Obama’s Budget

There is no doubting the significance of the budget that the administration published and circulated late last week. For those of you who are interested in reading it this is where to find it: FY 2010 President’s Budget

This is not a budget for the faint hearted. Nor is it a budget for the Republicans. This is a pure and simple declaration of change. It will become a classic document for American political historians to mull over for significance.

I don’t think I am overstating this case.

If the slew of proposals that fill the 147 odd pages in the summary document are all enacted then the Obama administration will emerge as the most progressive, left of center, administration since FDR. The intention is crystal clear: the days of market driven deregulatory policy and laissez faire attitudes are gone. The Reagan revolution will be rolled up and reversed. America will embrace a redistribution of wealth and the expansion of middle class targeted services.

Plus there is a breath of fresh air in the transparency of the document. The costs of the Iraq war are firmly brought onto the books and laid bare for us to see. Contingencies are created to cover future ‘Katrinas’ so that the money [$20 billion a year] will be set aside for disaster recovery.

The first forty pages of the budget read like a manifesto or statement of intent. The ‘misplaced priorities’ of the Reagan era are clearly outlines and then programs are introduced to attack them. the focus is relentlessly on infrastructure and investment: health care, education, and the energy independence are all elevated to national priorities.

Among the specific steps are:

Reducing energy consumption at the Federal level. The Federal government is the country’s largest energy consumer so there is money set aside to modernize all Federal buildings. This complements the money also set aside for subsidizing private home improvements aimed at energy conservation. Solar and wind power are both to be given large support. The total set aside for clean energy is $120 billion over the next ten years.

Health care costs are targeted heavily. The creeping privatization of Medicare is totally reversed; drug policies will be changed to force down prescription costs; and automation of record keeping will be aided to improve timeliness and accuracy of medical records. America is the lsat large industrial country to automate its record keeping with the result that a large part of health care costs go toward paper work and not medical help. The administration expects to cut about $316 billion from spending over the next ten years from these initiatives.

But the big sea change is the next line item of the budget: by limiting tax deductions for high earning families the government expects to raise $317.8 billion over ten years.

Thus a total of about $630 billion has been set aside as a ‘reserve fund’ to help pay for the anticipated broadening of national health care. This will not be sufficient to introduce truly universal health care, but it is enough to prevent the lack of money being a line of attack in the discussions over health care policy.

The redistributive core of the budget comes from the enormous amounts involved in the tax shifts proposed.

The tax cuts for those earning less than $250,000 a year cost about $940 billion over ten years, which is partly paid for by closing tax loopholes for the wealthy and business. These loophole savings are expected to generate $353 billion over ten years.

Then there is the $636.7 billion tax increase targeted at the wealthy – those earning over $250,000. this is essentially the undoing of the Bush tax cuts for that tier of earners and the raising of the top rates of tax back to their Clinton era levels.

Education spending is much smaller by comparison with the programs already mentioned, but still adds up to $65 billion over ten years. But more significantly is the intent of the actions. The entire student loan program is to be brought under closer government management which closes off a huge profit source that the Republicans had created for private lenders. Plus both the Pell and Perkins grant programs are updated, with the Pell program now indexed to cover inflation costs. one of the subtle ways that the Republicans had reduced government involvement was through the benign neglect of programs like the Pell grant system. By refusing to keep the grants up with the pace of inflation a huge portion of the cost of college was shifted to the consumer. This cost fell disproportionately on lower income families. So the redistributive intent of the administration is clear in this action.

The last of the large items on the budget is the Iraq war which is now revealed to cost about $1.5 trillion over the next ten years.

Even with all these huge action items and the war costs, the administration expects to reduce the ongoing deficit from the levels it inherited. For instance the forecast for 2012 is for a deficit of $581.3 billion, down from an original ‘Bush Policy’ base case of $757.5 billion.

The only criticisms I have are the fact that Obama still adheres to the Reagan trickery of having a ‘unified’ budget which masks the deficit on ongoing government programs because it adds back in the surplus on Social Security cash flows. Reagan invented this ruse to mask the extent of his profligacy and all the subsequent presidents have gone along with him.

And while I applaud the return to ten year accounting – Bush had limited the budget to five years in order to avoid accounting for the costs of his tax cuts – I think a fifteen year horizon is better. This is especially true given the debt burden being created as we dig out of the current recession.

Fiscal policy is strongly stimulative throughout the ten years of the budget. At no time does the government expect to run a surplus. Given the debt riddled source of the recession a firmer grip of fiscal policy will be needed to stem possible interest rate hikes down the road as the government continues to finance its debt. It seems inevitable that the general level of taxation will creep up so as to get the nation’s books back into order. My own prediction: look for a sales or Value Added Tax down the road, after we are back on our feet. VAT helps reduce spending and stimulate savings, so it would slow growth a little and lift the government’s revenues. It is exactly the kind of thing that fits the philosophy articulated throughout this budget.

Finally: the budget includes a further $250 billion for financial market bail outs. This is a little deceiving because it is a ‘net’ number. The ‘gross’ number is $750 billion, which is reduced by the assumed $500 billion raised through the sale of the assets, like the Citibank common stock just allocated, taxpayers pick up from the banks and AIG.

All in all this budget represents a sea change. Given the Democrat majorities in Congress we can assume that much of the budget will find its way into law – America is very different from Europe and Japan in that the President’s budget is a proposal and is always changed through negotiation with Congress; in those other places the government’s proposal becomes law quickly because of the greater conflation of executive and legislative power there.

Once the dust clears from the legislative process we can safely assume that a new course for America will be set. The Reagan era seems to be over. Definitively.

And that is why this budget matters.