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The State Of The Union

from the January 31, 2012 eNews issue



President Barack Obama's State of the Union speech last week presented a struggling but succeeding America, a country successfully climbing from its financial hole and taking strides to fix its problems. His speech presented an America with hope. The President had a great deal to say that could appeal to both sides of the political aisle, from giving tax breaks to new businesses to keeping college education costs down. As is often the case, however, the reality is much harsher and grandiose plans much more difficult to accomplish than are expressed in a few pleasant words on a January evening.

There's a lot to be said about giving a man hope. Hope encourages and inspires. It spurs people to attempt what appears to be the impossible. President Obama has long been good at presenting the future as one of hope. Unfortunately, thus far his ability to paint lovely pictures has proved much more deft than his ability to make those pictures a reality.

President Obama promoted a number of healthy ideas for America in his speech. He called for policies that would encourage manufacturers to return their factories from abroad to the shores of the United States. He called for cleaning up Congress and for keeping taxes low for the middle class. He praised America's military and reminded us that the hunt for Osama bin Laden is over.

He also said some things worth looking at twice.

Trimming The Fat:
Late into his speech, President Obama said, "I've asked this Congress to grant me the authority to consolidate the federal bureaucracy so that our Government is leaner, quicker, and more responsive to the needs of the American people." His offer to streamline the government with Congress' authority appeals to those who want a smaller, less behemoth government. He did not give examples, so it's not certain what his "leaner" government would look like. Regardless, if the President truly wants to trim the fat in government, he already has the authority to do so right now. Remember when Reagan fired 11,000 striking air traffic controllers in 1981? They were replaced, but the President does have the authority to get rid of people. Obama could go on a spree of firing government workers in the Executive Branch, and America would applaud. (If he wanted to get serious, the President could eliminate the Department of Education, for example, and leave education decision making to the state and local governments. After all, the federal government's involvement hasn't helped much to improve the U.S. education system since 1980, and Obama noted in his speech that the schools should have more flexibility to make decisions.)

Instead, however, President Obama informed the American people that he is in fact creating more government. For instance, he is forming The President Trade Enforcement Unit to investigate unfair trade practices in countries "like China." He is creating a special unit of federal prosecutors and state attorneys to investigate risky mortgage lending practices. Whether or not these prove useful, they also don't fall into the category of trimming government.

Bad Mortgages:
Regarding the sub-prime mortgage fiasco that contributed to the current financial crisis, President Obama said, "mortgages had been sold to people who couldn't afford or understand them. Banks had made huge bets and bonuses with other people's money." On one hand, the President wants to investigate risky lending practices, and he rebuked banks for selling mortgages to people who shouldn't have taken out those loans. On the other hand, he said, "I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks."

It is not the responsible loan-seekers who are getting turned down for refinancing; those of questionable responsibility are the ones having a harder time getting new loans – especially right now. The banks were badly burned when streams of homeowners defaulted on their mortgages, leaving behind houses worth much less than their loan amounts, and banks don't want to risk new loans on people who aren't quite so responsible. If America refuses to offer any more bailouts, as the President warned in his speech, the government shouldn't force the banks to offer loans to people considered reasonable risks.

Oil and Clean Energy:
On the subject of energy, President Obama took a whatever-we-can-get approach. America is hungry for energy, and the President recognized that fact. He said America would expand offshore drilling, and he encouraged the tapping of natural gas resources. He pressed for the United States to be competitive in developing renewable energy.

He also said he wanted to "help" manufacturers and businesses to waste less energy by upgrading their buildings. It remains to be seen what that "help" means. Offering tax incentives would certainly help. Burdening companies with heavy "energy-saving" requirements, on the other hand, might just weigh down already struggling businesses.

The President did not mention the Keystone Pipeline, which, considering the massive controversy surrounding it, was probably politically wise of him. In January, Obama rejected a move by Republicans to approve the pipeline, which would have created thousands of jobs and brought oil from Alberta's Athabasca Oil Sands to several locations in the United States. Serious environmental concerns have brought the project to a halt, but not without frustration from those who see the oil and job production as worth the trouble, especially while millions of Americans are desperately looking for work.

Seeing Red:
Then there's deficit spending. Anything great that the Executive Branch wants to do must take into account the fact that America is having financial problems along with most of the world. The Congressional Budget Office projects the federal budget deficit as $1.1 trillion for fiscal year 2012 if current laws remain unchanged. That's an "improvement", down from $1.3 trillion last year and $1.4 trillion in 2009, but fantastically higher than the 2008 deficit of $248 billion and surpluses at the turn of the century. There are a number of factors involved in these record high deficits - from attempts to infuse the economy with massive federal "stimulus" packages, to wars in Iraq and Afghanistan, to the fact that tax revenues drop during a recession.

The harsh reality is that the federal government is in a serious hole of debt, and it gets deeper every minute that goes by. When the President says things like, we should, "give more young people the chance to earn their way through college by doubling the number of work-study jobs in the next five years," while keeping interest rates on student loans from doubling, the prudent question is then, "Okay. How are we going to pay for that?"

Mark Kantrowitz notes in The New York Times that 700,000 additional federal work-study jobs would come with a $1 billion-a-year price tag, on top of the $7 billion it would cost to continue offering students Stafford loans at a low 3.4 percent interest rate. It's true that subsidizing student loans and work study jobs are widely helpful to financially strapped students, and yet, the federal government has already had to cut back on Pell Grants to low-income students, dropping the income threshold for those can receive a full Pell Grant from $32,000 to $23,000. If the government is cutting back on Pell Grants, it doesn't have money to add more work study jobs while at the same time extending a 3.4 interest rate for subsidized Stafford loans to 7.4 million students.  It's not a matter of what would be nice to do, it's a matter of what is practical.

The same goes for infrastructure projects. The President spoke of crumbling infrastructure and said, "In the next few weeks, I will sign an Executive Order clearing away the red tape that slows down too many construction projects. But you need to fund these projects. Take the money we're no longer spending at war, use half of it to pay down our debt, and use the rest to do some nationbuilding right here at home."

The problem is that much of our war spending has been deficit spending. We've spent a good $2.3-2.7 trillion in rooting out al Qaeda for 10 years in Afghanistan. That's about $250 billion per year – less than the average deficit during the Bush (43) years. If we want to cut the deficit, we cannot divert the money we were using on wars to other projects because we were borrowing that money in the first place. The stimulus packages were already supposed to have provided money for fixing infrastructure, but every state has its extensive wish list, and the possibilities are endless. Would a high-speed rail line from New York to Washington be useful? Certainly. Would it be nice to have high speed internet in the Appalachians? Yes. Is it the right time for the federal government to spend billions of dollars on these projects? Not if we are digging ourselves into an ever deepening hole.

Taxing The Rich:
The President's answer to our money problems is to tax the super wealthy at a mandatory 30 percent rate. Warren Buffet, Obama declared, uses loopholes to pay a lower rate than his secretary. It would definitely behoove America to simplify the tax code, and if we want to talk "fair", a word the President used repeatedly through his speech, it is certainly more fair to tax everybody, rich and poor, at the same rate. The President doesn't actually want fair, though. The President simply wants the rich to take a bigger chunk of the tax burden. (Not that the middle or lower classes should be taxed more. Who wants somebody pushing by on $25,000 or even $50,000 per year to pay 30 percent of their income in taxes? Have a mercy and let them keep as much of their money as possible.)   It may indeed hurt the multi-millionaire less than the blue collar worker to pay a larger portion of his income, but fairness really is not the issue.

In the end, though, even if the law said rich folks should hand over 50 percent of their income each year, that would not guarantee those tax revenues would land in the government's coffers. As Thomas Sowell noted last November, "[T]he genuinely rich are likely to be the least harmed by high tax rates in the top brackets. People who are looking for jobs are likely to be the most harmed, because they cannot equally easily transfer themselves overseas to take the jobs that are being created there by American investments that are fleeing high tax rates at home. Small businesses — hardware stores, gas stations, restaurants — are likewise unable to transfer themselves overseas. So they are far more likely to be unable to escape the higher tax rates that are supposedly being imposed on “millionaires and billionaires,” as President Obama calls them. Moreover, small businesses are what create most of the new jobs."

What's more, the Buffet Rule does not really deal with the innate problems in the tax code. "They're using a baseball bat, rather than a scalpel" by applying the 30 percent minimum rate, said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. "By proposing the Buffett Rule, they're saying: 'We don't like how the tax code is working. We're worried that there are some very wealthy people who aren't paying a fair share,' " he said. "But instead of eliminating deductions and simplifying the tax code, they're just introducing more bells and whistles."

Choosing Our Own Light Bulbs:
The U.S. government has gotten increasingly bulky and has become patient with owing vast amounts of money. The U.S. paid off its debts after the Revolutionary War and again after the Civil War. The American government hasn't paid back what it's borrowed since the 1930s and WWII, and the prospects are not getting prettier. America is still breathing and so hope remains, but there are extremely serious matters that the United States needs to squarely face before it gets too much later.

Indiana Gov. Mitch Daniels responded to the President's speech, saying, "The President did not cause the economic and fiscal crises that continue in America tonight. But he was elected on a promise to fix them, and he cannot claim that the last three years have made things anything but worse: the percentage of Americans with a job is at the lowest in decades…In word and deed, the President and his allies tell us that we just cannot handle ourselves in this complex, perilous world without their benevolent protection. Left to ourselves, we might pick the wrong health insurance, the wrong mortgage, the wrong school for our kids; why, unless they stop us, we might pick the wrong light bulb!"

We need to take responsibility for ourselves and for each other, and demand that the federal government cut its spending and its overwhelming need to be involved in every aspect of our lives. When talking about the auto industry, President Obama spoke of depending on Americans. "We bet on American workers. We bet on American ingenuity," he said. For the state of the union to improve, the U.S. government needs to really take those words to heart, to depend on Americans without having to constantly look over their shoulders. More importantly, we the American people need to take charge of ourselves, work hard, use ingenuity, and not depend on Washington to feed us. If we want to free ourselves from debt, if we want to live in a country of liberty rather than slavery, we need to be a wise and self-governed people. If we manage ourselves well, there will be no need for a burdensome and expensive nanny-state government, regardless of who sits in the White House.

Related Links

- The Budget and Economic Outlook: Fiscal Years 2012 to 2022 - Congressional Budget Office
- U.S. Set For Fourth Year Of $1 Trillion-Plus Deficit: CBO - Reuters
- Will President Obama's Blueprint Cut College Costs? - The New York Times
- Rules For Infrastructure Stimulus - The Washington Times
- U.S. Has Record Number of Millionaires - The Wall Street Journal
- The TRUTH About Who Really Owns All Of America's Debt - Business Insider
- Talk of Taxing the Rich More Faces Political Realities - The New York Times
- You Can't Tax The Rich - National Review Online

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