Proposed Federal Budget Based on Unrealistic Forecast

Feb. 1, 2009

At first glance, President Obama’s proposed budget appears to be an innocent gesture.

It contains his Making Work Pay tax breaks for about 110 million families.

Elementary and secondary education would get $3 billion, the president’s Race to the Top initiative would receive $1.35 billion, and Pell grants to help for students afford college would jump $17 billion.

Local and state infrastructure projects would get $100 billion + while $4 billion would target national and regional infrastructure.

The Bush tax cuts for the wealthy would expire.

Big banks would pay a so-called financial crisis responsibility fee.

To stimulate job creation, small businesses would receive a $5,000 tax credit for each new worker. New businesses would get 50 percent of that amount. Businesses’ Social Security taxes on payroll increases would be reimbursed – increasing paychecks or hours worked would qualify.

Afghanistan and Iraq wars would be funded at $159.3 billion.

Green energy research and development would receive $6 billon while $3.7 billion would be spent on civilian R&D.

Department of Homeland Security would increase by 2 percent to $43.5 billion. New full body scanners at airports would be budgeted at $734 million.

Appearances on the federal budget and other public policies are important.

Not to be gauche, but the budget is a joke just as President Obama is the subject of caricatures.

He’s generating laughs for Jon Stewart who said on The Daily Show: “You set up a presidential podium and a teleprompter in a sixth-grade classroom?. .. I’m not a political adviser, campaign strategist, etc., but that’s not a great photo op in a middle school classroom.”

And there are valid reasons why the budget proposal is also a joke.

Consider the analysis of Dr. Peter Morici, a former Chief Economist at the U.S. International Trade Commission business professor at the University of Maryland who has a more serious take:

“…the document assumes that real GDP grows at better than 4 percent a year over the four years from 2011 to 2014, and the economy does not encounter a serious recession. If your staff economist tells you that is realistic, fire him.”

And here’s a Dr. Morici line I wish I coined: “Rosie Scenario wrote this budget.”

I concur with him that the fiscal viability of the U.S. is threatened by deficit budgets to the tune of $1 trillion and investments in government bonds long-term is dicey.

“It is not that Washington won’t pay, but longer term, an international run on the dollar and inflation are real risks,” according to the economist.

The budget follows another recent erroneous government statement of the facts. The Commerce Department claimed the gross domestic product accelerated by 5.7 percent in Q4 2009. But 60 percent was essentially an accounting shell game or put more politely – an accounting adjustment.

Consumer spending remains low along with real investment. Economists will tell you such indicators tell the accurate story about economic growth. That means the real GDP is 1.8 percent.

The national unemployment rate is about 10 percent and every week an average of 450,000 American workers file for unemployment. With benefits expiring and millions of underemployed Americans and others struggling as independent contractors at odd jobs, my sense is the real unemployment rate is approaching 25 percent. Combined with all the business cash-flow headaches is why we call it the Great Recession.

Realistically, stimulus spending only saved or created government jobs. Most of those beneficiaries join public-sector unions clamoring for more pay and benefits – translation, more political clout. Only a productive free-enterprise system will create jobs for a booming economy.

Businesses don’t have money to create jobs because they don’t have enough customers for cash flow. And their credit lines are practically non-existent – the big bailed out banks aren’t lending the money they received at near-zero interest rates from the Federal Reserve. Bureaucrats in both the Bush and Obama Administration failed to establish checks and balances for the taxpayer bailout.

It’s past time for the government to treat businesses more candor with productive forecasts and public policies. We’re not naïve. Our economic and economic freedoms remain under attack.

Seattle business consultant Terry Corbell provides high-performance management services and strategies.