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Fixing Obama's Economic Plan
Last Tuesday morning, Fox Business News gave me a call. Would I like to go on the air to debate the merits of Barack Obama's economic plan? It sounded like a nice change of pace from the usual currency and stock discussions, so I accepted. I have to admit, up to that point I hadn't heard any actual proposals from the Obama camp, just some vague rhetoric about hope and change. Now we were finally going to see some specifics. Just how were we going to pay for all of this change, and who would be paying? I dug into the Obama plan, looking for answers.
Now, there are many things I like about Barack Obama. He is a brilliant orator. He is an inspirational figure. Perhaps most important, he is congruent – when he speaks, he believes in what he is saying. I think that's the main reason for his tremendous appeal. Let's take a closer look at his proposals.
Obama wants to invest $60 billion over the next 10 years to fix bridges, highways and other infrastructure. He claims the plan would generate up to 2 million new jobs, directly and indirectly. He also wants $150 billion to create 5 million so-called "green collar" jobs to develop more environmentally friendly energy sources. He wants to pay for these proposals with money that's now being used to fund the war in Iraq, and through higher taxes. As Obama said in a speech in Wisconsin at a General Motors plant on February 14, and has alluded to several times since, "It's time to stop spending billions of dollars a week trying to put Iraq back together and start spending the money on putting America back together instead."
Sounds reasonable so far, right? Here's one problem – it is based on money that doesn't exist. The U.S. doesn't have some big imaginary pile of money waiting to be spent on Iraq that can be easily diverted to other causes. Instead, the U.S. borrows money, mostly through foreign government purchases of U.S. Treasuries, in order to finance spending in Iraq and elsewhere. So, in essence the Obama plan calls for borrowing funds from overseas to create U.S. jobs. When these facts are considered, Obama's contention that his jobs plan is already paid for doesn't hold up.
This proposed borrowing will increase the burden on our already out of control budget deficit. The Bush administration is projecting that the deficit for the current 2008 budget year will total $410 billion and decline only slightly to $407 billion in 2009, while a recent, more realistic Goldman Sachs estimate boosts their deficit forecast for this year to $425 billion and to $440 billion in 2009. Do we really want to add another $210 billion to that figure? Keep in mind that as employees of the U.S. government, every dollar that is earned by these new government workers puts us one dollar deeper into the deficit hole, whereas jobs created by the private sector cost the government nothing.
If we're going to go deeper into debt, at least we'll get some bang for our borrowed bucks, right? So how great is our need for 7 million new government jobs? According to recent data released on February 1 from the Bureau of Labor Statistics, the U.S. unemployment rate is currently a mere 4.9%. That number is likely to rise if the U.S. slips into a recession, but with "Chainsaw Ben" Bernanke standing ready to slice interest rates to the bone, any recession is likely to be short-lived. If millions of new jobs were introduced into the economy at a time when the unemployment rate is less than 5%, it's conceivable that the government would find it difficult to fill all of those positions. Also, the massive influx of jobs would create a distortion in the employment supply/demand equation, leading to wage inflation. Under these circumstances, borrowing $210 billion from foreign governments in order to create jobs in the US seems a bit like carrying sand to the beach. This is not the 1930's, and we are not in the Great Depression, yet these government jobs programs are reminiscent of FDR's New Deal. Yet we can't ignore the fact that there are parts of the country that are in a depression-like state.
I think Obama's plan does have some merit, and there certainly are parts of the country that really need decent jobs. How can we make this plan work? Scale the plan down, therefore borrowing less, and then target specific areas with jobs. I think thousands of construction and infrastructure jobs would be welcome in a state like Michigan, which has been hit particularly hard by a loss of manufacturing jobs. Michigan had an unemployment rate of 7.4% as of November, 2007 – the highest in the U.S. At the same time, there are five states that boast an unemployment rate of less than 3%, and eighteen states that have an unemployment rate under 4%. Since many states don't really need a huge influx of jobs, why not save money by targeting areas like Michigan and Mississippi, which has an unemployment rate of 6.3%? This way we can save money by spending less, and still help the areas that need it the most.
Unfortunately, if Obama's tax plan comes to pass, the need for those new government jobs might increase because as it stands now, his plan would hinder the private sector from creating jobs. When the private sector creates jobs, the benefit is great because those workers are not a financial burden to the government, yet the government benefits by taxing the income created by private sector jobs. On the other hand, when the government is the employer, the cost of hiring and maintaining a workforce falls directly on to the taxpayer's shoulders. By raising taxes on businesses, the private business sector – the engine of job growth in this country – would suffer, resulting in fewer jobs.
For those of you who believe I'm giving the Republicans a free pass here, think again. We got into this deficit mess because of uncontrolled spending under the current Republican administration, and that is a fact that should not be forgotten. Once upon a time, the Republicans were thought of as the party of fiscal responsibility, but those days are gone. Alan Greenspan, who considers himself a libertarian Republican, wrote in his memoirs that congressional Republicans "swapped principle for power," and "ended up with neither." So far this year, federal spending is 8.3 percent ahead of last year's pace, at $949.1 billion. That is far ahead of the 3.2 percent increase in revenues, which have totaled $861.4 billion in the current budget year. Whatever happened to fiscal responsibility? Like a shopaholic with an unlimited line of credit, we are spending ourselves into oblivion.
Under the current administration, we have dug ourselves a massive hole in the form of a budget deficit. But by increasing spending, Obama's plan in its current form only serves to dig that hole faster and deeper. What this country needs is a return to fiscal sanity, and a determination that we will spend no more than we take in, yet I haven't heard any of the remaining contenders address this issue in a convincing manner. We may have spent our way into this mess, but we are not going to spend our way out of it.
Free Special Event in Washington! Chris Koomey, Scott Trello, and everybody at the brand new Online Trading Academy Washington, DC office would like to invite you to a special Forex seminar and book signing event on February 29. I'll be speaking about the Forex market and answering your questions, and my new book "Forex Patterns and Probabilities" will be available at a special discount price. Who knows, maybe Hillary, John, Huck, and Barack will show up! I hope to see you there.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through 