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Jul 11 2009

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Tipping Point

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Time and pressure are the constants in the American political system. They shape the terrain where critical decisions are made; a mixture of public attitude, political interest, policy priority and leading indicators. The best in the business can occasionally manage them, but their physics cannot be overcome.

Time and pressure are contriving to create havoc with the Obama administration’s remaining agenda for the year, with serious implications for the rest of his term.

The Strategic Plan

Sometime during the Transition or its early days of governance, the Administration made a consequential decision to take on a “go for broke” strategy. The nation was in the midst of economic crisis that had profoundly impacted average Americans. Citizens were open to, indeed hungry for a different course of leadership.

President Obama had the choice to sequence his program, using success to build success. But as most seasoned politicos know, crisis is opportunity, so Obama decided to swing for the fences, tackling not just the immediate economic issues, but launching all his ambitious health care and environmental legislation, while bringing a uniquely liberal brand of government intervention and intrusiveness to the private market.

Instead of success by assembly line, Obama decided to make stew.

Despite this approach, the unspoken challenge for Obama remained that the credibility of his entire program would be tied to the success of his first initiative, February’s $787 billion Stimulus bill, which may not have been immediately understood by his policymakers.

That he violated the business maxim to undersell and over deliver on this bill is a key source of today’s emerging threat to his agenda.

Stimulus Calculus

Let us be candid.  In order to sell the government-centric public works Stimulus to the American people – who were still reeling from the TARP bill of autumn 2008 and bailouts for AIG and other larger companies – the Administration effectively “terrified” the American people on the crisis.

From the President on down, Administration officials and Congressional Democrats justified the $787 billion Stimulus bill as “the” antidote for the “greatest economic crisis since the Great Depression.”  The alarmist rhetoric about pending economic catastrophe was a centerpiece of Democratic persuasion efforts.

The President himself said that the bill was necessary because “…the failure to do so would cost more jobs…a failure to act would worsen our long term deficit.”1

If that was the benchmark, the bill has been an unmitigated disaster.

The Administration said that the bill would keep unemployment from rising beyond 8%. Today unemployment stands at 9.5%.

The Administration said that the bill would “save” or create 3.5 million new jobs. In June there were 467,000 new unemployed according to the Labor Department.2 Job losses since the Stimulus was passed total 2.2 million according to Labor.

First quarter GDP dropped -5.7%.  The second quarter is likely to experience a retraction, but less than -5%.

As indicators head south, only 11% of that the Stimulus project spending will take place by the end of fiscal year 2009. According to Doug Elmendorf, head of the CBO, even by the end of fiscal year 2011, only 72% of the spending will have occurred. Ironically this means that more spending will come in fiscal year 2012 and beyond, than is happening now.

The inefficiencies, waste and delay of the Stimulus have been laid bare. But by selling the Stimulus so hard, the Administration may have unintentionally turned it into a trap of its own making. Specifically, if the very expensive Stimulus bill isn’t the elixir for the ailing US economy, what is the alternative after nearly a trillion went out the door with almost no effect?

The Budget Picture

Any additional fiscal stimulus is greatly complicated by the President’s ten-year budget estimates.

The Administration estimates that the budget deficit for 2009 will hit $1.8 trillion or 12.3% of GDP.3  The previous postwar deficit record, set amid recession in 1983, was 6% of GDP. The 2008  budget deficit, by comparison was a virtual miser’s $400 billion.

According to the CBO, the ten-year Obama budget blueprint will more than double the national debt, amounting to a eye-popping 82% of GDP in 2019. The Washington Post, no harsh critic of the President, editorialized that the Obama plan required borrowing $9 trillion over ten years; a plan that the Post said was “unsustainable.” Distressingly, these figures depend on favorable economic growth scenarios that have yet to pan out, meaning the budget picture could be worse.

It is the height of irony that in less than six months, and sustained criticism through 2008, Obama and the Democrats have made Bush and the Republicans look like pikers by comparison.

Joe Six-Pack

So what does America think so far?

President Obama maintains an impressive job approval rating that is largely consistent with his predecessors at this point in their presidencies.  According to Gallup, Obama had a 58% rating for the first eight days of July.4

However, Rasmussen outlines potential trouble for Obama and the Democrats on issues. According to Rasmussen, the GOP holds a six-point lead among the public on economic issues. Rasmussen notes that this is only the second time in over two years of polling that Republicans have had such a lead.5

Perhaps more disturbing for the Democrats, voters not affiliated with either party trusted Republicans more to handle the economy by a 46-32 margin. Also according to Rasmussen just 39% of those surveyed believe the President is doing a good or excellent job, while 43% rate his performance as poor; the worst ratings of his presidency.6 On taxes, 52% trust Republicans vs. 36% for Democrats, the highest level for Republicans in two years.7

Quinnipiac noted that while Obama has maintained an overall strong approval rating, the public’s support for the President’s plan on medical reform draws a 46-42% approval, providing a warning sign  for the White House.8

As a snapshot of potential, further trouble on the horizon, Quinnipiac surveyed Ohio, one of the most important swing states in last year’s presidential election. In May, the president enjoyed a 61-31% rating in Ohio which has dropped precipitously to 49-44% as of July 7th.  By 48-46% margin, Ohio voters disapprove of the way Obama is handling the economy. Ohio independents similarly disapproved, 48-46%.9

The mixture of polling results represents three lessons for Team Obama:

  1. While the President maintains the good will and trust of the American people generally, it is no longer automatic.
  2. That the economy, not carbon credits or health care, remains the dominant issue for Americans. Moreover, voters are now beginning to hold the current Administration responsible for the recession.
  3. The lack of economic progress will be central to the success of Obama’s   ambitious domestic agenda on the environment and health care, particularly as unemployment heads into double digits nationally.

Consider:

The Legislative Agenda

Alarmingly, there is no economic relief in the President’s two other signature proposals currently moving through Congress; Cap and Trade emissions standards and health care reform.

As described in Duffy’s July 7th “Destructive Creation,” the Cap and Trade system proposed by House Democrats is little more than a massive tax increase on any productive enterprise that doesn’t breath. It will cause dislocation, scarcity, higher costs, slower economic growth and, importantly, it won’t do anything to address global warming.

If the domestic bill wasn’t enough, President Obama has called on finance ministries from the wealthiest nations to formulate plans for funding worldwide emissions reductions and bring them to a meeting in Pittsburg in September. The idea would be for wealthy nations to provide countries such as Brazil, China, India and Mexico with significant money to help pay for technology required to reduce emissions.10

Yes, you read that correctly. While we work to implement a Cap N Trade system in the US that will cripple our economy and international competitiveness, the Obama administration is proposing we provide new monies to emerging economies so that they create and adopt technologies to curb reductions.

Two immediate problems here.

China, India and Brazil, along with Mexico, are the chief culprits of growing GHG emissions. China currently holds an astonishing $1.5 trillion in foreign currency reserves. India holds $262 billion and Brazil, $206 billion. Are we to believe that the US is prepared to run up a $10 trillion debt over the next decade and in addition is going to subsidize these countries that have massive financial reserves of their own to invest in emissions control?

Moreover, during the campaign, didn’t Team Obama promise that its environmental policy would mean a new Green Economy with high pay jobs in the US? Doesn’t this announcement at the G8 sound as if the Obama Administration is “outsourcing” an economy and technology that we haven’t even developed yet?

The Cap and Trade debate now borders on madness.

Health Care Reform:

The challenge has been how to expand health care to include the uninsured without breaking the bank. Cost summaries of various plans have put the price tag at between $1-1.5 trillion over a decade.

Again, far from serving as a tool to help the economy out of recession, proposed prescriptions for healthcare reform threatens additional cost, rationed care and dislocation.  According to theWashington Post, Congress has decided to fund health care reform on the backs of the only cash cow in Washington without a constituency; the rich.

“House Democrats agreed yesterday to raise taxes on the wealthy to pay for sweeping expansion of the nation’s health care system, proposing a surtax on the highest earners that could send the top federal tax rate toward 45%”.11

So, the Democrat’s solution for health insurance reform is to saddle the top 5% of wage earners, who already pay 60% of Federal taxes under current regulations (aka, before the expiration of the Bush tax cuts next year and this surcharge), with additional taxes.

Analysis

The emerging, fundamental paradox of the Obama legislative program is that robust economic activity is at the heart of its success. Yet the legislative program itself is the biggest drag on economic growth through misallocating resources, increasing public debt, new direct and indirect taxation, market uncertainty and  colossal federal intrusion into the workings of the private market at all levels and sectors.

In sum, the goals of the Obama administration are at war with the means to achieve it – indeed are undermining it – just as the public seems to be cluing in to the lack of systemic economic change and hair raising debt.

As former presidential speech writer Michael Gerson pointed out in his recent column, “No economic theory suggests that a round of new federal regulations and entitlements would result in a burst of economic growth. Indeed, is a time of unsustainable debt and economic contraction really the right moment to add massive spending and debt, along with the taxes they will require?”

For all of its promise, the fundamental flaw of Obamaism appears to be its most basic conception. As economic stagnation continues, the American people are just beginning to tune in.


1. Obama Speech before a Joint Session of Congrress

2. Department of Labor, Bureau of Labor Statistics.

3. Washington Post Editorial 7-10-09

4. Gallup Survey 7-10-09

5. Rasmussen Reports Trust on Issues 7-9-09

6. Ibid

7. Ibid

8. Quinnipiac Poll 7-2-09

9. Quinnipiac Poll 7-7-09

10. Washington Post, “Nations Agree to Curb Emissions” 7-10-09

11. Washington Post, 7-11-09, Democrats Agree on Tax Hike” A5

 

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