numbers that are in any event estimates; all data from the non-partisan Congressional Budget Office.) Government debt held by the public has gone from 40 percent of GDP when Bush was last in the White House to 63 percent now and will hit 90 percent by 2020. That’s the level at which new studies say debt begins to reduce growth and jobs.
Unfortunately, the situation is even worse than reported, figures suggest. For one thing, the accounting tricks used to get the health care bill through Congress made it seem a deficit-reducer. It isn’t. Ask this: how can the government increase the number of insured people by 30 million, with half needing annual subsidies of $6,000 per year per family, and lower spending? Answer: it can’t. Most dispassionate observers are estimating that the new law will add $1 trillion to the nation’s $8 trillion debt, and that the government’s unfunded liabilities -- its promises of future pension and other payments -- come to somewhere between $60 trillion and $75 trillion over the next several decades. Even without those obligations, the government now has $14 trillion in liabilities against only $2.7 trillion in assets. Bring in the receivers.
Well, no. We are not dealing with a private-sector company, but with the U.S. government, which differs from an ordinary company in two crucial ways: it can levy taxes, and it can print money. President Obama knows that. He knows, too, that if he is to pursue his ideological commitment to “transform” America he has to ignore calls for fiscal responsibility, and such roadblocks as the opposition of the vast majority of the American people to his takeover of the health care sector, some 18 percent of the U.S. economy.
His fiscal plan is to raise taxes; his political calculation is that once Americans receive the benefits of his health care “reforms” they will come to love them and rank him with Franklin Roosevelt in their pantheon of heroes. If along the way several congressmen who were pressured to give him their votes lose their seats, well, c’est la guerre. There are always ambassadorships and other federal appointments to ease their way into eventual retirement.
Next on the president’s list is the financial services sector, where somewhat different wide-ranging reform bills have already been crafted by leaders in the House and the Senate, and will have to be merged. There is little doubt that the president will get most of what he wants -- more and in some instances better regulation of banks, procedures for winding down bust banks without massive taxpayer bailouts, consumer protection, control of bankers’ compensation systems. Business groups plan to spend millions fighting these reforms, but popular anger at bankers’ role in creating the financial meltdown, and the public’s inability to separate the guilty from the innocent mean that the administration will get from Congress much of what it is seeking.
On to the energy and education sectors, both on Obama’s “transformation” list. Congressional reluctance to give the president the cap-and-trade legislation he wants is no longer an obstacle to his plans. The courts have ruled that the Environmental Protection Agency already has wide-ranging power to reduce carbon emissions, and the president has shown in the health care fight that voter opposition cannot deflect him from his drive to change America.
Education reform will come next, or perhaps sooner, since there is less vocal opposition to changes, and the opponents -- the teachers’ unions -- might huff and puff but they are unprepared to switch their allegiance to the Republicans, something they would have to do if they really want to blow the administration off course. Anyhow, they are sympathetic to the president’s plan to increase minority access to advanced classes until now filled on the basis of merit, and indebted to him for killing a model program in the nation’s capital that saved a handful of poor kids from the non-education offered by teachers in the public schools.
The administration’s deficit-fighting takes the form of increasing taxes on the riches and, less overtly, on the middle class that Obama promised would not pay one dime in new taxes. Families earning more than about $250,000 will have their marginal income tax rate increased from 35 percent to 39.4 percent when the Bush tax cuts are allowed to lapse, and capital gains taxes will go from 15 percent to 20 percent. In addition, the health care bill levies a hospital tax of about 1 percent of income, and 3.8 percent on some portions of their incomes, including interest, dividends, and short-term capital gains.
But revenues from these taxes won’t begin to make a dent in future deficits, which the CBO estimates will still exceed 5 percent of GDP as far ahead as 2020. Which is why it is now generally accepted that the president’s commission on fiscal reform will recommend adoption of a European-style value-added tax (VAT). A 3 percent levy would bring in $300 billion per year -- $280 billion if food is exempted. Throw in inflation of around 4 percent per year -- the number the International Monetary Fund’s economists are now recommending as a target to replace the 2 percent most central banks are using -- and the deficit just might become manageable.
These taxes and the president’s other measures will indeed transform America -- to a nation modeled on Europe’s social welfare states. Government will be more intrusive. The health care bill provides for over 16,000 new tax inspectors to make sure that every American has health insurance or has paid a fine, which by 2016 will come to $2,085 or 2.5 percent of income, whichever is higher. Emissions from not only coal plants but privately operated lawn mowers will be regulated. Standards by which schools will be judged will come increasingly under the jurisdiction of the federal government, and will include preferential access of minorities to advanced classes, who will also have priority claim on funds allocated to health care research.
Incomes in this new world will be more equal. The incomes of families earning more than $250,000 and of those in ranks of middle earners will be taxed more heavily to fund programs for lower-income groups. And, if the president has his way, and persuades congress to grant legal status to the 13 million illegal immigrants now in the country, the cultural mix of the citizenry will have been changed. That would cost about $30 billion for the health care entitlements of this new group, but in the great scheme of Obama things that will be a small price for completing the transformation of America. The bigger price will be the lost growth due to declining incentives that will make entrepreneurial risk-taking less worthwhile.