Budgetary Aftermath

There's an interesting phenomenon occurring in bits and pieces: oops.

In regard to all the excessive spending that has taken place on Obama's watch, there's a creeping revelation that maybe it wasn't such a good idea after all.  Aside from the sheer staggering amount of debt that Obama has heaped upon future generations of Americans…

…we are now starting to see some of the early effects of all this spending.  Let's look at the auto bailouts first:

After months of pressure from the federal government to push down General Motors’s and Chrysler’s debt loads, a deal remains far out of reach. With the promise of further federal bailouts, no debt-holders wants to make concessions—accepting just 30 or 40 cents on the dollar, and much of that in possibly worthless stock—when holdouts could wind up paid in full.

Bailout-free Ford announced yesterday that investors agreed to swap nearly $10 billion dollars in its debt for cash and stock, reducing its total debt burden by 28 percent. The price: about 38 cents on the dollar. After the late-afternoon announcement, Ford stock rallied, gaining 16 percent.

Without a government backstop, Ford could argue credibly that its debt-holders would take a beating if the company were forced to file for bankruptcy. But that seems increasingly unlikely: Ford’s prospects have been looking up, as car-buying consumers flock to the only Detroit manufacturer that hasn’t taken taxpayer dollars. In any case, without the uncertainty of government financing, Ford’s debt-holders were able to put a firm value on its bonds and then choose whether or not to accept the automaker’s buyback terms.

Its rivals’ creditors, locked in a game of chicken with the federal government, cannot. The result is a stalemate that’s impeding GM’s and Chrysler’s turnaround plans—another cost of doing bailouts instead of straightforward bankruptcy.

Huh.  How about that.  I believe a certain group of people predicted exactly this sort of thing happening: conservatives.  Maybe people should start listening to that group of people a bit more…

And what about the monstrous budget that just passed?  Is it feasible in the long run?  No:

The administration’s original proposal, you recall, left a persistent budget deficit of roughly 3 per cent of gross domestic product. This has nothing to do with stimulus: the gap is there 10 years out and beyond, long after the economy is assumed to have experienced a prompt, strong, and sustained recovery. Taking account of newer data, and using slightly less optimistic near-term assumptions, the Congressional Budget Office has already upped that projected deficit to 4 per cent of GDP.

Even before the budget, the country’s underlying fiscal gap, reflecting demographic and other distant pressures on public spending, had been estimated at 8 per cent of GDP. On the administration’s plans, the US economy will prepare to greet that eventual shortfall with a big structural deficit already in place.

But that is not all. One of the most expensive commitments in the budget is healthcare reform. Towards the full cost of this initiative – estimated at $1,200bn (€890bn, £810bn) or higher over 10 years – the budget merely calls for a 10-year “downpayment” of $600bn. So even that 3 per cent full employment deficit (4 per cent, according to the CBO) was a deliberate underestimate.

And still it gets worse. Congress’s new versions of the budget tweak here and there, paying lip service to the need for fiscal control, but taken together point in the direction you might expect, towards even bigger long-term deficits. Both chambers have agreed to scale back spending on future financial bail-outs, and to trim relief for the alternative minimum tax (a parallel tax code originally aimed at the very rich, which is starting to affect middle-class households). These are delusional economies. More will have to be spent on bail-outs before this crisis is over, and it is the closest thing to a political certainty that the ever-encroaching AMT will continue to be pushed back, at the cost of forgone revenue, year by year.

Also bear in mind that the budget’s signature spending initiative now looks more likely to pass, whereas its signature revenue-raising initiative looks doomed.

So, the question is not will there be a crash, but rather when will the crash happen?  Obama and the Democrats have lit the fuse on the ticking time bomb of the new American economy, and there is no extinguishing it now.  Well, I suppose there is one possibility – electing a majority of Republicans in 2010 would give us a shot at killing about 60% of the spending Obama has gotten passed into law.  It may be too little too late, but it's certainly worth shooting for!

Regardless, the inevitable crash is based on shaky information itself:

The job figures reported today add to the growing body of evidence indicating that the Administration’s economic forecast is much too optimistic.  The unemployment rate is already significantly above the Administration’s forecast for all of 2009. The Administration projects that real GDP will fall 1.2 percent in 2009 and rise 3.2 percent in 2010, compared with a Blue Chip Consensus forecast of a decline of 2.6 percent in 2009 and an increase of 1.9 percent in 2010.  The CBO forecast of a 3.0 percent decline in 2009 GDP also shows how far off the Administration is likely to be for 2009.


The Administration’s unduly optimistic economic assumptions are a major problem.  These optimistic assumptions are a key foundation of the President’s budget proposals, and lead to artificially low deficit and debt projections.  No wonder The Economist called the assumptions in the Administration’s budget “deeply flawed” in an article entitled, “Wishful, and dangerous, thinking.”

So, things are almost certain to be worse than the already-disastrous projections.

Part of the problem is that political payback is the order of the day in the Obama administration.  For example:

Quid Pro Quo. The American Heritage Dictionary defines this Latin phrase as “an equal exchange or substitution.”

Here’s another definition: When 17 United States Senators and Representatives accept contributions in excess of $359,000 during the 2006 and 2008 congressional elections from political action committees (PACs) funded by several major labor unions. Then, these same Member of Congress—hailing from both sides of the aisle—co-sponsor the Employee Free Choice Act (EFCA).

What’s even more troubling than the fact that EFCA’s co-sponsors have all taken money from Organized Labor is that these major unions funding these PACs all suffer from “significant internal corruption problems.

Since 2001, these unions —the Communications Workers of America; the Boilermakers Union; the International Brotherhood of Electrical Workers; the American Federation of Government Employees; the Paper, Allied-Industrial, and Chemical Energy Workers International Union (PACE); and the Service Employees International Union (SEIU)—have racked up a total of “71 convictions in federal courts…of felonies ranging from embezzlement and mail fraud to falsifying official reports to government and conspiracy.

As the Washington Examiner notes, “those convicted were division presidents, vice presidents, secretary-treasurers and business managers. The amounts for the embezzlement convictions were from $5,000 to more than $100,000.”

This revelation, of course, begs the obvious question: Who were these Labor bigwigs embezzling from? Not each other, that’s for sure. It was from the rank-and-file workers—the same women and men who unions insist do not need the protection of a private vote when deciding to join a union —whose hard-earned money union officials stole

Given the fact that the heads of these five unions not only promote aggressive recruiting tactics such as SPIN-selling, but also steal from the workers they represent, it is little wonder that Americans are increasingly in favor of protecting these worker’s right to a secret ballot.

When political payback trumps fiscal responsibility and accountability to the voters, we have a big, big problem.  In America in 2009, we have a big, big problem.

Another part of the problem — one that contributes to all the others mentioned above — is that there is a fundamental lack of respect for the Constitution and the rule of law in our political leaders.  We have seen increasingly blatant disregard for the rule of law in our political leaders, from the sweetheart mortgage deals to campaign violations to tax cheating, and all at the highest levels of government.  And it hasn't stopped yet:

Rule of law? Who needs it!

That seemed to be the message of the Obama Administration as it seeks to maneuver around restrictions imposed by Congress on bailout recipients. As the Washington Post describes, the Administration is laundering money to bailout recipients by “set[ing] up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.”

The end result of this scheming is that measures like caps on executive pay and limits on bonuses simply don’t apply to businesses receiving bailout bucks. That assumes, of course, that this maneuvering is legal.

The Administration’s gaming is driven by pragmatism, to be sure. Congress imposed a bunch of counterproductive, micromanaging requirements to go along with government dollars, and these terms are scaring participants away from the government’s economic rescue programs. And meddling with the internal affairs of private companies is almost always bad policy.

But the worse policy is this never-ending parade of bailouts, which has injected an enormous amount of uncertainty and risk into financial markets. As the government extends its reach into more sectors of the economy, the uncertainty only grows. The result is paralysis: It’s dangerous to make an investment when the government may sweep in tomorrow and upset everything.

Outright evisceration of the rule of law, even for what seem to be pragmatic reasons, is even more dangerous, because it throws every transaction, every investment, every deal into question. Doing business becomes more risky and far more expensive. That’s why countries that don’t respect the rule of law are, by and large, very poor. The link between rule of law and prosperity is strong.

In the United States, Congress writes the laws, and it is the executive branch’s duty to execute them, even if they’re dumb and counterproductive. It may be that this system of government, or any system of government, is simply ill-equipped to bailout and then manage large sectors of the private economy—politics and profits just don’t mix. In that case, we should stop doing bailouts and act to unwind those already done.

Attempting an end-run around our laws, however, is no solution at all. It only risks far greater failure.

After watching all this happen, with the government picking winners and losers and trying to wrest control over private companies, one message from Washington is clear: earn as we say, not as we earn.

There are two sets of rules, you know.  You and I just happen to be living under the wrong set.

There's my two cents.


I'm a gun-owning, Bible-thumping, bitter clinger conservative in the heartland. You can disagree with me if you want (you do, after all, have a right to be wrong)...just don't be rude or stupid and we'll get along just fine! :)

Posted in Economy

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

Follow me on Twitter

Enter your email address to follow this blog and receive notifications of new posts by email.

Join 95 other followers

%d bloggers like this: