President Obama just spoke about the downgrade and his remarks were very disappointing. He uttered some empty platitudes, offered no plan, (amazingly) called for more government spending, and continued his advocacy of class-warfare taxation.
So what does this mean? Other than expecting volatility, I have no idea what will happen in financial markets over the next few days. But I can opine about the downgrade, Obama’s unserious response, and what it means in terms of public policy over the next few years and into the future.
Notwithstanding the President’s cavalier attitude, America is in trouble. But while the crisis is severe, we have some breathing room.
Our fiscal crisis is akin to a very dangerous, but slow-developing cancer. It is not a car wreck with immediate life-threatening injuries.
And there are solutions, as explained in this good news-bad news-bad news-bad news-good news-good news analysis.
1. There is virtually zero chance of the United States defaulting in the next 10 years (heck, probably the next 20 years). Yes, fiscal policy has been reckless and irresponsible during the Bush-Obama spending binge, but I’m guessing it will take another 10-20 years of additional over-spending to bring America to the point of Greek-style collapse. Simply stated, the U.S. economy is so large and so rich that it can’t be destroyed quickly.
…but…
2. The United States does not deserve a triple-A rating, at least for long-term debt. The nation has a giant fiscal problem, but it’s not the annual deficit or the national debt. The true crisis is the $100-trillion-plus unfunded liability for entitlement programs – especially Medicare and Medicaid. This is why America deserved to be downgraded.
…and…
3. The left in America, as exemplified by Obama’s vapid press statement, has no serious intention of addressing this problem. The President has failed to present any sort of plan. His budget early in the year was a business-as-usual document with no reforms and even the Democratic-controlled Senate rejected it 97-0. But while Senate Democrats joined Republicans in deep-sixing Obama’s joke budget, they have failed to produce a budget of their own for more than two years.
…moreover…
4. The left is treating America’s fiscal crisis is an opportunity to trick Republicans into a tax increase. That would be smart politics, to be sure, since it would automatically give Democrats the upper hand, but higher taxes would probably worsen the problem of excessive government since politicians would spend any additional revenue. And the kind of class-warfare taxes Obama has in mind would further undermine growth, adding to the nation’s fiscal woes.
…however…
5. After eight years of being corrupted by “big-government conservatism,” the GOP may finally be sincere about reducing the burden of government. Led by Congressman Paul Ryan, House Republicans approved a very serious budget plan that would have reformed both the Medicare and Medicaid and substantially reduced the long-run burden on the U.S. economy.
…fortunately…
6. America is not at the point of no return. I’ve periodically commented about the dangers of a nation reaching a tipping point, which occurs when the people riding in the wagon outnumber those pulling the wagon. But even though dependency has jumped in America, the national spirit of self-reliance, independence, and freedom remains strong. Indeed, I think that’s what the Tea Party largely represents.
But none of this should suggest optimism. We know the solutions, but that does not mean that the politicians will do the right thing. As I said in the beginning of this post, America is at a crossroads. We can either continue a descent into Greek-style fiscal morass or, at some point in the next few years, we can implement reforms.
But, barring some remarkable change in attitude, Obama is mostly irrelevant except to the extent that he can make matters worse by luring Republicans into a phony tax-hike deal.
“His budget early in the year was a business-as-usual document with no reforms and even the Democratic-controlled Senate rejected it 97-0. But while Senate Democrats joined Republicans in deep-sixing Obama’s joke budget, they have failed to produce a budget of their own for more than two years.”
Why wasn’t there an in-depth coverage of this budget by Obama? People need to know the work of the One they have elected?
Excellent summation: realistic but yet not too depressing. Thank you Mr. Mitchell.
[…] by JOHN: Dan Mitchell of the Cato Institute has observations on Obama’s speech here. One paragraph: The left is treating America’s fiscal crisis is an opportunity to trick […]
I know that it is arrogant to come to too many conclusions in response to short term events. But I cannot help but ask…
So how’s that optimism? Is the American middle class still going to command a standard of living 6 times the world average in 10 years? How is it going to hang in there? Somehow I don’t see the world average dropping that fast. The world, as an aggregate will probably still grow 2-3% this year. It is primarily America and Europe that are going down the tubes. Going down the tubes because of the hubris. The western voters’ hubris who thought they had finally become rich enough that they could finally implement some socialism, some central planning, some more bureaucracy, some more disincentives to production some more indolence inviting redistribution programs and decarbonize their economies at the same time. In other words, American voters in particular, thought they could finally afford to jettison a lot of the industrious attributes that set them apart from the rest of the world and which were responsible for their x6 world average levels of prosperity. But heck! They could not stand the fact that Steve Jobs had so much more. So they got duped to turning towards those exact policies that once kept 3 billion people in a production quagmire. So the 3 billion people started waking up, emerging and applying competitive pressure to the west and, at the same time, the American citizen voter started experimenting with socialism.
To reset reality…
Even pre-Obama America was already having too much taxation and too much central planning to maintain a standard of living 6 times world average, an almost obscene multiple that Americans took for granted – otherwise how does one justify the fact that Americans imagined they could afford to experiment with socialism? How on earth is America going to arrest an even faster decline under the new American philosophy of compromise and shared sacrifice that is so characteristic of hope and change? There are other pernicious effects in government, such as central planning etc. but redistribution is what provides the ideological underpinning for most voter requests to government action, loss of freedom, mandatory collectivism, declining production and economic decline.
But who am I? An extremist. Such an extremist that my neutral goal would be to actually have Americans preserve their exceptionalism at 6 times world average prosperity levels. But so pathetically similar to the rest of the world have Americans become that not loosing ground is considered extreme. And so delusional have voters become that they think that they can maintain that exceptional differential by copying the rest of the world.
And there are other ways for the gov’t to increase revenues while at the same time stimulating job growth and lowering prices: sell land, drilling rights, and mineral rights.
If your income shrinks and you can’t afford that huge mortgage, you put the house on the market. We can’t afford as a nation to preserve all that wilderness for a few thousand tree huggers. Where is DC’s “shared sacrifice.”
I suppose Tea Party members can volunteer to carry the increased tax revenue to the Treasury if
1. Tax rates are reduced permitting producers to thrive and
2. Regulations are cut, permitting producers to thrive, and
3. “Entitlement” participation is made voluntary, freeing the next generation from debt enslavement.
to the first Steve: I think it is the height of chutzpah for liberals (with some help from Bush and his apologists) to increase spending by trillions of dollars, and then to claim they need a ‘balanced’ approach to getting the deficit under control.
How about restoring both spending and tax rates to their 2008 level?
Steve, there are a few assumptions that you seem to be making that need to be called into question. To begin with, you shouldn’t assume a static model where incentives and disincentives have no effect on behavior.
We’ve seen over and over that we can’t accurately gauge what the actual incentivized effect of a change in tax rates or even policies will be. Accordingly, we don’t know how to make changes that can guarantee what the actual amount of “increased revenue” would be from a proposed change.
Since we can’t do that, it’s disingenuous to say that we can “pay for” a portion of the change in the deficit with a given “ratio” of revenue increases. People change their behaviors based on changes that they see, because they are (in aggregate) largely rational actors. That’s why, historically, it’s been nearly impossible to get more that about 19% of GDP in revenue… REGARDLESS of how the rates or loopholes are set!
We therefore need to fundamentally change the nature of the argument. It needs to be a question of how much we need to increase the private-sector GDP output… the increase in output increases the absolute levels of revenue without having to change the rates to a more confiscatory structure.
The problem is not one of rates being too low, or too many loopholes being in place. The problem is one of GDP being suppressed due to regulation and political uncertainty (never knowing which direction the administration will thrash next).
Since that has led to lower revenues, until we can change the political approach that is being taken, the only other option is to cut actual spending… and that means abandoning the fiction of baseline budgeting. True year-over-year reductions in the number of dollars spent is the only way to substantially reduce the actual deficit.
Ok, I forgot General Electric, and the SEIU employees
When the problem is spending, why is a tax hike a good idea?
Now I would support a tax hike to 120% levels, but only if it fell completely on the trial lawyers, communist actors and producers, communist union organizers, communist controlled trust funds, the Bradey campaign against civil rights for firearms owners, social workers, and woman’s and ethnic studies professors.
“His budget early in the year was a business-as-usual document with no reforms and even the Democratic-controlled Senate rejected it 97-0. But while Senate Democrats joined Republicans in deep-sixing Obama’s joke budget, they have failed to produce a budget of their own for more than two years.”
I don’t know why there hasn’t been any sort of in depth coverage of this Obama budget. What is in it? Was it that much of a joke?… much like the President himself, I guess.
Terrible press conference. This is the 20th time he has kept people waiting for him and when he does finally shows up, he doesn’t say anything.
What if the only way to get the necessary cuts in spending is to go along with a tax hike? At what ratio do we have to agree to it? 4:1? 5:1? (spending cuts: tax hikes). And what if the tax hikes resulted in a flatter curve with fewer deductions, but still technically raised taxes? It’s great for pie-in-the-sky thought that spending deductions alone should do it…but what if it’s not politically feasible?
the incompetence is staggering. the Obama administration could easily release transcribed notes of his daily speeches (which do not change) and we can all avoid having to watch the market crater further.
[…] DANIEL J. MITCHELL: Obama’s Failed Response to the Downgrade and the Outlook for Fixing America’s Spending Crisis. […]