Thursday, February 26, 2009
In what could prove to be one of the greatest hypocrisies ever to come out of the Washington D.C., Obama today released his 2010 budget proposal. Titled "A New Era of Responsibility," the document contains a blueprint for the biggest expansion of government spending and deficits since WW II, with heroic assumptions for how much extra tax can be squeezed out of the rich, and how all the extra spending can be reined in at some point in the future.
This chart shows both the history of federal receipts and outlays, and what Obama's budget assumes they will in future years. Federal receipts are assumed to skyrocket at double-digit rates in 2010 and 2011, despite only a modest recovery, as higher taxes and new limits on deductions presumably succeed in grabbing hundreds of billions of extra dollars from the pockets of the rich. Receipts are then expected to stabilize at just over 19% of GDP, even though they have averaged less than 18% of GDP over the past 40 years and have only exceeded 19% for a handful of those years.
Spending will surge this year, but is then expected to perform the never-before-seen feat of not growing at all for the next 5 years, even as the government brings a huge portion of the population under its healthcare wing and countless government programs expand in coming years thanks to the recently passed "stimulus" bill. Spending is expected to stabilize at just over 22% of GDP, even though it has averaged about 20% for the past 40 years and has only barely exceeded 22% in a handful of those years.
Even if you believe these projections, this president has the gall and the daring to label a massive and unprecedented increase in government spending and taxation a "return to responsibility."
The potential pitfalls of this exercise inspire dread rather than optimism. What if higher tax rates don't elicit higher revenues? What if spending just keeps ratcheting higher, as it always has in the past? What if interest rates rise, making trillion dollar deficits massively expensive to finance? What if an expansion of government slows the growth of productivity, which in turn results in an economy that grows below "potential" for many years to come?
I don't think you have to look too far or too hard to realize that this document is, for the market, the Sum of All Fears.
Posted by Scott Grannis at 2:01 PM