On January 1, 1863, Abraham Lincoln signed the Emancipation Proclamation under great pressure from northern business interests. This document freed African Americans from slavery, however, the years after would be hard fought as we strived to achieve equality. Over 145 years later, America is celebrating the election of the first African American to the highest regarded office in the world. Unquestionably, the inauguration of Barack Hussein Obama as President of the United States will usher in a great wave of change in the American political system – now what?
For all his talk about “change” over the last 12 months, Obama will begin his presidency much as George Bush did: with a fiscal stimulus that is expected to boost the economy and promote some pet objectives, dramatic expansion of federal government power and oversight, and more record budget deficits. Of course, I agree that government intervention is necessary to turnaround the economy from a near death experience; however, Mr. Obama has an opportunity to accomplish what Bush never did – long-term fiscal reform. The same political capital that Obama used to skillfully capture the White House should be put to work in the halls of Congress to pass legislation that will provide a long-term fix to Social Security, Medicare, and our overly burdensome tax code.
Bush inherited a surplus of 1% and after eight years of misguided spending the deficit reached more than 2% of GDP last year. Bush gave the voters a ton of goodies without developing a plan to pay for them. He pushed through tax cuts without tax reform, subsidized prescription drugs without Medicare reform, and etc. Undoubtedly, Obama’s $825 Billion stimulus plan will include tax credits for low-income workers, expanded unemployment benefits, and public investment into alternative energy, stem cell research, and infrastructural improvements. The merits of such projects are debatable and the impact to America’s balance sheet will create long-term challenges.
According to the Congressional Budget Office, only 7% of the money intended to make investments in roads and bridges will get spent in the initial year of appropriation. Therefore, the stimulus plan will not “stimulate” the economy, but instead will only inject capital into the system. In fact, the stimulus from this injection will potentially vitalize the economy after the end of the recession and cause an unintended battle with inflation. A quick study of the 1930’s and the actions of the Roosevelt administration will reveal the “New Deal” and its intended expansion of the federal government had no lasting effect on the economy, and most of the programs enacted were curtailed once they realized the war created a broad recovery.
A more plausible idea would be to immediately cut payroll taxes. This idea will benefit labor and their employers by providing workers with more money in their pockets for necessities and looming debts, while reducing the employer contribution to payroll taxes and increasing available cash for business stabilization. In addition, the integration of such an idea would not require the same government bureaucracy that is involved with the distribution of tax credits and rebate checks. Instead of granting capital to state governments for infrastructural improvements, Obama can achieve the same outcome by offering a federal guarantee on the debts issued by municipalities. This will provide the states with the necessary backing to secure capital in the bond markets and complete much needed infrastructural projects while reducing the expansion of the central government’s balance sheet.
A crowd of over 2 Million Americans (black and white) travelled to Washington, D.C. to watch Barack Obama take the oath of office and complete the 44th successful transition of power in the world’s greatest country. A spirit of “hope” permeates through-out the homes and offices of all Americans, but we must not allow our emotion to distract us from reality. America is dealing with the most severe global recessions in 80 years, ongoing conflict in the Middle East and Africa, uncompleted missions in Afghanistan and Iraq, rising dominance from China and Russia, soaring domestic unemployment, a failing health-care system, record deficits, and distressed local communities.
Mr. Obama is off to a good start with the appointing of an intellectual and centrist-minded cabinet of advisors and I applaud him for not engaging in the “cronyism” that was rampant under the leadership of Bush and Cheney, but long-lasting change will require the “hard choice” between reforming expensive entitlement programs and bankrupting the federal government. Obama has proved himself to be intelligent and far more pragmatic than what he revealed on the campaign trail. His commitment to fundamentally “change” America will only be achieved through long-term fiscal reform and this goal should be pursued while optimism remains intensified.
