Wednesday, January 16, 2013

A Tale of Two Obama’s

Once upon a time Obama had this to say about the debt ceiling “The fact that we're here today to debate raising America's debt limit is a sign of leadership failure. Leadership means 'The buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America's debt limit.”

At his last press conference Obama had this to say about the debt ceiling “If congressional Republicans refuse to pay America’s bills on time, Social Security checks, and veterans benefits will be delayed. We might not be able to pay our troops, or honor our contracts with small business owners. Food inspectors, air traffic controllers, specialist who track down loose nuclear materials wouldn’t get their paychecks. Investors around the world will ask if the United States of America is in fact a safe bet. Markets could go haywire, interest rates would spike for anybody who borrows money. Every homeowner with a mortgage, every student with a college loan, every small business owner who wants to grow and hire.”

As usual, Obama is not being entirely truthful in the above statement. The federal government has a protocol to follow in the event of a government shutdown. First, the federal government does not completely shut down. Tax revenues are still being collected and those funds are used to 1. Pay off the interest on treasury bills so America does not default on their obligations. Hence, investors around the world do not have to worry about the U.S. credit rating being downgraded. 2. Remaining revenues are then used to pay off commitments to American citizens such as Social Security, Medicare, Veterans pay, and so forth. So these items would also be covered if the event of a government shutdown. If there is any money left over, the government will then have to prioritize what jobs to keep active, such as Air Traffic controllers, food inspectors, nuclear materials specialists, etc.

Obama also had this say at the press conference about spending cuts “Over the past two years, I’ve signed into law about $1.4 trillion in spending cuts. Two weeks ago, I signed into law more than $600 billion in new revenue, by making sure the wealthiest Americans begin to pay their fair share. When you add the money that we’ll save in interest payments on the debt, altogether that adds up to a total of about $2.5 trillion in deficit reduction over the past two years, not counting the $400 billion already saved from winding down the wars in Iraq and Afghanistan.”

Once again there are lies in the above statement. The one thing Obama said that was truthful is the 600 billion in new revenue – this was the result of raising taxes on the wealthy over the fiscal cliff negotiations. The rest of the statement about spending cuts is all fabricated. The 1.4 trillion in spending cuts Obama is referring to are 800 billion saved from ending the Wars in Iraq and Afghanistan and 600 billion in Medicare cuts. However, the Medicare cuts were used to pay or fund a portion of ObamaCare costs and unfortunately, future budgets have no allocation for War revenue beyond 2015 and that is only 44 billion dollars. Hence, there are no 1.4 trillion in spending cuts and therefore, there are no 500 billion in interest savings. Most economists believe the U.S. must trim at least 4 to 5 trillion in debt over the next five years to keep the U.S. financially stable. Thus far Obama has only reduced the debt by 600 billion over 10 years and this is due solely through tax increases, there are no spending cuts.

Bottom line is Obama is not even telling half-truths. He makes these statements with a straight face, but less than 30% of what he is saying is factual or truthful. Obama was right back in 2006 when he said it was bad leadership and fiscally irresponsible for Bush to keep raising the debt ceiling. Now, when the shoe is on the other foot Obama must lie to win public favor.


  1. The one single thing, Patrick, that you say that President Obama was truthful about -- the $600 billion in new tax revenues -- is the worst lie of all. I say it's a lie because (a) it is false and (b) the President knows it to be false.

    He is counting on- and correctly so -- America's economics illiterati (a) not distinguishing between a tax increase and a tax RATE increase, and (b) not knowing that every single time on Planet Earth that anyone anywhere anytime has raised tax rates on top earners, revenues to the Treasury from those earners has DECREASED, not increased.

    Because of all the other disincentives to investors' being productive, it is difficult this time to predict how large the reduction in revenues will be, but I'll hazard that it'll be somewhere between $1.3 trillion and $1.7 trillion, a far cry from an increase of $600 bil.

  2. Dr. Pete, I completely agree with your analysis. I did a linear regression model that I posted as a blog a year back that showed increasing the effective tax rate of Americans by 1% (about the same as raising taxes on the top income earners by 5%) would result in a shortfall of about 700 billion dollars in consumer spending and no net gain in tax revenues. This is the 50% point meaning the result could be worse (considering we are still trying to get out of recession) or it could be better. This was based on historical data back to 1920.

    1. There is no relationship in the raising rates of Americans in the aggregate and raising the rates on top earners, and the issue has to do, not with consumer spending, but rather capital investment.

      A research study by Barack Obama's former Chairman of the Council of Economic Advisors, Christine Romer, an economics professor along with her husband at Cal Berkeley, determined that the "hump" in income tax rates is at 28%. So raising rates up to 28% increased revenues to the Treasury. Raising rates higher from there yields lower revenues.

      Obviously, raising the rate from 35% to 39.6% on the top 2% of earners will cost the Treasury big bucks. But, if like President Obama your goal were to implode capitalism and the USA, you'd do and say precisely what he has.

  3. I am sorry Dr. Pete, but consumer spending is more statistically significant and has more correlation to government revenues than capital investment. I have done the numbers. I have also done a study on the Laffer Effect "hump" tax rate and it is 32%, but more importantly the effective tax rate on all Americans cannot exceed 15%. I will put my numbers up against any economist. Besides, if you do not figure the numbers out for yourself, it is just hearsay. Heck, anyone could just quote Paul Krugman.

  4. The deceit and hypocrisy are really stunning. More and more it feels like we're living in an alternate universe.