HOW TO KEEP OBAMA $2 TRILLION CAMPAIGN PROMISES

By some estimates the total cost of Barack Obama’s campaign promises could come to $2 trillion. The new president will have to disappoint many of his voters — or resign himself to an enormous government deficit.

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President-elect Barack Obama has a lot of election pledges to live up to

BY GABOR STEINGART

Barack Obama has avoided the public since he was elected the 44th president of the United States. But the public has not been equally reticent. In fact, it both seeks and finds him.

A so-called protective pool, consisting of journalists from a wide range of publications, follows the new president-elect around the clock. The dispatches filed by these reporters, whose lives currently alternate between rushing around and spending hours waiting, read like excerpts from an espionage report. They write about the most mundane aspects of his life, including when he goes to the gym, how many hours he spends in his Chicago office and which restaurants he and his wife Michelle frequent.

But the journalists’ detective work isn’t exactly fruitful. On Tuesday, someone reported: “The pool is unable to get a clear look at him.” On Wednesday, the frustration continued: “The pool cannot see him getting into his car.” On Thursday: “The pool can only get a fleeting look at Obama.” And then, on Thursday evening: “Shortly after Obama left the underground parking garage, he was followed by another, unidentifiable motorcade.”

The reason for the new political star’s public reserve is obvious: The Democrats are busy with their own affairs. Forming a new government is a delicate and complicated business.

A tough and probably dramatic wrangling over the priorities of Obama’s presidency, which begins on Jan. 20, 2009, is taking place behind the closed doors of the president-elect’s headquarters in downtown Chicago. In light of the tense financial situation, both in the country and in the government’s budget, the foundation is already being laid, at this early stage, for the young president’s long-term success or early failure.

Learning to Say ‘No’

During the campaign, he repeated his mantra — “Yes, we can” — several times daily. But now it will be more important for Obama to know when to say “no.”

The outcome of this internal debate will depend in part on which groups have a greater say in the party in the future. The so-called “deficit hardliners,” the party’s frugal wing, face off against a phalanx of union leaders, leftists and professors who refer to themselves as “progressives.”

Time is running short. The new treasury secretary cannot be appointed until the basic tenets of financial policy have been defined. A member of Obama’s transition team of roughly 400 people, which is currently preparing to assume the business of governing the country, says: “Treasury is the toughest job we have to assign. First we need clarity on our future direction.”

The Obama team has been dealt probably the most complicated cards in recent US history. According to estimates by independent experts, the promises Obama made to his voters during the two-year campaign will cost more than $2 trillion (€1.58 trillion) to fulfill. That includes $1.5 trillion (€1.2 trillion) for a new health care policy in the coming 10 years, $150 billion (€120 billion) for an infrastructure program and $360 billion (€284 billion) for a major tax reform to be implemented by 2013. Obama also gave taxpayers the magnanimous promise that 95 percent of them would see their taxes lowered.

But then, in the final spurt of the campaign, the underlying economic situation changed. The financial market collapsed, growth fizzled and the labor market began to falter. Both parties were forced to give President George W. Bush the power to spend $700 billion (€553 billion) to save the banks, a bailout plan that will weigh heavily on the national budget for years to come. And no one knows whether this sum will be sufficient in the end.

Despite the government’s cash injection, the financial crisis has now reached the so-called real economy. Insurance companies in the United States are ailing, many credit card companies are on shaky ground and the entire American automobile industry, after losing money for years, now has serious liquidity problems. The country’s largest carmaker, General Motors, cannot survive without government help. Chrysler has announced plans to lay off 25 percent of its salaried workforce.

But in the run up to the election, Obama was both unwilling and unable to scale back his lavish promises. He remained generous, even adding more promises that would cost additional billions.

Admirable, Desirable — Not Payable

Under Obama’s plan, the car industry — which he calls “America’s backbone” — can expect an additional injection of government cash. He has also promised an economic stimulus package worth about $150 billion.

Obama also proposes extending unemployment benefits and a plan to help the poorest of the poor by increasing the value of the food stamps used by 30 million Americans.

Each of these promises may be reasonable, admirable and desirable. But one thing they are not is payable, at least not in their entirety. If the new president attempted to make good on all of his campaign promises, America, in the wake of crises in the real estate sector, banking and the auto industry, would face a new budget crisis.

According to current estimates, the budget deficit — the difference between government revenues and expenditures — will amount to up to $1 trillion in the 2009 budget, which ends next September. This would represent a doubling of the 2008 deficit. In the last three months of this year alone, the US Treasury Department plans to float US treasury bonds worth $550 billion (€435 billion) on world financial markets. Additional treasury bonds worth $368 billion are scheduled to be issued in the first quarter of 2009.

At more than 60 percent of the gross domestic product (GDP), the US government debt is on par with government debt in Germany, France and Great Britain, and is only one-third as high as Japan’s government debt. Nevertheless, debt is growing faster in the United States than in any other Western country.

According to initial forecasts, new borrowing will increase to significantly more than 6 percent of GDP. Germany, by comparison, with less than 1 percent in net new borrowing, seems in a far better position.

There is government debt and there is government debt. In a country with a high savings rate — Germans save an average of 11 percent of their incomes — the money remains within the cycle. The citizens lend their government money, and in return the government pays them interest.

In the United States, however, government debt, in the absence of sufficient savings, means an outflow of money to other countries. Government debt makes America’s competitors strong. The government and private citizens borrow about $1 billion a day from other countries. Three years ago, that figure was only $660 million.

The middle class is likely to be especially hard-hit by the effects of growing government debt. High budget deficits can boost inflation, thus reducing the value of income. Inflation has already reached 5 percent in the United States today.

A New Chapter in American Social Welfare?

An exploding public deficit also does not bode well for the future of the social security system. Contrary to what many Europeans believe, the United States does have a social welfare system funded by taxes and allocations. All working Americans pay about 7.5 percent of their income into the social security system, which provides pensions and health insurance for retirees, and their employers pay about the same amount into the system.

The financial outlook for Social Security and the government health insurance system, Medicare, are bleak, as they are in Europe. When all baby boomers reach retirement age, Social Security benefit payments will have increased from 9 percent to about 20 percent of GDP. Obama’s financial experts have advised him to defuse this time bomb in the government budget instead of making it even worse by injecting new risks.

The new president can hardly expect any tailwind from the economy. A wave of layoffs has begun to accelerate at an incredible rate, destroying 17,000 jobs in January, 62,000 in June and 240,000 in October. Experts say that America could see next year’s unemployment rate rise to twice the 2007 rate.

All of these figures combine to form a horrific scenario for the future treasury secretary. Because current tax revenues will decline as a result of the recession, he or she will face the difficult combination of growing expenditures and declining revenues, so that the only variable still capable of being influenced will be newly promised expenditures.

Although money is the deciding factor in the Democratic camp these days, it is not the only one. The debate also revolves around the fundamental tenets of political strategy. Should the Democrats be bold, ride on the coattails of a historic landslide and open a new chapter in the history of the American social welfare state built by former Presidents Franklin D. Roosevelt and, in the 1960s, Lyndon B. Johnson?

Pressure from the Progressives

Or should Obama move cautiously in his first term, especially in a country that has traditionally greeted strong government with sentiments ranging from skepticism to hostility? To this day, many citizens treat as dogma former President Ronald Reagan’s mantra that government “is not a solution to our problem, government is the problem.” This popular sentiment led a formerly left-leaning Governor Bill Clinton to quickly turn into a pragmatist as president, making allowances for what he called the “silent majority.”

The proponents of a progressive agenda are already building an enormous wave of pressure. Senator Edward Kennedy, who has been one of Obama’s most prominent supporters, is calling for speedy implementation of health care policy promises made during the campaign. “The cost will be substantial, but the need for reform is too great to be deflected or delayed,” Kennedy wrote in the Washington Post.

A colorful and vocal coalition of union leaders, senators and experts, like this year’s winner of the Nobel Prize in Economics, Paul Krugman, support a policy of major steps. Democratic financial leaders, like Senator Max Baucus, the chairman of the US Senate Committee on Finance, are also eager to see quick action on health care. The government, says Baucus, must take over the costs and risks of illness from citizens and businesses quickly. “Now is the time.”

The $150 billion infrastructure program Obama promised in the campaign will also be difficult to dispense with. It is the Democratic answer to the disintegrating public sector in the America of George W. Bush.

The infrastructure program is designed to repair roads and bridges, install subway systems and revolutionize the energy efficiency of major cities. It is also expected to create jobs. A potential director of such a program already exists: Bruce Katz, a vice president with the privately funded Brookings Institution, a Washington think tank. Katz’s vitalization program for urban regions is called “Blueprint for American Prosperity.”

Overall, the pursuit of such policies could end up harming the Democrats, say Democratic economic advisors like Gene Sperling.

But slashing the government programs Obama promised during the campaign is no less problematic, because he owes his victory to the historically high support from African Americans and Latinos. Nowhere is the share of people without health insurance higher than in these two groups and many of them love what other Americans hate: big government.

Developing ‘Sustainable Capitalism’

They are offset by another group: cautious blue-collar and white-collar workers. These voters, slightly right of center, expect seriousness, not new record debt. Bill Clinton is still their hero, and they have fond memories of those days of high economic growth, lower taxes and government surpluses during his administration.

Conservative America is just waiting for the opportunity to accuse the Democrats of megalomania when it comes to fiscal policy. “I am pessimistic about whether our next president and the savants in Congress can deal with the massive economic issues we face,” Harvey Golub, the former CEO of American Express, wrote in the Wall Street Journal on the day after the election.

Strong political supporters of Obama, like former Vice President Al Gore, are calling on the new administration to think in terms of long-term responsibility, when it comes to both the environment and economic policy. “We must develop sustainable capitalism,” Gore wrote after the Democratic victory.

Gene Sperling has also warned persistently against overconfidence. The same thing, just on the opposite end of the political spectrum, happened to the conservatives under Bush after their 2004 election win, says Sperling. They believed in what Bush advisor Karl Rove called a “permanent Republican majority.” And, says Sperling, they misunderstood the election as a mandate to privatize the social safety net.

Suddenly the Republicans found themselves trapped in their own ideological definitions, prompting Rove advise his party not to repeat the same mistakes.

See Related: PRESIDENTIAL TRANSITION

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