Budget Blogging [Bryan]

A dialogue on the federal budget:

Friend: So, Bryan, have you seen the Obama administration's proposed budget? Looks like a huge move to socialism to me. I warned you about him. He is Karl Marx incarnate.

Bryan: Everything about his budget proposals are in line with his campaign promises. Everything. The energy policy, the health care policy, the education policy, and tax policy...everything. I know actually following through on campaign promises is new to people, but that is exactly what he is doing.

Friend: But he is stealing from the rich to give to the poor. He is raising taxes on the wealthy -- those that invest and innovate. He is a communist I say!

Bryan: This is nonsense on stilts. Absolute and utter nonsense. Below is a listing of the top marginal income tax rate across the decades. The far right column is Obama's proposed increase (up to 39.6%). Even with Obama's tax increase, it is lower than it has been for most of American history. It is lower than most of the time it was under Ronald Reagan (it was a 50% rate for most of Reagan's presidency). Was Ronald Reagan a communist? Was Eisenhower, Truman, or Nixon? Notice that America often prospered under a much heavier tax scheme. People who think this is new or radical simply do not know what they are talking about.

Friend: But is it wise to raise taxes in a recession?

Bryan: No, you're right, it wouldn't be wise. That is why the tax increases (or, more accurately, the expiration of Bush's tax cuts) won't take effect until 2011. If the economy is still in recession at that point, the budget can be revisited.

Friend: Wouldn't a better policy be a spending freeze, like Republican Rep. John Boehner (House minority leader) has recently proposed?

Bryan: No, in fact that would be the absolute worst thing that anyone could enact. A recession occurs because, for whatever reason, people stop spending. Because people aren't spending, nothing can be produced, jobs are lost, and so forth. If the also government cut spending, things would be catastrophic. This is actually what Hoover did (and, to be honest, what FDR did in 1937), both with the terrible consequence we now call the Great Depression. The fact that Boehner proposed such a thing, frankly, shows the intellectual bankruptcy of the Republican party.

Friend: But I've also heard that the Obama budget would reduce the tax deduction that the wealthy can take for charitable giving. Won't that take money away from charities when they need the money the most?

Bryan: First, none of this will happen until 2011. Second, it simply reduces the deduction to rates to those present under Reagan (reduce it to 28 cents on the dollar for people earning over $250,000). Third, it has been calculated that the reduction in charitable would be about 1% -- a small price to pay for a start toward universal health care. Fourth, although this is not Obama's position, I have doubts about the wisdom of this deduction anyway. There is almost no accountability behind the groups that allow you to claim this donation.

Friend: But Obama is really adding to the budget deficit. In the long run, this will cause inflation and dry up funding for private investment.

Bryan: I don't think we should be worried about inflation right now. For one thing, there is no sign of anything approaching inflation. For another, we seem to know how to handle inflation fairly well through monetary policy.

True, there is big deficit over the next couple years. The Obama plan has a deficit of about $1 trillion in 2010 and 2011. Fighting two wars and a huge financial crisis doesn't help things. The deficit is projected to then drop to $533 billion by 2013. This still sounds high, but it is only about 3% of GDP which (I'm told) is fairly manageable. It is not even that big by historical standards.

Let's be clear: we are facing huge problems as a country, problems that every president since Reagan has let fester and get worse. It will take time and money to correct our course.

Remember, a budget deficit cannot be evaluated unless you figure out what you are getting for the deficit and if that spending supports long-term growth. Is the president's projected deficit a good investment or not? If we are making progress in areas like health care, global warming, education, infrastructure, and so forth, we are setting ourselves up well for the future. If we are funding pointless wars, we are not. I haven't read the whole budget, but there are lots of good things therein from what I have read, things that seem like really good investments. In the area of education, for example, there is more money for college education and for preschools. These sorts of investments will make a big difference.

Friend: I see the light now, Bryan. Thanks for enlightening me.