March 19, 2009
By Mike Benevento
Since January, President Barack Obama and his congressional cohorts have been busy spending — or plotting to spend — trillions of taxpayer dollars. This is not surprising given that Democrat leaders are firm followers of Keynesian economics.
Believing the private sector does not efficiently stimulate the economy, John Maynard Keynes called for massive government spending increases during economic downturns. This spending flies directly in the face of President Ronald Reagan’s supply-side economic policies.
But these days, conservative fiscal policies are out of vogue. Americans voted for change. Obama won.
Increased spending actually started during the final months of the Bush administration with the $700 billion bailout of teetering financial institutions under the Troubled Assets Relief Program (TARP).
Shortly after Obama’s swearing in, Democrats (supported by only three Republican senators) pushed through a $787 billion economic stimulus package. Keynes, especially, would be proud that the stimulus was the largest spending bill in world history. The Keynesian spending was just getting started.
About a month ago, the Obama administration revealed its $700 billion plan for the financial system. As Stephen Bernard noted, a new capital-injection program allows the government to pour hundreds of billions into banks that undergo “stress tests” to determine their financial health. The plan also calls for increased government ownership of troubled banks.
For the housing market, the government said it would help lower mortgage rates by giving $200 billion more to Fannie Mae and Freddie Mac. This will be in addition to the $200 billion the two institutions previously received.
Further, the administration promises to spend $75 billion helping homeowners who are near default with their mortgages. A government-backed refinancing program plans to reduce mortgage payments for up to 9 million at risk homeowners.
Last week, President Obama — despite his pledge to curb earmarks — signed a $410 billion “omnibus” spending bill to keep the government running through the end of the fiscal year. The bill, which spends 8 percent more than last year’s, contains almost 8,000 earmarks.
In February, Obama presented his $3.55 trillion fiscal year 2010 budget. The proposal calls for annual deficits more than $500 billion for the next decade, according to USA Today. As a result, the federal debt will soar to $23 trillion by 2019.
President Obama’s budget includes $634 billion to start an overhaul of the nation’s health care system. While raising taxes on those earning more than $250,000, the plan extends the stimulus package’s middle class tax cut for a decade — costing almost $1 trillion.
Obama’s budget contains economic reforms, reinventing health care, fighting climate change (formerly global warming) and increased education spending. Columnist Charles Krauthammer wrote, “Obama has come to redeem us with his far-seeing program of universal, heavily nationalized health care; a cap-and-trade tax on energy; and a major federalization of education with universal access to college as the goal.”
Krauthammer documents that the credit bubble, housing collapse and a systemic failure of the banking system caused the economic crisis. Since health care, education and energy — worthy as they may be — did not cause the financial collapse, they are not the cure.
As former President Clinton adviser Dick Morris points out, “Getting out of this economic mess depends on consumer and business confidence, a faith that Obama is eroding with his looming tax increases as rapidly as he tries to kindle it with his excessive spending.” One only needs to turn to the stock market for proof of that lack of faith.
In economic terms, a 20 percent decline in the stock market defines a bear market. Since Obama’s inauguration, the stock market has experienced the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg.
“It’s the Obama bear market,” said Capital Management’s Dan Veru.
Investors have responded to Obama’s agenda with pessimism. According to Dick Morris, “The stock market has figured out his (liberal) priorities and is responding accordingly.”
Just as in a family’s budget, debt reduction is crucial to economic wellbeing. Recovery starts with halting excess spending. In a February letter to top Democrats, Republicans called for a spending freeze, the first step toward a “new standard of fiscal discipline.”
If the excessive spending continues, Morris foresees a future in which the current recession is followed by hyperinflation. Since other countries besides America are borrowing and spending money they do not have, this inflation will be global in scale.
Obama’s Democrats have the ability to change this future. Unfortunately, we may be already doomed as they are too far committed to Keynes to reverse course now.
Michael Benevento is a former Air Force fighter jet weapon systems officer. He has a bachelor’s degree in Military History and a master’s in International Relations. Mike resides in Williston with his wife Kristine and their two sons, Matthew and Calvin.