Time For Obama To Lay Out A Real Fiscal Policy

Given that America really has no fiscal policy (the Senate hasn’t even approved a budget in four years), we think our transformative President should devote the lion’s share of his State of the Union address this week to laying out in plain, non-campaignspeak his fiscal policy for the country.

We’re not talking about a campaign-winning cornucopia of priorities to rein in climate change, regulate banking and investment, rebuild the nation’s infrastructure, promote green energy, achieve energy independence, improve the state of education in America, expand the peoples’ entitlements (including providing for everyone’s healthcare and retirement) etc. We accept that these, along with providing for the national defense, are the priorities that should comprise an on-going national dialogue, if not a national agenda.

All of these objectives regardless of how meritorious they may be, however, come with hefty price tags, and a universally accepted definition of economic policy is how a nation (any nation) allocates limited or scarce resources. So just what is the President’s fiscal or economic policy for the allocation of our available resources?  Most economists would agree that borrowing (deficit spending) to fund current consumption (a government addiction), which leaves less for meaningful investment, is a very bad idea. So what should we do?

Liberal economist cum progressive guru, Paul Krugman, for whom the progressive left swoons on a weekly basis, opined in The New York Times last week that our weak economy requires us to “kick the can down the road.”  He acknowledges, however, the real need for our elected leaders to agree on a long-term fiscal policy, a likelihood he equates with having “peace on earth and universal marital fidelity.”

But this is no laughing matter.  America is not out of the economic woods by a long shot.  To the contrary, we think we’re in the thick of it, with some treacherous slogging in front of us.  We have the anomaly of a wealth of capital liquidity and a dearth of capital velocity.

The unemployment picture is abysmal. Forget the 7.9% unemployment rate that is being touted as an improvement.  The rate at which people are giving up looking for work is both sad and alarming.  When unemployed men and women give up looking for work, the unemployment rate actually drops.  We agree that that doesn’t make sense, but that’s the self-serving way our government calculates the rate of unemployment.  Now get this. Last month, according to the Bureau of Labor Statistics (BLS); the United States added 157,000 nonfarm jobs.  So far so good. But during the same reporting period 169,000 people dropped out of the labor force, that is, they quit looking for work.  If the too-discouraged-to continue-looking population were counted, our unemployment rate would be over 11%.  Here’s how BLS puts it:  “In January, 2.4 million persons were marginally attached to the labor force. These individuals…were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.”

And here is what looks to us like another disturbing trend. Aggregate hours worked in the retail sector last month fell below their January 2012 level, even though industry payrolls are up 200,000 over the comparable period. Conclusion? Employers are hiring defensively by switching from full-time work forces to part-time work forces.  This is not a new phenomenon, but it certainly seems to be a growing trend. Several companies, among them, Wal-Mart, Krispy Kreme, Darden Restaurants and Frisch’s Big Boy Restaurants have just disclosed that they are shifting to more part-time hiring to escape Obamacare penalties.

And, while we’re on the subject of Obamacare, the non-partisan Congressional Budget Office (CBO), just last week, sent up a few warning flares regarding the adequacy of resources allocated for this massive entitlement.  The new CBO report makes clear that Obamacare is going to cost more than advertised, distort the marketplace far more than projected, and travel a rocky road to implementation.  The CBO has significantly increased by $233 billion its estimate of the cost of the subsidies (entitlements) needed to fund the Obamacare exchanges. CBO’s original estimate of the annual per-family cost of the subsidies was $3,970.  Last year CBO adjusted that estimate north to $4,780, and last week they again raised the projected annual cost per family to $5,510. Anyone care to wager whether this will be the last upward adjustment in the cost of Obamacare…er um…The Affordable Care Act? This is not good. These trends do not seem to us to portend a return to prosperity, but rather a drift into an economic malaise caused, in part, by a fiat allocation of resources the cost of which will be far greater than what was anticipated to support this newest entitlement.

As we have written repeatedly, the 2012 election campaign is over. The President won and now he must lead.  President Obama should turn off the 2012 campaign autopilot and recognize that the nation needs a reasonably unified approach to navigating our ship of state.  With the top 20% of taxpayers now accounting for about 95% of federal income tax revenues, the President should put his class warfare cloak in mothballs for Hillary or Joe (or whoever) to wear in four years. Perhaps, this campaign garment will still be in fashion in 2016.

When GOP candidate Mitt Romney suggested raising tax revenue by reducing tax rates while eliminating tax preferences that favor the wealthy (a pro-growth strategy almost identical to Simpson-Bowles) we predicted that President Obama would deftly “pocket” those revenue-increasing proposals for another day and plow ahead with his plan to continue to raise tax rates on the wealthy.  That, of course, is exactly what has happened. The President and Congress inked an 11^th hour tax-rate deal that will raise over $600 billion over the next ten years by hiking taxes on the so-called wealthy.  Do this now and we’ll talk about bringing spending under control next year, Obama said then.  Well, now it’s next year and we’re only three weeks away from the delayed draconian sequester hammer the Obama White House concocted in 2011. So what is the President’s position now? Let’s delay the cuts required by our sequestration strategy (or any real cuts at all) and fold into our tax code those Romney proposals we rejected during the campaign to raise revenues by eliminating tax preferences. 

Now, we don’t know of any serious economists who propose reductions in spending during a bad economy, but nor do we know of any serious economists who propose raising taxes in a bad economy.

The Obama Administration is, we think, putting the cart before the horse. We won’t debate, at this time, the contents of the cart, but absent a sensible fiscal policy, we believe there is a growing likelihood that the wheels may fall off the cart.  Here’s why.  While it is true that the economy is performing poorly, our economic malaise is not the result of a crisis of liquidity.  There is plenty of money waiting to be spent.  Business has built up huge capital reserves through the improved efficiencies a recession imposes, and consumers have jettisoned an enormous amount of debt. What the business sector needs, and what the 90% of the working public needs is some real confidence in the government’s economic coherence.

We fear that Obama is about to confuse what has been a winning campaign strategy with a winning economic policy.  It won’t work. Democrats may have far more to fear over the looming sequestration they created than the Republicans.  The Republicans may not like the defense cuts, but many are probably willing to live with them and assume that they will be quickly restored if world conditions warrant restoration.  They may very well be willing, however, to accept those defense cuts in return for the non-entitlement spending cuts sequestration will impose.

Given the huge liquidity that is currently waiting on the sidelines, a case can be made that the $1.2 trillion in government spending cuts imposed by the sequester over the next ten years would reduce, if not eliminate, the fear of major inflation looming in the background, as well as the inevitable misallocation of resources these grand government spending schemes create.

Sequestration is no way to budget (or to run a railroad, as the expression goes), but it does impose a semblance of forced prioritization and allocation of scarce resources, and that may, at last, force the government to begin to get serious about developing a real fiscal policy for the United States.