Saturday, December 27, 2008

Doubts increase over Barack Obama's ambitious spending promisesSuzy Jagger in New York

From The TimesDecember 27, 2008

Doubts increase over Barack Obama's ambitious spending
promisesSuzy Jagger in New York
Barack Obama is expected to spend so much propping up the world’s biggest economy in 2009 that the national debt will balloon by an astonishing $2 trillion (£1.36 billion). It is $2 trillion that the US Government will try to fund by selling Treasury bonds.

But there are increasing expectations in Washington that by the time Mr Obama is sworn in on January 20, the financial burden on Capitol Hill will be so overwhelming that the man tipped to be America’s most radical President since Kennedy will be unable to fund the promises that secured his entry to the White House.

Many economists, think-tanks and independent financial watchdogs believe that the combined cost of industry bailouts, soaring unemployment benefits, declining tax revenues, new fiscal stimulus packages and the $500 billion public infrastructure splurge will stymie Mr Obama’s plans to overhaul the American healthcare system and invest billions in alternative energy.

And there is increasing evidence that Mr Obama is already shifting his rhetoric to persuade Congress and the American people that his healthcare and environmental reforms should, like the bailout of the banks, be reclassified as emergency measures and therefore worthy of immediate funding.

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Earlier this month, Mr Obama, who was formally announcing Tom Daschle, the Senate majority leader, as his Health Secretary, said: “The time to solve this problem is now. It’s not something that we can sort of put off because we’re in an emergency. This is part of the emergency.”

Robert Bixby, the head of the Concord Coalition, a bipartisan financial responsibility think-tank, told The Times: “We can afford to spend like that, whatever ‘that’ ends up being, for a very short period of time. We can afford to spend that amount of money because we are in a period of economic emergency. And we are going to have to borrow a ton of money.

“But the only excuse for having this level of deficit is for an emergency. What my fear is — what is happening now — is that we are hearing Obama speak less about finding ways to fund his healthcare and environmental initiatives, such as using tax increases, and more about how these initiatives are an emergency.”

This is a dangerous tactic. America is already estimated to have a $12 trillion debt pile — roughly 70 per cent of gross domestic product. America’s annual deficit has now hit the highest level since the Second World War, running at an equivalent of about 7 per cent of GDP, surpassing the previous record in the early Reagan years of 6.5 per cent.

But not all debt is the same. As Mr Bixby points out: “I am not in a panic about the national debt levels at all, so long as we don’t start adding to long-term problems. It is one thing to spend in order to alleviate a recession — I am willing to give them a short-term pass on that, because it is in no one’s interest to have another Great Depression.

“But I do worry that politicians will take the current climate as a signal that anything goes. ‘Let’s do healthcare’, ‘let’s cut taxes’ — all in the name of an emergency. If we are not careful, this culture will become ingrained.”

Economists differentiate between the long-term commitments triggered by different types of federal spending. All broadly welcome Mr Obama’s plan to spend $500 billion on public infrastructure projects, which would represent the biggest expenditure on roads, bridges, new schools and water systems since Eisenhower.

According to Mike Lucki, an infrastructure specialist at Ernst & Young, the global consultancy group, federal spending on public projects is a clever way of making taxpayer funds stretch further: “For every dollar you spend on infrastructure, you get two or three out of it. The jobs you create, create other jobs and it ripples through to boost spending and increase tax revenues.”

Apart from the hoped-for boost to job creation across a wide range of industries from construction, building materials firms, engineers, architects and all the support businesses which cater for them, there are no residual financial obligations. However, with healthcare reform, the long-term liabilities for helping Americans meet their medical bills are huge.

Mr Bixby explains: “Once you’ve built a bridge, the only thing you have left is a new bridge. There’s no long-term obligation. But if you start entitlement programmes such as Medicaid, you are adding a permanent stream of spending.”

Steve Ellis, vice-president of Taxpayers for Common Sense, a US budget watchdog, predicts that Mr Obama will be forced to delay some of his reforms because of the increasing financial strain on the public purse.

He said: “Something has to give. During the end of the election campaign both candidates were loath to say what they would jettison. But that train has now left the station. Obama will have to drop something or we will be in a much deeper hole.”

However, Taxpayers for Common Sense urges Mr Obama to stick to his healthcare reforms and abandon other pricey programmes: “Medicaid is a budgetary time bomb. It is not going to get any easier. What is clear is that his tax increases that he planned for those earning more than $250,000 a year are off the table. It was those tax rises Obama hoped would pay for healthcare change.”

As the world’s largest economy deteriorated rapidly after the collapse of Lehman Brothers in September, Mr Obama has been forced quietly to change his tune. During the presidential campaign, he suggested that reforming the health system would cost about $65 billion a year, taking into account increased taxes.

Since then, the recession has gained pace, unemployment has surged and the US car industry teeters on the brink of collapse. Such conditions make the prospect of income tax rises not only improbable but economically irresponsible.

Mr Bixby concludes: “Obama will have to delay some of his reforms; I don’t know which. But in this climate he just can’t do it all.”

Have your say

Hi Suzy Jagger the writer of this comment did you ask any of those economics how they think the crisis that is gripping this country can be solve? if no go back to them and asked them for their input about reviving the economic if they have any then let us the readers know.

kuriya, jacksonville, fl

If obama wants to see the result of all this bail out stuff, he need only to scroll back to 1965 when labor won in GB. GB's ability to manufacture and sell anything was zero . In the 50's in the US, everyone wanted a British Sports car or motorcycle, in the 70s you couldn't give them away

Evan, Boyd, Texas

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