Meeting Barack Obama

I had the privilege of briefly meeting Barack Obama at a fundraiser in early September. Seeing and hearing him speak first-hand stripped away all the layers of media and punditry that has made it so difficult to assess which candidate is best for our country. Meeting him not only confirmed for me that Obama is the best choice, it also confirmed for me that he has what it takes to be a great leader. One of the major epiphanies I had following the meeting centered around his economic plan: how it would impact me personally and how it would impact America as a nation if he executes his plan.

One of the many components of the Obama economic plan is to roll back the Bush tax cuts on the wealthiest Americans, back to the level they were under Bill Clinton. We happen to fall within this group, yet we fully support it. Why would we advocate a tax plan that costs us more money? Because it has a better return on investment than the alternative, which calls for further tax cuts despite rampant federal spending, thus putting the stability and security of our country at great risk. Let me begin with a crash course on federal budget economics.

Tax revenue is the primary source of income for the federal government. When it spends more than it receives, it has a budget deficit. To fund a deficit, it borrows money by issuing government bonds to domestic lenders and sovereign bonds to foreign lenders. These bonds are considered risk-free because the government can raise taxes, reduce spending, or even print more money if necessary to ensure the bond can be redeemed (paid back in full) at maturity.

Therefore, with a budget deficit, part of the tax revenue received is spent on interest payments to debt holders. New debt issued at higher interest rates due to inflation costs more. Interest payments made to foreign debt holders fluctuate in cost as the value of the US Dollar changes. This is because sovereign bonds are denominated in the foreign currency, and a cheaper dollar means more is required to convert to the currency for interest payments. The worst case scenario is when tax revenue decreases and spending increases over a long period of time, because it pushes national debt to levels that could be catastrophic to the economy and the value of our currency.

As of March 2008, our national debt was about $9.6 trillion dollars. $5.4 trillion was owned by the public. Public debt is lent by individuals, businesses, and both local and foreign governments. Almost half of this (over $2.6 trillion) is sovereign debt owned by foreign countries. Russia owned $60 billion, oil exporting nations owned $153 billion, and China owned a whopping $502 billion in US debt. Altogether, we spent more than $250 billion dollars in FY08 paying interest alone on our national debt. Only defense, Social Security, and Medicare cost more.

Since then, we’ve spent over $60 billion dollars in Iraq. The Bear Stearns bailout and nationalization of Fannie, Freddie, and AIG will cost more than $300 billion. Now Washington is asking for $700 billion more to absorb a fraction of the toxic debt behind the currently unfolding financial crisis. So we’re looking at more than a trillion dollars in additional national debt, and we haven’t even addressed the potential spending burden of the growing crises in Afghanistan, Pakistan, and Georgia!

As a result of all this spending, our national debt has surged to record levels. A year ago, Congress raised the debt limit to $9.8 trillion. In July, they raised it to $10.6 trillion. With the bailout package currently being legislated, it is now expected to rise to $11.3 trillion, and there appears to be nothing stopping it from going to $12 or $14 or even $15 trillion dollars in the next few years. This would be sustainable if tax revenue was growing with it, but it is not. Tax revenue is constrained by the high unemployment rate, lack of income growth, and by businesses that exploit loopholes or move revenue offshore. And the Republicans in power over most of the last seven years have been cutting taxes (i.e., reducing tax revenue) with the belief that it will stimulate the economy, which has further exacerbated the ballooning deficit and accumulating national debt.

Imagine you have a stable job and live in a house that you financed with a $400,000 loan from a bank in Canada. You pay your bills on time, generally paying more than the minimum on your credit card each month, but the balance has increased dramatically this year. One day you got throbbing toothache that required emergency dental surgery, but dental insurance only covered a fraction of the cost due to a high deductible. High gas prices have doubled how much you spend to get to and from work every day. The dental surgery, high gas prices, and general inflation have made it difficult for you to make even the minimum payment. And since the value of the US Dollar has dropped considerably, monthly payments on the Canadian loan have almost doubled because of required conversion to the Canadian Dollar.

Suddenly, you find yourself in a cash flow negative situation. You try to trade your car in for a more fuel-efficient model, but you don’t have the money saved up to make the down payment, nor the capacity for the monthly payments. You look for other ways to cut costs such cancelling memberships, turning the heat down in your house, use Netflix instead of going to the movies, and downgrade cable service, but it’s not enough. You explore refinancing your home loan and/or establishing a home equity line of credit, but your debt-to-equity ratio too low to qualify. The only alternative is to get another credit card, but due to inflation and a lower credit score from the existing credit card balance, the credit card has a high APR.

Now imagine a solution to your income problem taking the Republican approach: rather than ask for a raise or find another income source, you show up at work and ask for a salary cut. Your rationale is that it will allow your employer to develop more business, and thus it will increase your chances for an excellent review and higher annual bonus. Despite best wishes, less income only accelerates your descent into bankruptcy, so it is clearly not a feasible approach to take. Our federal government now finds itself in a similar conundrum: unforeseen natural disasters and economic problems, inflation, higher interest rates, and exposure to currency risk on foreign debt redemptions contribute to our ballooning national debt. It is not feasible for the federal government to do the equivalent of a salary cut and lower tax revenue in hopes that it will stimulate the economy.

The Obama economic plan calls for addressing this problem by optimizing both tax and spend to pull us out of this rapid descent into economic oblivion. Despite widespread belief, Obama’s plan does not raise taxes. Specifically, the plan states that if your family adjusted gross income is $90,000 or less, you’ll get tax cuts. If between $90,000 and $250,000, your income tax stays the same. Anybody above $250,000 gets rolled back to what it was under Clinton, which is 36% for the second highest tax bracket, and 39.6% for the highest tax bracket. Effectively, Obama is calling for distributing tax cuts given to high income taxpayers under the Bush administration to over 150 million taxpayers who fall below the top two income tax brackets.

Despite the fact that Obama calls for more of my money to be taken from me—money to feed my kids and put clothes on their backs, or perhaps go on a family vacation—I think it is an essential component to restoring economic stability. More money in the hands of those who really need it brings back that extra cappuccino, brings people out to the movies again, affords higher car payments for more fuel efficient automobiles, etc. 150 million people consuming more stimulates the economy by growing businesses whose additional sales results in more tax revenue for the very government who must reduce the federal budget deficit to avert major financial crisis. I’d rather suck it up with a moderate income tax increase than the alternative – watching everything I own go down the tubes along with the economy.