February 25, 2008

USA Today: Who Pays The Bill?

So far, the lack of daylight between the agendas of the two Democratic contenders for the party's presidential nomination has kept the focus mostly on experience and campaign tactics. USA Today took a look at the actual economic policies of Hillary Clinton and Barack Obama and especially at the bottom line. They wonder who will pay the bill for the latest Democratic Party giveaway:

In 2009, when the next president takes office, the government is expected to spend $400 billion more than it takes in, adding to a national debt that tops $9 trillion. Yet Clinton and Obama both offer a long list of new spending proposals that suggests a lack of seriousness in confronting the nation's fiscal condition.

Obama has received more criticism, perhaps deservedly so, because his list is somewhat longer. But Clinton also appears to be overpromising on what she would do and underdelivering on how she would pay for it. ...

While it's hard to come up with a precise price tag given the lack of specifics in many of their proposals, these plans are likely to cost the Treasury well into the hundreds of billions of dollars a year. The National Taxpayers Union, a conservative group that favors lower taxes and smaller government, gives a very rough estimate of $287 billion for Obama and $218 billion for Clinton.

How would the candidates pay for all these new programs without driving the deficit to new heights? Some have specific funding sources; some don't. The candidates rather vaguely claim that costs would be covered primarily by repealing President Bush's tax cuts and ending the Iraq war.

This is where the math gets fuzzy.

A rollback of Bush's tax cuts for the wealthiest Americans could generate perhaps $75 billion next year. The Iraq war savings are much harder to figure. The war has been costing about $100 billion per year. But a Democratic president, once in office, might decide that national security demands a gradual withdrawal, or a redeployment to Afghanistan. Health care for Iraq war veterans will run into the billions for decades. It's unlikely that winding down the war will produce a large, quick peace dividend capable of supporting a host of new programs.

The real answer: the taxpayers. Both candidates essentially offer the same discredited statist solutions that now burdens Europe Neither have honestly addressed the costs to taxpayers, nor how it will add to both the deficit spending and the federal intrusion into markets that do better at producing results.

Repealing the Bush tax cuts, both candidates claim, will pay for their fiscal agendas. This assumption is false on two fronts. First, both candidates plan to spend far more than the tax cuts and the war costs, even in static analysis. At best, the income derived from both would cover 75% of Hillary's plan and 60% of Obama's.

That doesn't account for the fact that the so-called war costs also include a lot of normal fixed military costs, and that a withdrawal will actually drive up costs in the short run. Also, the impact of a hefty tax increase -- which is the effect of allowing the Bush tax cuts to expire -- will be to take capital out of the market, resulting in decreasing revenues, not increasing revenues. Both Hillary and Obama rely on static analyses to hide the true effect of the tax-cut repeal.

That will force both candidates to either increase deficit spending or to hike taxes even further. Both claim they will increase taxes on the wealthy and on corporations, while giving tax breaks to the middle class. That won't work. The tax increases will have to hit the middle class as well, either directly or indirectly in higher costs associated with heavier burdens on producers -- and employers. The gaps are simply too large to be made up by hitting "the rich", unless one defines "rich" significantly downwards.

Besides, this shouldn't really take a genius to deduce. Anyone demanding an additional $287 billion a year in spending when we are facing the entitlement debacle from the retirement of the Baby Boomers has to have their head examined. Perhaps one can make an argument for tax increases to cover those costs, but increasing federal spending by hundreds of billions in this situations is akin to looking for an additional iceberg to hit before the Titanic sinks entirely.

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