2010 April 03 Saturday
Obama Sees Overtaxed Claim As Misinformation

Barack Obama spent over 17 minutes telling a woman why she was wrong to feel overtaxed. Really.

Toward the end of a question-and-answer session with workers at an advanced battery technology manufacturer, a woman named Doris stood to ask the president whether it was a "wise decision to add more taxes to us with the health care" package.

"We are over-taxed as it is," Doris said bluntly.

Obama started out feisty. "Well, let's talk about that, because this is an area where there's been just a whole lot of misinformation, and I'm going to have to work hard over the next several months to clean up a lot of the misapprehensions that people have," the president said.

He then spent the next 17 minutes and 12 seconds lulling the crowd into a daze. His discursive answer - more than 2,500 words long -- wandered from topic to topic, including commentary on the deficit, pay-as-you-go rules passed by Congress, Congressional Budget Office reports on Medicare waste, COBRA coverage, the Recovery Act and Federal Medical Assistance Percentages (he referred to this last item by its inside-the-Beltway name, "F-Map"). He talked about the notion of eliminating foreign aid (not worth it, he said). He invoked Warren Buffett, earmarks and the payroll tax that funds Medicare (referring to it, in fluent Washington lingo, as "FICA").

If we aren't overtaxed now we are going to be. The US budget deficit is going be well over $1 trillion per year over the next 10 years and that is before Obama gets the government doing everything he wants the government to do. He's not done spending yet. He wants more spending programs.

The Democrats want to close the budget deficit with taxes. So it is not acceptable to Obama for someone to already feel overtaxed. He needs people to take on a 50% higher tax burden and still not feel overtaxed. So he feels a desperate need to convince people that they should not feel overtaxed. Yes, with taxes alone to close the deficit would require a 50% increase in federal taxes.

A solution that relied only on taxes would muzzle economic growth. To cover the costs of future spending — the retirement of the baby boomers and everything else — federal taxes would have to rise by almost 50 percent, immediately and permanently, according to a recent analysis by the economists Alan Auerbach and William Gale.

I do not think the vast majority of the public grasp the size of America's financial problems. After a slow growth last decade (about 2% GDP growth per year on average) we are now feeling the long lingering effects of a bank crisis. That's a really big deal. Bank crises have consequences that last far longer than recessions due to other causes. Plus, Peak Oil is approaching. The US economy is going to underperform the assumptions that go into current US government deficit projections. Far less tax revenue will flow in from an economy that will be smaller than business-as-usual economic modelers predict.

But business-as-usual modelers are already projecting deficits so large that we'll eventually hit a sovereign debt crisis. That next financial crisis will happen in part due to US Treasury bond interest rates too large for the US government to keep running deficits. The US is headed for a Greece-style crisis of confidence.

America's elites and populace act as if the United States is so rich and powerful that it is immune to a great reckoning. The current US fiscal course reflects their delusions. These delusions are headed for a collision with the limits of America's power. That collision is going to be ugly. Prepare yourself financially and emotionally.

Share |      By Randall Parker at 2010 April 03 06:00 PM  Economics Sovereign Crises

markymark said at April 4, 2010 7:08 PM:

"America's elites and populace act as if the United States is so rich and powerful that it is immune to a great reckoning."

Bingo. And I think the belief is so powerful that nothing short of the great reckoning itself will disabuse the populace as a whole.

For me preparing yourself "emotionally" starts with 'expecting the worst and hoping (faintly) for the best'. I find this strangely calming and liberating. If you genuinely accept that everything is going to crash, each day that you wake up to find that things carry on pretty much as normal is a good day.

You will mostly need to keep your thoughts to yourself though as if you are saying, in effect, that the majority of the populace is delusional then the corollary is that the populace by and large thinks you are nuts.

If you do accept that the great reckoning is coming then it's hard not to get angry in advance for all the pain that will be caused to the most vulnerable groups in society (elderly, the poor/marginal) as governments cease to be able to provide basic support services.

If you were a Chinese Govt official what confidence would you have that US politicians will raise taxes on voters and cut services to voters to pay debts owed to non-voting foreign "currency manipulators". The Chinese may well want to through good money after bad a while longer for political reasons but the reckoning can't be far away.

gig said at April 6, 2010 11:47 AM:

the governor of China´s Central Bank has already criticyzed "over generous social programs" in "unnamed" European countries for creating volatility in the Global Markets

Randall Parker said at April 7, 2010 8:37 PM:


I see no need to keep my thoughts to myself. Granted, there are plenty of social situations and work situations where you should keep your thoughts to yourself. But in other situations one can say what one thinks and if the audience is smart enough they'll listen and consider your arguments. Don't be intimidated by the mainstream consensus view.

Pain for vulnerable groups: I see all the apathetic people as responsible. Their negligence and short-term focus helped make the coming financial disaster inevitable. Why get angry on their behalf? What did they do to deserve a better deal?

Crash: When oil production starts shrinking every year what happens then? I hesitate to use the word "crash" because different people mean different things by it. I expect lots of business failures including failures of large financial institutions. I expect declining living standards. Not sure if we'll hit a point of panic where the financial crisis causes a very rapid economic contraction that is faster than the decline rate in available oil. Maybe.

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