Sunday, January 6, 2013

Obama's Main Mistake

Compounded interest is interest that is added to the principal so that it also earns interest over time. For example, an initial deposit of $1,000 at 20% interest per year will be worth $7,000 after 10 years. Not bad for a relatively small investment.  Income interest, however, isn't the only thing that can be compounded over time.

Over the next few weeks we are going to here an awful lot from Republicans about the debt of the United States, which now stands at $16 trillion and has gone up $5 trillion over the last four years. The reason this is important is because for most of the last four years, Republicans have done a masterful job of blaming the economic woes of the country on that debt.

And, naturally, that new debt all belongs to one Barack Obama, the current president we're all told who has added more to the national debt than all the previous presidents combined. 

Of course neither of those claims is even remotely true.  The facts are that the debt had absolutely nothing to do with either the cause of the Great Recession or the slow pace of the recovery from it. Furthermore, the lion's share of the new debt that Obama supposedly added to the existing debt was from George Bush, courtesy of his huge tax cuts, two wars and Medicare Part D.  Added up they come to $500 billion per year. Then you have the cost of the recession itself, which amounts to roughly $250 billion annually in lost receipts to the treasury.

That's a total of $750 billion per year or $3 trillion over four years. The Iraq war is now over and in another year the Afghan war will come to an end. But the nagging issue that remains is the bulk of the Bush tax cuts for those families under $450, 000 which, now that they've been made permanent, will cost an estimated $240 billion a year, and Medicare Part D which will cost another $100 billion a year. There just aren't enough cuts in discretionary spending to offset that much of a revenue drain and there isn't one legitimate economist who believes otherwise.

And, therein, lies Obama's main problem and mistake. From day one the American people were never made to understand what was really driving the debt. Yes, they accepted that the rich needed to contribute more to help reduce the deficit, but they understood that to mean a tax increase. The idea that the tax cuts themselves were never sustainable in the first place was never effectively drummed into the collective consciousness of the country.

The result is that, while most people blame Bush for digging the hole the country fell into in the first place, they hold Obama accountable for adding to it. Most people still do NOT adequately understand that of the $5 trillion added to the debt over the last four years, less than a third of that belongs to Obama. The stimulus ($800 billion) and auto bailout ($25 billion) represent the bulk of the rest of the new debt. Discretionary spending has gone up only slightly during the last four years.

The person most responsible for this disconnect is the President himself. Yes he had a little help from a mainstream press that neither understood the basic facts nor were prepared to do the investigative research needed to get at the truth, but the buck, as Harry Truman used to say, stops with Obama. His inability to succinctly draw a line from A to B has plagued him throughout most of his first term and now threatens to undermine his second.

There's no way around this anymore. No matter what Obama does from this moment on, he has married himself to two thirds of George Bush's debt. Even if the economy grows by 4 percent per year over the next four years, he still can't get out of this hole. Without substantial increases in revenue, he will exit office in 2017 with an enormous debt hanging over his head.

Yes, it would've been far worse had Mitt Romney won the election. But that will hardly be a consolation prize when the final chapter is written on this presidency.

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