President Obama’s budget should be recognized as a step in the right direction.  There are many very good initiatives and it is good that he has reversed direction on several important issues.  Unfortunately, his small steps clearly are insufficient.

What is good about President Obama’s budget proposal, in my opinion?

a)     He has proposed to curb Medicare costs by:

a.     Raising Medicare premiums for affluent people (a good idea that he rejected when his opponents suggested it, I believe).  To get our country on a sound financial footing, I think we have to means-test our “social insurance” programs.  However, this underscores our need to move decision-making closer to the people (i.e., more local).  Congress promises insurance programs which invariably have to become means-tested because the promises cannot be kept.  We must break that cycle.

b.     President Obama proposes higher deductibles so people will pay more attention to the cost of their health care.  This is the kind of consumer-driven health care that Republicans have long espoused, so they should embrace it.  (This is a nice shift by President Obama.  His health care reform focused on transferring the cost of health care rather than reducing it. To reduce the cost of health care, you must enlist the effort of health care recipients.  Cost reduction must be done before subsidies dilute peoples’ incentive to reduce expenditures.)

b)     President Obama has proposed to reduce Social Security’s inflation component, which has long been known to increase retiree purchasing power instead of maintaining it.

c)     He has proposed increasing the cigarette tax from $1.01/pack to $1.95/pack.  By discouraging smoking, higher cigarette taxes will improve our health while reducing health care costs.  Of course, to the degree it reduces cigarette consumption, it won’t generate tax revenues.

d)     President Obama proposes to implement Governor Romney’s proposal to cap limit itemized deductions (capping at 28%) instead of raising tax rates.  Although charities and others will be concerned, I favored Romney’s idea because it would maximize people’s incentives to help build the economy.  I acknowledge the reasonable argument that if someone’s marginal tax rate is 36%, they should get a tax reduction of $.36 for each dollar deducted.  But this approach can be defended as well.

e)     President Obama wants to cap the value of tax-favored retirement accounts to $3.4 million for people age 62.  I don’t know the structure of the proposal and haven’t studied it, but certainly our efforts to encourage retirement savings have no need to fund extravagant retirement.  It is fair to let the affluent participate but why not cap the program for everyone?

f)      President Obama suggests a 30% minimum tax for households making more than $1million/year.  That seems to make sense, but the devil may be in the details.  I can understand that charities might be concerned.

g)     President Obama also proposes raising the estate tax.  I have long-favored a strong estate tax.  Personally, I think it can be debilitating to younger generations if too much inheritance falls in their lap.  The biggest counter-argument is to protect the ability of family–owned businesses to be kept in the family.  I believe we should address the family-owned business issue directly rather than establishing a high undifferentiated exemption.

h)     President Obama also suggests a change in how derivatives are taxed.  I don’t understand the issue, but I understand that it was originally proposed by Republicans.  Because it seems to be bi-partisan, I am listing it as a positive.

i)      President Obama proposes to lower corporate tax rates, which should boost jobs and our international competitiveness.

j)      President Obama wants to fund climate-change research at the federal level.  I think this is an important issue.  It seems logical to fund at the Federal level because neither the states nor private enterprise can fund the research.

Why is it insufficient?

1.     It reduces the 2023 Senate Democratic projected deficit by less than 25%.  The Democrats talk about Keynesian economics, but they essentially never want to have any surpluses to offset the deficits.  People say that President Clinton generated a surplus.  He certainly did a good job in that regard, but his “surplus” ignored the huge off-ledger entitlement growths in Medicare and Social Security.  We keep mortgaging our children’s future.

2.     It has too much spending at the Federal level.  I’m a strong advocate of education (President Obama wants to spend $77 billion over 10 years on early education) and transportation services, but they should be funded as locally as possible.  As I noted during the 2012 campaign, I’ve been disappointed that President Obama has not leveraged his opportunity to encourage and challenge inner city students to focus on education.

3.     President Obama wants to fund clean-energy research.  I’m a big fan of clean energy, but would ask whether private enterprise can do so on its own.  If it needs to be stimulated, the stimulus should be tax incentives rather than having the administration pick the winners and losers.  The Solyndra problem is just one of many problems that is inevitable when the government grabs control.  I would consider this idea to be a positive if done properly, but it does not seem as though President Obama would do it right, in my opinion.

4.     Of course, back-ended savings are unreliable.  Just as with the Medicare provider cuts and the social insurance programs, President Obama is promising cuts in the future, rather than today.

5.     We don’t budget for contingencies.  During President Clinton’s administration, one of his staff came to Kansas City and presented an optimistic projection of future budget surpluses.  I thought it was very unrealistic, ignoring entitlement commitments, exigencies such as wars and natural catastrophes, recessions, etc.  As people were leaving, I asked them if they believed the projections.  I was astounded that everyone believed the projections.  We dug this hole by believing what we wanted to believe.  Wishful thinking will not fill it.

6.     President Obama has apparently proposed cuts in budget items that he strongly expects to be restored by Congress, such as water projects by the Army Corps of Engineers and Homeland Security.  We need serious suggestions.

7.     President Obama’s budget involves raising medical fees for veterans, including a $140/year fee for family coverage that would increase to $250 over 5 years.  Perhaps this does not directly reduce health care funding for veterans, but I’m leery of the proposal.  We’ve generally treated veterans very poorly.

8.     President Obama would hold military pay increases to 1%.  That does not seem logical to me.

President Obama’s budget proposals on which I am neutral.

a)     He has proposed to curb Medicare costs by reducing provider fees.  Such reductions have been proposed and passed repeatedly, only to be reversed.  They supposedly helped to fund health care reform.  Will this actually get done?  I don’t know if this is a good idea or not, but it certainly is not a good idea to repeatedly spend such savings but never achieve them.

b)     I understand that he also wants to reduce the degree to which inflation automatically increases tax brackets.  If the tax brackets are over-inflated, then I agree with him.  I’m not sure that is the case however.  Appropriately-inflated tax brackets are a good way to discourage government waste.

c)     President Obama suggests curbing pay raises for federal employees.  I am not expert enough to judge that idea.

d)     President Obama wants to spend $50 billion for infrastructure.  I strongly support infrastructure but I am leery for the following reasons:

a.     The stimulus supposedly did this, but there does not seem to have been a lot of very good work done.  Some of the stimulus “infrastructure” projects would have been low on my priority list.

b.     President Obama claims that it will be funded with reduced expenditures on the war in Afghanistan.  He is ignoring that we have to do zero-based budgeting and work harder to balance the budget if we want to avoid a disaster for our descendants.

e)     The President’s budget would close military bases in the USA, and cut 50,000 of the 800,000 civilian jobs in the military, and impose “modest” cuts to major weapons programs. .  If there is “fat” that can be cut, that would be a good idea.

I think many Republicans are making a mistake by saying that President Obama's proposal is “dead on arrival”.  We clearly need increased taxes to get out of this hole.  The right thing to do is to work together.  Furthermore, the Republicans are allowing themselves to be branded as being against everything.