Obamanomics -- what's next?

Earlier today I wrote about the economic policy followed by the Obama adminsitration for the first third of the term. So far, this policy has been a failure. Obama has kept things under control enough to allow the financial markets to quiet down, although a bit of bad news could send them again into a tailspin. Unemployment has soared way past the level promised by Obama if only the stimulus were passed. The economy is growing, but not at a sufficient rate to allow for the creation of any net jobs. So what is next?

Obama's answer is rapidly taking shape. First, there will be new taxes. Second there will be new regulations on the financial industry. Third, there will be no meaningful cuts in spending. This package of measures is bringing the USA one step closer to renewed economic decline.

First come taxes. Certainly, there is a need to close the deficit that threatens to cause hyper inflation, higher interest rates and the collapse of the economy. Obama's answer is new taxes. These proposals include the Value added tax which has gone from an impossibility to a distinct possibility in the space of a few weeks. Let's assume for the moment that the ultimate answer from the Democrats is to allow the Bush tax cuts to expire and also to enact a ten percent VAT. This will mean that trillions of dollars will be taken from consumers and sent to the government to pay for its planned expenditures. Even if the Democrats do not enact further spending plans (unlikely), the net effect will reduce consumption and production of goods in the USA. People who are now just getting by will be driven under when faced with a ten percent rise in the cost of nearly everthing they buy. How many more houses will go into foreclosure as a result of this tax? How many fewer cars will be sold? How many jobs will be lost due to this tax? The results of this tax would be a severe blow to the economy. And there will be fewer new investments coming from the usual sources of growth in the economy since these folks will be paying much higher income taxes, leaving them with less assets to invest.

The proposed new Wall street regulations are equally as harmful to the economy. The truth is that the bill should be called the big bank protection plan. All of the new regulations will stiffle competition by making it much harder for a small player to enter the field. Indeed, the biggest beneficiary of this statute will be none other than Goldman Sachs, the biggest investment bank of all. Less competition will allow costs to raise capital for new investments to rise. this will reduce total investment and will reduce economic growth, job creation and even tax revenues. Again, this will harm not help the economy.

The lack of spending cuts are not by themselves harmful if there was a way to pay for all of the spending other than raising taxes. Unfortunately, there is not. Clearly, spending has to be cut in order to reduce the need for higher taxes. The spending which gets cut should be that which has the least effect on economic growth. For example, construction of infrastructure improvements should be kept at high levels. These facilitate growth and allow for job growth. Excessive and conflicting regulatory schemes, however, should be abolished so as to remove obstacles to growth. Entitlements should be rationalized in one major change that affects everyone. No one should be off limits from such an adjustment. Government workers benefits, pay and pensions should be reduced. Social security retirement ages should be changed to reflect the longer lifespan of people today compared to what they were when the program was last modified. Medicare fraud should be rooted out. medicare benefits should be changed to prevent unlimited use of the system for unnecessary procedures and doctor visits. Subsidy programs from the government should be cancelled. Every federal program should be reviewed and closed down unless it serves a valid current purpose, and this has to be done without regard to the constituency that supports the program.

Will Obama do any of this? The simple answer is NO! We are in for rough days ahead in my opinion.