Last week we expressed disappointment in the President’s State of the Union address. While it contained the tone of a leader seeking common ground, and talking the talk of deficit and debt reduction, it was bereft of specifics. Now having had the opportunity to review the speech against the backdrop of Mr. Obama’s specific statements over the past two years on the need for the government to live within its means, we are convinced that not only is he not serious about the subject but, worse, that budgetary discipline has little place in the President’s dramatically stated pre-election boast that he was going to “fundamentally change America.”
In the short term, before the fuzziness and emptiness of his address sinks in with the public, Mr. Obama’s ratings may rise. Self-assured oration, like a cup of strong coffee, can be temporarily stimulating. He remains a popular and likeable man, who exudes sincerity. Without a frame of reference, he might sell (until the verbal caffeine wears off) the notion that a five-year spending freeze truly tackles America’s fiscal crisis. How could the public know, until it is brought home to them by his own actions, that the freeze he dangles for effect won’t even pay the interest on the further incremental debt we will run up in just the next two years. Soon enough the electorate will see his so‑called “Sputnik moment” as nothing more than a redux of the agenda of the left during the past two years: electric cars, wind and solar energy and saving the country by invoking the word “green” enough times to make Pollyanna turn green with envy. As Peggy Noonan put it in her Wall Street Journal op‑ed piece on January 29, “The President delivers a sincere lecture in which he informs us of things that seem new to him but are old for everyone else. He has a tendency to present banalities as if they were discoveries. ‘American innovation is important. As many as a quarter of our students aren’t even finishing high school. We’re falling behind in math and science: Think about it!’ Yes, well all the rest of us have done is think about it.”
So, what was the real purpose of this speech, which was, as is the custom, delivered in prime time to a national TV audience in which the President, like all Presidents, uses the majesty of his office and the bully pulpit it provides to mesmerize the nation? In our view it revealed his short-term political objective . . . a strategy to force the Republicans to shut down the government) ala the Clinton‑Gingrich confrontation in 1995. The GOP leadership has threatened not to agree to raise the national debt limit or pass a Continuing Resolution (to fund the government in the absence of passing current fiscal year appropriation bills and a federal government budget, which the previous democratically controlled Congress refused to pass. It is widely believed that the 1995 shutdown was a victory for the Democrats and a political move that backfired on the GOP, bringing about President Clinton’s re-election in 1996. Whether or not it will work (and we see numerous differences between 1995 and today) only time will tell. But it is clearly in the Democrats playbook.
This brings us to the title of this essay: to Compare Billy and Barack the two Chicago lawyers. Billy is, of course, Billy Flynn, the lawyer from the musical comedy “Chicago” who explained his craft to the audience this way “It’s a circus kid. A three-ring circus . . . the whole world ‑ all show business. But kid you’re working with a star, the biggest. [You just] give ‘em the old razzle dazzle, razzle dazzle them.”
Let’s examine the razzle-dazzle of the non‑fictional Chicago lawyer, now President of the United States. His major comprehensive effort to rein in spending, control the annual budget, reduce the deficit and take meaningful steps to address the unfunded liabilities of Social Security and Medicare was his appointment of a bipartisan presidential commission. After laboring for many months and making serious but politically unpopular proposals which would cut the deficit by $3.8 trillion, reduce marginal income tax rates while also eliminating tax breaks (e.g., the mortgage interest deduction) the President failed to embrace even a single specific recommendation, allowing himself only to praise the report as worth discussing. What purpose did the Commission serve if the President won’t muster up the political gumption to embrace its report? How does he expect its recommendations to jump over all the legislative hurdles and lobbyists it faces without his support? By osmosis? Of course not. This President doesn’t want to stop spending and borrowing, and everyone inside the beltway knows it.
To quote Billy:
Give em the old flim‑flam‑flummox,
fool and fracture them.
How can they hear the truth above the roar?
Razzle Dazzle them, and they’ll beg ya for more.
Real deficit reform would mean embracing at least some of the ideas of the House Republican Study Committee. Their proposal would return federal spending to pre‑Obama levels, eliminate any unspent stimulus money (approximately $45 billion) and end more than 100 (out of thousands) of specific programs. This proposal would set the stage for the upcoming legislative fight (discussed above) over the Continuing Resolution and the debt ceiling. We can all debate which programs deserve the budgetary ax, but this proposal is at least noteworthy for being specific and starting a serious Congressional discussion. Mr. Obama’s “freeze” proposal at 2010 levels simply “pockets” the approximately $1.0 trillion increase in the federal budget since 2008. Surely the government should be able to squeak by on the amounts it spent just three years ago before the monetary floodgates were opened.
The President has repeatedly criticized the Congressional Republicans for proposing cuts in education spending. Of course what he doesn’t say is that the cuts proposed by the GOP would come from meaningful reforms such as more Charter Schools, voucher programs and school choice as well as curtailing obscene union negotiated pension and health plans that provide for early retirement and health and pension benefits with little or no contributions from the teachers themselves.
All of the above says nothing about the increased costs facing the taxpayers from Obamacare (the so-called Patient Protection and Affordable Care Act). Recall that the health care law was passed only by “scoring” it to include only six years of costs (benefits) but ten years of revenue, thereby miraculously rendering it budget neutral (ah, the razzle dazzle). And the true costs of health care coverage, notwithstanding Administration claims of gouging by the health insurance industry, are going up. How else can the requirement of unlimited portability and the coverage of all preexisting conditions be financed by insurance carriers except by mandating that everyone buy insurance coverage whether they want it…or believe they need it, like it or not.
Give ’em the old double-whammy
Daze and dizzy ’em
Back since the days of ol’ Methusala
Everyone loves the big bamboozala
Finally, perhaps the most important clue to the President’s efforts to continue business as usual without even an acknowledgment of its cost to the federal fisc is the failure to address the terrible impact of housing policies as highlighted by the insolvency of Fannie Mae and Freddie Mac. In September 2008, the Director of the Federal Housing Finance Agency placed those two large government‑sponsored enterprises into conservatorship. At the same time, the Secretary of the Treasury seized a major ownership interest in both entities. In taking those steps, federal officials were exercising authority provided in the Housing and Economic Recovery Act of 2008.
In the judgment of the Congressional Budget Office (CBO), those actions make Fannie Mae and Freddie Mac part of the government and imply that their operations should be reflected in the federal budget. As much as from any other reason, the bursting of the housing market bubble was attributable to the implied federal nature of those two agencies, with the implied full faith and credit of the United States standing behind them. Always denied, with a wink and a nod, by the Democrats, the implied subsidy became a very real one. CBO believes that it is appropriate to account for and display the entities’ financial transactions alongside other federal activities. However, the Administration chooses not to.
In the baseline budget projections it published in 2009, CBO treated the mortgages owned or guaranteed by Fannie Mae and Freddie Mac as loans and loan guarantees of the federal government. That is entirely appropriate, given that the taxpayer is now stuck making good on those guarantees. Thus, CBO’s 2009 figure reflects the recognition of substantial losses on the approximately $5 trillion in mortgages held or guaranteed by Fannie Mae and Freddie Mac at that time.
Following the housing bust that began in 2007, Fannie Mae and Freddie Mac experienced unprecedented portfolio losses stemming largely from their holdings of risky private securities, such as securities backed by subprime and Alt-A mortgages that had historically high default rates. CBO’s $291 billion estimate closely corresponds to Fannie Mae’s and Freddie Mac’s own estimates of the deterioration of their net worth when valued at market prices—from a surplus of $7 billion in June 2008 for the two entities combined to a deficit of $258 billion in June 2009.
The Obama Administration, however, continues to treat Fannie Mae and Freddie Mac as outside the budget, As a result, the Administration has not included in its budget figures subsidy costs that would be directly comparable to CBO’s $291 billion estimate of subsidy costs in 2009.
We can only conclude that the President’s soft and soothing words have little to do with any effort at fiscal discipline. In his view he was not elected to reduce spending but rather to complete his party’s statist agenda to “fundamentally transform America”. We continue on a course best summarized by the caption of our recent essay: Tax, Spend and Borrow the Difference.
Or, as Chicago’s Billy Flynn stated it:
Give ’em the old Razzle Dazzle
Razzle dazzle ’em
Show ’em the first rate sorceror you are
Long as you keep ’em way off balance
Razzle Dazzle ’em
And they’ll make you a star!
Or perhaps even elect you to a second term.
By Hal Gershowitz and Stephen Porter