US Austerity Coming Says Obama – How it Will Affect You

by Darwin on June 28, 2010

US Austerity is on the way?  I couldn’t help but notice the irony in recent headlines touting Obama’s ambitions to get serious about deficits while he’s simultaneously preaching to the G-20 and the Eurozone especially, how they need to keep spending in order to prevent a global economic slowdown.  While there are prominent economists on either side of the argument (Cut Spending and get deficits under control vs. further Stimulus spending to spur economic activity), the administration ALWAYS seems to err on the side of increased spending.  The various bailouts, stimulus packages and tax credits have all been a complete sham – every one of them.  From the New Home Buyer Tax Credit which essentially paid people to do something they were going to do anyway, to bailouts to homebuilders, automakers and out of control state budgets, the answer has consistently been “Spend Now and we’ll worry about it later”.

Now, Obama’s talking about getting tough and says there will be some difficult choices next year (after mid-term elections of course).

  • The Case for Austerity – the thinking here is that nations most in debt (US being a usual suspect) should reduce their deficits in order to convey market confidence and flexibility for future crisis should they occur.  Since most government spending is a complete waste, but cutting out unnecessary government expenditures, money expended is done so more efficiently, which is favorable to markets.
  • The Case Against Austerity – The fear is that by cutting spending now instead of spending more on stimulus, economies will sink back into another recession, perhaps even a Depression.

Here’s my take on what sort of austerity measures the US SHOULD embark on vs. the ones that we WILL embark on under this administration:

Austerity Measures the US SHOULD TAKE

  • Cut government expenditures across the board. Set reasonable targets, announce cuts and competent Department heads will easily identify waste and cut it.  The government is full of waste, but there is no incentive to root it out.  Incompetence is rewarded.
  • Terminate public sector unions. There is no reason the public should be held hostage to union demands.  A typical union job is already compensated at an above-market rate, there is above-market job security, benefits are more generous than equivalent private sector jobs and pensions are breaking both municipalities and the federal government.  First, cease new hires, then start to privatize these jobs.  They don’t have to be “lost” jobs, they should be private sector jobs where the free market governs wages and benefits, not the taxpayer.
  • Revisit the Healthcare Bill. Realizing no politician is going to take back something that was already given away (because it’s “free” right?), it’s completely evident that this disaster of a bill is nowhere near revenue neutral, it’s front-loaded and it’s going to destroy the American economy from 2020 onward.  While Michael Moore loved pointing out how great it was in Canada and France, now those countries are reigning in their programs since they’re unsustainable.  We should do it now before it is underway and no political will exists to pull it back.  Improved healthcare delivery is a noble cause; adequate incentive and burden must be shared though.  The way is is structured now is sure to bankrupt the country within a generation.
  • Stop the Bailouts, Stimulus and Pandering Handouts. Virtually every dollar spent since the financial crisis has been a complete waste.  That’s the subject of an entire post for each wasted bucket of billions of dollars, but the evidence is irrefutable by rational, analytical analysis.  We’ve pissed away over a Trillion dollars on everything from housing bailouts for deadbeats to giveaways to the weakest companies that should have been allowed to fail.

Austerity Measures the US WILL TAKE

  • Raise Taxes on Corporations and “The Rich”…Again – Obama has already declared war on capitalism.  The few that have “made it” to the big time in America can be milked year after year.  It’s just another few percent after all.  With half of Americans paying no federal tax already, it’s easy to just continue to burden the top few million earners further.  You give up a portion of those votes for millions more that benefit from this money grab.  Tax capital gains further, the top couple income tiers, health insurance, add in some fees here and surcharges there (all taxes by another name) to be funded by the same people being targeted in 2010.
  • VAT – A European value added tax is just around the corner, well, right after that next election.  See, the VAT isn’t as despised as a tax you see on your paycheck or tax return, because it’s insidious, invisible, pervasive.  It’s another backdoor tax to usurp tax dollars and redistribute it to growing the government further.
  • Unions will get more sweetheart deals – Just like unions got a sweetheart deal in the Healthcare reform bill (outrageous pandering with no logic), there will surely be more incentive for anyone that’s marginally considering the unionization drive to jump on that bandwagon and then start having money directed to union dues which automatically go to the party.  Card Check, deferrals on healthcare premiums, you name it.
  • Evil “Big Business” – Since we’ve now seen several industries vilified under the administration – from Wall Street to Health Care to Big Oil, there are a few industries left that yet to be fleeced.  Perhaps a “windfall tax” on mining companies like Australia is mulling over?  Perhaps some extra “surcharges” and taxes on other successful companies?  Apple’s looking a little too profitable…but wait, they’re trendy.  OK, maybe Microsoft.  Maybe hit the pharmas again.  Big tobacco has been noticeably out of the news lately.  Surely, there are some more big bad corporations to fleece in the next cycle.

The bottom line is markets will eventually force the US to start to make some tough decisions.  Now that the G-20 has virtually (ex-Canada) unilaterally agreed to start enacting tough cuts, we’re going to see those currencies start to strengthen while the US continues to print dollars.  As our currency plummets and our yields rise, debt service will become overly burdensome and we’ll need to start cutting in order to retain any semblance or market legitimacy.  That’s when the fun will begin.

For insight into the various EU Austerity Measures take a read on the country by country breakdown (some “measures” are actually quite comical).

How Do You Envision US Austerity?

{ 17 comments… read them below or add one }

Financial Samurai June 29, 2010 at 4:17 am

How can we have austerity when we are going into a record budget deficit due to massive spending?


Darwin June 29, 2010 at 7:43 am

That’s the question. At some point we have to reverse course, stop the spending and start cutting. Most of the rest of the developed world is changing course now. The administration proposes we continue with profligate spending on primarily wasteful endeavors, but does admit, that eventually “tough decisions are going to be needed”. We will be in much worse shape another half a Trillion dollars in, especially in relation to our peers who are becoming more disciplined starting 2010. By waiting until later in his term, post mid-terms, it’s evident it’s just more kicking the can down the road.


Early Retirement Extreme July 3, 2010 at 10:21 pm

Because the money will increasingly go to interest payments?


Invest It Wisely July 16, 2010 at 12:47 pm

“See, the VAT isn’t as despised as a tax you see on your paycheck or tax return, because it’s insidious, invisible, pervasive”

Yep! There are many places where people think there’s no tax, such as Taiwan or South Korea, and it’s true, taxes are much lower, but there is still a 10% to 20% VAT that is basically invisible.

“Because the money will increasingly go to interest payments?”

Unless they decide to “screw the bond market; we don’t need debt to spend!”


lump August 24, 2010 at 8:56 pm

Using the wrong word “heir” instead of “err” makes everything you say seem intellectually doubtful. It’s not even a related word.


Darwin August 24, 2010 at 9:17 pm

Oh, aren’t you just above it all? You’re so intellectually superior because you spotted an insignificant error that has no bearing on the subject. To the contrary, you’ve called into question your intellectual prowess. You’ve masked your blind love for Obama regardless of how much he’s destroying the economy (how’d you like those housing numbers today?) by focusing on minutiae instead of taking on the actual issue. If you have an actual opinion on something, try again.

Would love to see your blog – oh, never mind, you don’t have one.


Roger, the Amateur Financier November 16, 2010 at 1:21 pm

Hum, interesting thoughts on what the US will (and won’t) do to get our financial ship in order. Given the results of the election (the Republicans re-taking the House, Democrats losing ground in the Senate (where they already had a hard time beating out filibusters), Obama supposedly looking to tackle deficits and waste as a top priority), do you think we’ll see more of the items on your SHOULD TAKE list being enacted? Or do you think we’re still headed towards the items listed on your WILL TAKE list, political changes be darned?


Darwin November 18, 2010 at 10:47 pm

Call me a cynic, but I seriously doubt there will be any substantial sacrifices made. It’s too tempting to promise (and deliver) pork, handouts, subsidies and “social benefit” spending all with the goal of reelection. Dems and Reps alike will be unwilling to put forth serious sacrifices. It will be tit for tat and gridlock IMO. Baby steps – while the deficit continues to increase.


Roger, the Amateur Financier November 22, 2010 at 1:13 pm

*Sigh* I’m not going to call you a cynic, because that sounds like my thoughts on the subject, as well; without a crisis to force the cuts (and probably tax increases, as well), we’re unlikely to get things under control any time soon.


samuntha December 1, 2010 at 11:09 pm

how about tax big business? google pays what a paltry 2.4% on their earnings? when everyone else pays 30%+. congress passes laws that are good for big ag, banks, and wall street. the us is a heavy contributor to the imf. sending out money to bail out europe. now it’s s510 to take growing rights away from americans and small farmers. i’m tired of monstano and conagra. no more gmo’s! get rid of big pharma monopolies. no more corporate welfare. start truth in labeling and real third party research studies.

let us get back to basics. dismantle the fed reserve. don’t pay them or anyone else in the world one more cent. open up state run banks backed by gold and silver. get rid of austerity measures; they’re stupid and unnecessary. forget a one world government it’s costing us our economy, taxes, and jobs. end all treaties (the un should have no power over us and nafta/nau are terrible). employ tariffs to unfair trade practitioners (like china). tax investments and bonuses, and not our hard earned money! get rid of the global warming farce (the green economy killed spain and the science does not support climate change). no more bribes to congress (no business can “donate” to any politician’s funds). no more ear marks for politicians. no more wars (cut the budget to the pentagon by 3/4). secure our borders instead. it’s better to make friends then enemies.

if we got back to limited government and stop stealing out of social security (which would make it solvent), then we would be getting somewhere. first though, the fed reserve and its cronies must be arrested for being financial/economic terrorists. afterward, get rid of the un-patriot act. so we again can gain money by eliminating homeland security, the tsa, and atf.

wow, was that simple. do the right thing. stop telling the american people to tighten their belts when it’s NOT their responsibility. the bankers and financiers got us into the financial calamity, then they should be the ones paying to get us out. it’s their gambling problem… with mortgages, stocks, and commodities that should have been regulated by state gaming regulations.

pass a law that federal, state, and local employees as well as corporations and their employees cannot be above the law, no more waivers, no more free lunches especially at the cost of another person. as well, no corporate interest can have equal or heavier weight then individual americans. maybe then we could get polluters under control and make them clean up their messes (which includes the us government).

the american people are fed up with corporate congress, buy-what-we-tell-you presidents and state governments (car, house, health insurance welfare), and politically motivated supreme court justices.

get the money from the corporate welfare recipients that caused this mess. my bank account is closed.


Darwin December 1, 2010 at 11:19 pm

Wow, that’s an impressive rant :> Thanks for the impassioned reply seriously though. There are some problems with your logic though. To address just a few:

“google pays what a paltry 2.4% on their earnings? when everyone else pays 30%” – I somehow doubt you pay an effective 30% tax rate. And Google is following tax law. As a shareholder, wouldn’t you expect that a corporation you invest in seeks to minimize their tax burden? Don’t you? I take deductions for my kids, mortgage, etc. It’s legal and why wouldn’t I? Same with Google.

“no more gmo’s! get rid of big pharma monopolies” – GMOs are responsible for preventing the starving deaths of countless millions of people worldwide annually. And big pharmas don’t have a monopoly. At last count, there were hundreds of pharmas and biotechs and most major therapeutic categories have at least 2-3 new innovative drugs and more generically available. Perhaps you’re referring to their pricing. But that funds research. Take away profit motive? No new cures. I’d be willing to be at some point in your life you’ve either been vaccinated or needed medication. You can thank profit motive for saving your life.

“stop telling the american people to tighten their belts when it’s NOT their responsibility. the bankers and financiers got us into the financial calamity, then they should be the ones paying to get us out.” – The banks didn’t put the US in a $14 Trillion debt hole. You can thank decades of bloated government spending, but not the banks. In fact, the TARP bank bailout was actually PROFITABLE for taxpayers.


Truckin' Ronn December 20, 2010 at 3:21 pm

Interesting retort. I am in general agreement with you but please expand on the last statement “In fact, the TARP bank bailout was actually PROFITABLE for taxpayers.”
By the way I am an over the road truck driver who sees the economy from ground level. Post Christmas is going to be very harsh. I am delivering next weeks economy and I am currently sitting in Oregon praying for a load! The truckstop is nearly full at midday. Always a bad sign.
I have only recently began reading your column, thus far I find it informative and insightful. I don’t always agree, but you would hardly be interesting to read if I did!


Darwin December 23, 2010 at 10:20 am

On TARP, it depends how you measure and when you measure, but here’s a recent NYTimes article pointing out that it’s closing the gap down to under a $50 Billion cost with making profit as entirely plausible. I guess at the time, it should have read “not cost nearly what was portrayed initially”, but who knows, in a few months with a few more stock sales, we may be in the green.


Fred March 16, 2011 at 4:03 am

It appears that fiscally conservative governors across the U.S. are waging a war on public sector unions. Cutting collective bargaining rights and potentially the wages and salaries of public sector workers. One might be inclined to assume that states with higher mandated minimum wages will probably repeal those laws to attract businesses too.


rodney rondeau September 11, 2011 at 4:33 pm

the us does not need to cut. the defecit is not a problem. this is a power grab by big banks and big business. the us issues its own money and is its own creditor. It borrows its own ious to manipulate the interest rate. the first day we had government and it said you owe me 100 us dollars. how in the world was it paid unless the government spent dollars first. truth is taxes give the governments money value. we are not runnign out of money. banks would just rather we borrowed it from them. that is the real issue.


Darwin September 11, 2011 at 10:10 pm

Paul Krugman would be proud. So, what do you suppose would happen to interest rates on US Treasurys in the event we borrowed an extra couple Trillion per year over projected rates. You know, if our debt didn’t matter? You think the 10-Year would still be at 1.9% and we could continue to roll our debt?
No, as soon as the route in Europe is done, the US is next. Within a few years, it’s time here.


Justin September 13, 2011 at 1:29 am

“And big pharmas don’t have a monopoly. ” – They may not have monopolies, but the unfunded Medicare Part D (passed into law by George W. Bush and a Republican Congress in 2003) is a HUGE liability. By the design of the program, the federal government is absolutely NOT permitted to negotiate prices of drugs with the drug companies (as federal agencies do in other programs). The expense to our debt is mind-blowing.

“At last count, there were hundreds of pharmas and biotechs and most major therapeutic categories have at least 2-3 new innovative drugs and more generically available. ” -As for-profit corporations, the incentive to create “innovative” drugs is driven by profit maximization. As such, many billions go into research for new heartburn medications over less profitable therapeutic drugs. The incentive to produce blockbuster profits supersedes preventative medicine all too much.

“Perhaps you’re referring to their pricing. But that funds research. Take away profit motive? No new cures.” -The National Institutes of Health (NIH), which funds researchers at more than 3,000 US institutions, has done an amazing job of finding new cures (such as Polio). In addition, because they are for-profit, the U.S. pharmaceutical industry spends almost TWICE as much on promotion as it does on research. This includes paying most pharmaceutical representatives over $100,000 a year to provide free lunches.

Imagine how many “new cures” we would have if all this money was sent to our Universities instead.


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