Tags: obama | welfare | spending

Obama's Trojan Horse: Bailout Signals New Welfare State

Sunday, 18 Jan 2009 05:50 PM

By Newsmax Staff

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President-elect Barack Obama’s proposed $775 billion stimulus package, being sold as a cure-all for the ailing economy, is little more than a checklist for funding the pricey social-services agenda that he promised during his campaign.

Some experts say that the Trojan horse of pork and welfare spending will ultimately worsen the recession and drive the nation deeper into debt, according to financial experts.

Most of Obama’s costliest promises have found their way into the so-called American Recovery and Reinvestment Plan, which now includes everything from an expansion of Pell grants for college students, to health care for the unemployed, to an expansion of unemployment benefits, to investment in renewable energy.

“This legislation appears to blanket government programs in spending with little thought toward real economic results, job creation or respect for the taxpayer," said Rep. Jerry Lewis, R-Calif., ranking Republican on the House Appropriations Committee. "I'm scratching my head trying to determine how items like $50 million in funding for the National Endowment for the Arts will create jobs or provide relief for families across the country."

Lewis and other Republicans question the inclusion of items like $850 million for wildfire prevention and $600 million for new cars for the federal government.

Lewis lists others: $200 million to “encourage electric vehicle technologies” in state and local government motor pools, $1.9 billion in funding for high level physics research, $650 million to extend the coupon program to allow analog TV owners to continue to watch TV, and $400 to the Oceanographic and Atmospheric Administration for “habitat restoration.”

What do any of these expenditures have to do with creating job? They are a far cry from the traditional tools of stimulating the economy such as road and bridge construction, for which the bill allots $30 billion, some experts say. Their inclusion reflects Democrats' expansive view of how the government can create jobs: helping the auto industry by replacing government cars, for example, and hiring people to restore areas hit by wildfires.

Far from sparking the economy, the package will send the budget deficit soaring, crowd out private investment, and fuel a surge in inflation and interest rates, according to Arthur Laffer, an economic advisor to President Reagan.

The package essentially transfers wealth from those who are working to those who aren’t, Laffer tells Newsmax. “When you give people real resources other than what comes from work effort, those resources have to come from workers and producers.

“Conceptually, the government doesn’t create resources, it redistributes resources,” Laffer says. “Whenever you bail something out, you have to take resources from people doing well. It’s a zero sum game.”

Specifically, Obama is proposing spending $775 billion in government dollars in four key areas:

  • Tax Relief: $310 billion. Companies could write off losses for 2008-09, small businesses could write off spending this year up to $250,000, companies would receive a $3,000 credit this year for each employee hired and retained. Individuals would receive $500 tax rebates, couples $1,000. Those who don’t make enough money to pay taxes would benefit from reductions in Social Security and Medicare withholding taxes.

  • Energy. Obama seeks a national energy grid including renewable sources such as wind, solar and hydroelectricity. Funding for the Manufacturing Extension Partnership, which seeks new technology to make U.S. manufacturing more efficient, would be doubled. These are only part of Obama’s excessive $150 billion green-jobs plan.

  • Health Care: $100 billion. This includes more health insurance for laid-off workers and funds for states to finance Medicaid. The program also allocates $20 billion toward Obama’s ultimate goal of $50 billion to modernize medical records.

  • Education. Pell grants for college students and spending on Head Start programs would be increased. Funds also would be raised to help special education students.

    “I’m skeptical about green jobs. Why do we as a government propose all this green spending? Look at what happened when the government insisted on boosting the housing sector,” Steve Horwitz an economist at St. Lawrence University in Canton, N.Y., tells Newsmax.

    In fact, all of these pricey programs are likely to last a long time, whether they help the country out of its economic morass or not, experts fear.

    "If all of the infrastructure and the programs to temporarily help individuals, to temporarily [help] companies, if all of this becomes bureaucratic institutions that are in place from now until forever, we're in trouble," Thomas Donahue, president of the U.S. Chamber of Commerce, which represents more than 3 million businesses told Time magazine recently. "You stop and think of some of these things and you say, 'All right, that's just for two years.' Well, who's going to be in charge two years from now, saying 'We're not doing that anymore'?"

    Strikingly, things are so bad in the economy that Obama admitted as much in a speech earlier this month and still hasn’t engendered much resistance to his plans. As the economy has worsened, the president-elect has been asked repeatedly which of his campaign initiatives he would be willing to cut. The answer? Not many.

    "There is no doubt that the cost of this plan will be considerable," Obama said. "It will certainly add to the budget deficit in the short term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes and confidence in our economy."

    The reality of the Obama spending plan flies in the face of the consensus has emerged among mainstream economists that the recession can’t end without a massive fiscal stimulus program. Everyone from Larry Summers, incoming director of the White House National Economic Council, to Martin Feldstein, chairman of President Reagan’s Council of Economic Advisers, has jumped on board.

    But sometimes the consensus is wrong, and this, some financial experts maintain, is one of those times.

    The Congressional Budget Office predicts that the deficit will explode to $1.2 trillion this year, even before the stimulus package, which could another $1 trillion to the gap over the next two years.

    A $1.2 trillion deficit would amount to about 8 percent of gross domestic product, smashing the post-World War II record of 6 percent, set in 1983 under President Reagan. If the stimulus package pushes the deficit to $1.7 trillion this year, that would total a whopping 10 percent of GDP.

    Not everyone is comfortable trading deep deficit spending for the promise of recovery, however.

    “We’re in a situation where the budget deficit will top $2 trillion over the next two years, and they’re talking about adding $700 billion-$800 billion in new spending,” J.D. Foster, a senior fellow at the Heritage Foundation, tells Newsmax.

    “If deficit spending stimulated the economy, with $2 trillion already out there, the economy should be performing like a double shot of espresso.”

    Instead economists are forecasting a contraction of up to 5 percent for the fourth quarter of last year and the current quarter.

    “The reason why the package is not stimulative and that the additional deficit spending won’t help is that the federal government has to borrow from the private sector to spend it,” Foster says. “Whoever was going to spend that money in the private sector won’t be able to do so. Deficit spending just rearranges demand in the economy, it doesn’t change incentives to produce.”

    “The transfer [of wealth] drives a wedge between wages paid and wages received,” adds Laffer. “That larger wedge creates a disincentive to produce.”

    Laffer asks rhetorically: “If you’re going to give some resources to those who don’t work, why not give 100 percent? GDP would go to zero.”

    Many critics have said it was deregulation that sparked the financial crisis and recession, but Horwitz says the problem was too much regulation, and that the stimulus package represents just another example.

    “There was this government focus on the housing market, giving power to Fannie Mae and Freddie Mac and keeping interest rates low,” he says. “Now we’re repeating the problems that got us into trouble.”

    And of course, bulging deficits always are accompanied by jumps in inflation and interest rates. “We are taking about issuing an enormous amount of debt at the same time that governments around the world are talking about something very similar,” Foster says.

    “Globally, additional deficit spending could top $1.5 trillion this year. That’s an enormous number, large enough to have a material effect on real interest rates, driving them up and thereby slowing the economy.”

    As for the $310 billion of tax cuts in Obama’s program, many of them represent temporary measures, such as a $500 rebate for individuals, $1,000 for couples. And even those who don’t earn enough to pay income taxes would be handed a rebate for automatic Social Security and Medicare deductions from their paychecks.

    Experts like the idea of increased tax cuts, but fault Obama for seeking only temporary reduction. His tax plan is misdirected.

    “There will be more money left in families’ pockets, which is good, but that’s not stimulative,” Foster says. “The federal government has to borrow to give you rebates or lower withholding taxes. It’s a reduction in tax barriers that stimulates the economy.”

    Horwitz favors a reduction in capital gains taxes to spark business investment and Laffer would like to see a decrease in top marginal tax rates.

    Only one element of Obama’s spending plan makes sense, experts say: infrastructure improvement.

    “If you’re going to have a stimulus program, you may as well be sure you are spending on things the government can do that others can’t,” says Horwitz.

    “If you’re going to borrow, do so for the long-term. In that sense, infrastructure makes sense.” But that is about the only part of the boondoggle that is defensible, he and others say.

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