Saturday, February 21, 2009

Obama: I will worsen the recession in the US by decreasing the deficit

If you want to see the end of the Obama administration, it's on the front page of today's NYTimes. Obama does not understand that the Federal deficit funds private savings, and if he refuses to let the Government fund private savings by running a larger deficit, the private sector will try to save by cutting back on spending and investment -- also known as falling into a deeper and deeper recession.
Measured against the size of the economy, that would mean a reduction from a deficit equal to more than 10 percent of gross domestic product — larger than any deficit since World War II — to 3 percent, which is the level that economists generally consider sustainable.
Economists have to clue what they are talking about. The size of the deficit needs to be large enough to fund private saving, without triggering inflation. There is no "sustainable".
In his weekly radio and Internet address on Saturday, Mr. Obama said his first budget was “sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don’t, and restoring fiscal discipline.”

“We can’t generate sustained growth without getting our deficits under control,” he added.
Wrong on every count. The awful "stimulus" plan is useless pork and cronyism, with a lousy $400 that actually goes into people's pockets. $400 will not help households save.
Mr. Obama will also call for letting the Bush tax cuts on income, dividends and capital gains lapse after 2010 for individuals who make more than $250,000 a year. As a candidate, Mr. Obama called for immediately repealing those tax cuts; he decided instead to keep them in place through 2010, as scheduled, reflecting the widespread belief that raising taxes further depresses economic activity.
It's not a belief, it's a fact. Taxes uncreate money, and uncreating money depresses economic activity. The economy will be in desperate need of activity in 2010 and 2011.
As difficult as cutting the deficits will be, much of the reduction by the end of his term will simply reflect an end to spending from the two-year stimulus package and — assuming the economy recovers — higher tax revenues and lower expenditures for safety-net programs like unemployment compensation.
This is true, but simply reflects how the only effective fiscal response is being driven by automatic stabilizers such as income taxation, and unemployment benefits. Obama's "stimulus" is totally ineffective, and a transfer to the politically well connected.

The impotence of Obama's "stimulus" is clear when he talks about them:
"Never before in our history has a tax cut taken effect faster or gone to so many hardworking Americans," Obama said Saturday in his weekly radio and Internet address.

The president said his signature two-year "Making Work Pay" tax break will affect 95 percent of working families, and, in six weeks' time, a typical family will start taking home at least $65 more every month.
$65/month is pathetic. I'm surprised he's willing to say the number out loud. It should be more like $1000/mo. $1000/mo is stimulative. $65 is like leaving a 3 cent tip at a restaurant.

And where does this level of fiscal incompetence lead? NYTimes let's us know:When Consumers Cut Back: A Lesson From Japan
“My husband is retiring in five years, and I’m very concerned,” says Ms. Masaki’s mother, Naoko, 52. She says it is no relief that her husband, a public servant, can expect a hefty retirement package; pension payments could fall, and she has two unmarried children to worry about.

“I want him to find another job, and work as long as he’s able,” Mrs. Masaki says. “We must be ready to fend for ourselves.”
The Japanese income tax rate is 40% on its highest earners, and they have a VAT of 5%. Given that the economy has been in deflation now for 25 years and counting, why does the Japanese government collect any tax at all? Mrs Masaki is correct -- she has to be ready to fend for herself because the Government is actively depressing economic activity. Obama is doing exactly the same thing in the US. When he will announce a plan to raise taxes and decrease the deficit in the next few days, and the economy will take another big leg down. Economists will be baffled as to why this display of fiscal "responsibility" makes things worse.


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