Posted 3/2/2009

WILL THE OBAMA BUDGET RESTORE PROSPERITY?

There's a fair chance that it will, given the huge amount of money he's throwing at the problem. (I understand the Treasury's money press is running out of ink and paper.)

The huge size of the $1.7 trillion deficit ought to scare the bejeezus out of the recession.

Washington and the press have talked about the deficit as a percent of our economy.

The government says the deficit will be 12.3 percent of Gross Domestic Product (GDP) – about the same percent as the deficit of 1942, when we had gone to war production. It was this deficit ratio which pulled us out of the Great Depression, according to economists.

But there are six problems with that rationale:

1. In 1942 there was no ballooning growth of the Social Security obligation and there were no such rising balloons as Medicare and Medicaid. So if you factor future obligations into the current account deficit, it balloons from $1.2 trillion to about $2.1 trillion. A huge pile of debt to plunk into our children's already over-sized backpacks.

This might be a burden they will be unable to repay.

2. The second problem is that, unlike 2010, our 1942 planners anticipated that printing a great deal of money would cheapen the dollar and set off a hellish, South America-like inflation spiral. So they instituted rationing and price controls – both preventing inflation.

But the Obama plan does not anticipate the potential of a collapsing dollar and a runaway inflation spiral. There is nothing in his plan to prevent these things from happening. While he worries about a 1929 deflation, he may be blindsided by an Argentinean inflation.

3. The Obama plan sends money to people and offers all kinds of tax credits to get them spending again. But the first stimulus package didn't work this way. When people got their checks, they didn't run out to Sears to buy a new flat screen TV. Instead, they used the money to pay down their debts and pay up their savings.

I believe the average American is now so fearful of debt (and high credit card interest rates and fees) that he will once more go conservative with his new money. Increased saving will not boost the economy.

4. The fourth problem is that his plan is only an American plan – not a world plan. But the rest of the world is in a state of severe economic collapse. The over-spent and over-borrowed Eastern European countries are in such economic trouble that they may not survive without a major bailout from France, Germany and Italy. Yet these countries are themselves in dire trouble and asking for more funds from the World Bank and the IMF to help with the bailout of Eastern Europe. (This is a sneaky way to get American funds money laundered from Washington to the IMF to Eastern Europe.)

With the Japanese economy in the soup, China's exports collapsing, and the once formidable "Asian Tigers" like Singapore, Taiwan and South Korea sinking, it doesn't appear that the rest of the world is capable of rescuing itself, let alone of helping America.

5. President Obama seems to have forgotten that the Smoot-Hawley Tariff Act of 1930 set off a trade war which collapsed international business and eliminated millions of jobs.

If he keeps up his "Buy American" rhetoric and Congress succumbs to the wishes of the Big Labor lobby, we could be repeating a terrible economic mistake.

6. The sixth and final problem is Congress. Even if President Obama's plan is 100% perfect, history warns that Congress will warp it out of shape. His plan may end up like that famous Navy fighter project which looked good until it got into Congress's greedy paws. So many members forced add-ons into the design (extra fuel tanks, more rocket pods, bomb racks, more electronics, etc.) that the prototype was so heavy it couldn't go up or down in the elevators of our aircraft carriers.

This Congressional humiliation allowed the Air Force to get the F-16 fighter through without any extraneous add-ons. It became the world's best and most reasonably priced aircraft.

Will President Obama's proposal come out of Congress as an
F-16 or a fat, unworkable, overweight prototype?

We are confronted with three key questions:

1. Will the Obama Plan work as designed?

2. Will the Obama Plan be real change – or simply changed?

3. In 2015, will our children and grandchildren have any respect for us?

(click here for a printable version of this article)