Somewhat peevishly, the President went to some lengths to portray his current budget as fiscally disciplined. One supposes that he gave his people the mandate to find some impressive number of programs to cut, amounting to some impressive dollar amount. In the event, he got 121 cut programs (most of the cuts had already been announced, like the F-22 Raptor), amounting to $17 billion.
Now you know that Congress will restore most, all, or more than all, of those cuts. And you know that Obama knows that, too. So obviously, the whole exercise was intended to give him a sound bite and nothing more. But look, that matters tremendously, because from now until the end of his term in office (and beyond), Obama will say that he was the first President in goodness-knows how long to actually cut the budget.
For proof, he'll have the news headlines: "Obama cuts $17 billion in spending; Starts making the hard choices; Down-payment on Fiscal Responsibility." Repeating lies endlessly makes them true.
George Bush left office with a record federal deficit of about $475 billion. (It had dipped below $200 billion at mid-decade.) Over the course of his eight years in office, he took our public debt from $3 trillion to $6 trillion.
Obama's first budget will be in deficit by anywhere from $1.2 trillion to $1.75 trillion. (It will be worse if the economy, employment, and business income remain weak.) Obama promises in every speech to cut the federal deficit in half. He doesn't mean down to half of Bush's $475 billion. He means down to half of his own one-to-two trillion dollars. And even that he can only achieve by assuming the economy starts growing by 4% next year, which is not only silly given the banking crisis, but also far above the secular trend in any case.
The President is asking us to grade him on a curve. With one hand he wants to expand government spending far above what it's ever been in peacetime. With the other, he's going to trim a few things around the edges and ask to be credited as a fiscal conservative. But Obama will add more to the public debt in the next two years than George Bush did in eight.
Let's talk about that a little bit. The pledge from this President is that 95% of Americans should pay lower taxes. Almost 50% of them pay no income taxes now, but only payroll taxes. Let's assume that those people will be getting negative income taxes (which has already started happening). We know that taxes on the top earners will rise "to the levels of the Clinton era, which after all was pretty good for wealthy people."
Ok, so what do you do now to fix the incredible gap between that small revenue enhancement and what Obama (and Congress) actually want to spend? There will be big-time rule changes on high earners, on businesses, and on capital. (In the latter case, it helps a lot if you de facto control the banks, because they can't scream as loud.)
There's no way for productive people and capital to escape far higher taxation in the next few years, even if the top marginal income-tax rate remains below Clinton's 39.6%. The math just doesn't work otherwise. Obama, again grading himself on a curve, will tell you that he intends to find some savings in medical spending, so that his trillion-dollar-plus expansion in such spending won't be quite as large as it would have been otherwise. But again he knows full well that what some people consider wasteful spending, others consider their livelihood. He's asking us to give him full credit simply for making the effort.
Someone has to say it, starting now: there is a European-style VAT in our future. That is simply the only way to fund a vastly larger government without crippling wealth production, and without a debilitating inflation. Get used to it. The President's surrogates will start floating the idea after the midterm elections, and he himself will propose it right after election day in 2012.