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The Fiscal Cliff Proves Obama is a Brilliant Politician, But a Failed Leader

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As puzzling as the 2012 election result may have been for some, in so much as it was basically a vote to maintain the status quo, others have argued that the American people voted for both parties to compromise, kiss and make up. If that indeed was what Americans had voted for, then clearly neither party got the message.

Throughout the fiscal cliff negotiations, House Republicans have shown how unwilling they are to put their sacred cow on the table – tax rates – while Democrats won't touch their sacred cow either – entitlements.

Before we go further, let's take a look at an historical graph of federal spending and revenues.

As you can see, federal spending has steadily climbed higher and higher in the post-World War II era, as did revenues. Interestingly, even during the 1980s, when Ronald Reagan and a Democratic-majority Congress cut income tax rates for everyone, lowering the top bracket from 70% to 28% and the corporate tax rate from 48% to 35%, revenues continued to soar.

Now, in the 1990s, there were two things that occurred. The one that all liberals remember is that Bill Clinton raised tax rates on all Americans, hiking the top bracket from 28% to 39.6%, which liberals credit the budget surplus to. But as you can see on the chart below, Clinton and the Republican-majority Congress were able to slash spending from 23% of GDP down to 18%, on par with the historical rate of revenues as a percentage of GDP. That marked the first significant reduction of spending in decades and, coincidentally, helped balance the budget for the first time in 30 years – following up on a promise to deliver a government "that lives within its means."

 

Now, in the 2000s, a few things happened. As you can see in both charts, spending remained relatively flat as a percentage of GDP for 25 years (from about 1983 to the 2008 recession), where it then skyrocketed. You can also see two significant short term drops in revenues after the 2001 and 2008 recessions. Liberals love to claim this was all due to the Bush tax cuts implemented in 2001 and 2003, which actually provided relief to more middle class Americans than wealthy Americans. What they don't bother mentioning is that, as you can see in the first chart, revenues fully recovered their growth rate after both recessions.

In fact, with income tax rates currently at a near historic low, revenues have never been higher. So are our record high deficits and debt really a problem of revenues or a problem of spending?

So what the heck is eating up all our tax dollars? The biggest consumer is entitlements. More than half our tax dollars (55%) go to Social Security, Medicare, Medicaid, welfare and unemployment. Defense takes up another 20%, followed by interest on the debt – totaling over 80% of our spending.

According to the trustees who oversee Social Security, Medicare, and Medicaid, the nation's entitlement programs are going bankrupt even faster than predicted.

The trust funds that support Social Security will run dry by 2033. Medicare's hospital insurance fund is projected to run out of money by 2024. The federal government will spend more than $668 billion on anti-poverty programs this year, an increase of 41%, or more than $193 billion, since Barack Obama took office. State and local government expenditures will amount to another $284 billion, bringing the total to nearly $1 trillion in 2012. Entitlements are now at an all time high as a percentage of our GDP, more than double our defense, according to the Office of Management and Budget.

If we examine means-tested welfare programs alone, we see that a record 70.4 million Americans are now enrolled in Medicaid (20% of the overall population), a record high 47.7 million Americans are on food stamps (15% of the overall population), a record high 8.8 million Americans are receiving disability benefits with 5.7 million Americans collecting unemployment insurance for a total of over 100 million Americans – or more than one-third of the entire population (34.5%) – now receiving some form of means-tested welfare through Medicaid, food stamps, unemployment and disability claims, according to the U.S. Census Bureau.

Which makes sense, considering the labor force participation rate, which measures the number of working age people (18-64) actively looking for work, is at an historic low as less than two-thirds of working age Americans (63.6%) are working, according to the Bureau of Labor Statistics.

So much for the Obama administration's near trillion-dollar leap of faith in the Keynesian "multiplier" effect of government spending. It was the same approach that didn't work in the 1930s, didn't work in the 1970s, and didn't work in other nations such as Japan. It didn't work again in 2009-2010.

So what does this all mean in the current fiscal cliff talks? The Democrats are predictably asking for higher tax rates on the top income earners. At least when Clinton was in office (genuinely) negotiating with a Republican Congress, he cooperated in return by reducing spending to 18% of GDP, enacting welfare reform and cutting the capital gains tax rate in half to incentivize investment.

What has Obama offered to meet this Republican Congress halfway? Nothing. Quite the opposite, he's demanding a blank check: including higher tax rates from income to capital gains, more spending/"stimulus," an infinite debt ceiling and no entitlement reforms.

This is "compromising?"

For argument's sake, let's say the Republicans were to give the Democrats the higher tax rates they want on only the top income earners. According to the non-partisan Congressional Budget Office, the federal government spends $9.7 billion a day. That adds up to $3.5 trillion a year. Last year we brought in a record $2.3 trillion in taxes (an all-time high, mind you) which still leaves a deficit of $1.2 trillion from our out of control spending levels – or about 4 months and 1 week's worth of spending. If we raise tax rates on those making over $250,000 back to the Clinton levels, that should bring in an extra $82.5 billion in revenue every year – which covers 1 week's worth of the deficit. What about the other 4 months? In addition, the CBO projects that Obama's budgets will incur $9.5 trillion worth of deficits over the next 10 years. So raising tax rates on the rich only covers about 8.7% of deficit spending over the next decade.

And what would Republicans get in return, besides pissing off their fiscally conservative base?

Romney-Ryan campaigned on turning Medicare into a premium-support system that would've put more power and decision-making responsibilities in the hands of the consumer instead of government bureaucrats, while turning Medicaid and food stamps into block grants that would return power to the states and make recipients work for certain benefits or enroll in jobs training programs. These reforms would've reduced federal spending significantly while extending these entitlement programs' longevity beyond 2033 so that my generation may even begin to hope these safety nets may be there for us, but 51% of America chose to reject these reforms – thus maintaining the status quo and keeping our safety nets on the road to bankruptcy.

At the very least, we could raise the age of retirement eligibility. The average life expectancy for Americans was 62 when Social Security was enacted in 1935. Today, it's 78, while the eligibility age (65) has remained unchanged for the last 77 years. Other aspects such as altering cost of living adjustment calculators and means-testing benefits at a lower rate for individuals with higher incomes should also be implemented.

But what incentive at all does Obama have to prevent this nose dive off the fiscal cliff? Think about it: 1) Taxes go up on everyone. I don't buy for a minute that Democrats are that concerned about middle class tax relief. If they truly were, they could pass a bill doing so today that the House already passed back in August. The fact that they haven't done so proves that they're perfectly willing to sacrifice the middle class to hold the scalp of the rich as a political trophy for their radical base. 2) Most of the spending cuts from sequestration will affect defense – the ONLY department Democrats are willing to cut – in amounts that would be impossible to negotiate thus could otherwise only dream of, and 3) Entitlements won't be touched, as usual.

So in other words, whether Obama gets tax hikes on only the rich + more spending + an infinite debt ceiling or tax hikes on everyone + defense cuts + no entitlement changes, politically he gets everything he wants. Best of all, he has a well oiled marketing machine and a mainstream media on his side ready to blame the Republicans for whatever happens. But while this will provide short term political victories, one has to wonder how a double dip recession will affect his long term legacy in the annals of history.

Thus, he proves to be a brilliant politician, but a failure as a leader.

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