Busch: What Obama Won't Say Tonight
Japan held an emergency policy meeting to announce an agreement between the government and ruling parties to include a new economic stimulus package in the second supplementary budget for fiscal 2009. The original plan was for Y2.7 trillion budget and now this will be expanded. They are doing this because the economy is sliding back into deflation and the stock market had declined 1700 pts since August (it jumped abt 500 pts on this news).
This begs, if not screams, the question: will it really help?
It's a lesson for the United States to learn that continuous government spending doesn't not make/create/save jobs in the medium to long term. It takes the private sector to do that not the public. The public sector needs to provide the conditions by which the private sector can be incented to succeed. Higher spending begets higher deficits and higher taxes. It is the exact opposite of what needs to be done to the private sector.
This isn't new news by the way. One of the first US Treasury Secretaries understood this concept. Andrew Mellon in 1924 wrote, "The history of taxation shows that taxes which are inherently excessive are not paid. The high tax rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business and invest it in tax-exempt securities or to find other lawful methods of avoiding the realization of taxable income. The result is that the sources of taxation are drying up; wealth is failing to carry its share of the tax burden; and capital is being diverted into channels which yield neither revenue to the government nor profit to the people."
As President Obama takes the stage tonight, he will discuss many issues surrounding Afghanistan.
One issue he apparently won't be discussing is how to pay for this surge.
Some estimates have it at $1 million per soldier. Chairman of the Senate Armed Services Committee Carl Levin (D, MI) suggested there should be a surtax for the surge on those making above $250,000. Chairman of the House Appropriations Committee David Obey (D, WI) proposed a surtax for those making over $150,000 starting in 2011 to pay for the surge. This concept isn't new either as US presidents from Abraham Lincoln to Lyndon Johnson have used the tactic.
But this will come at a time that the Bush tax cuts roll off and could put the top tax rate above 50%. And I'm not sure we'll stop there as history also tells us that as recent as the 1970s, the top tax rate in the US has been at 70% and helped create the conditions for stagflation.
Clearly we're not there yet from an inflation standpoint, but the path forward is getting set now. We're going to further reduce incentives for productive uses of capital at the same time that we're greatly expanding our future obligations for spending and debt. As it approaches 200% of debt to GDP, Japan is the poster child for why this journey is a mistake.
Andrew B. Busch is Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.