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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

Why Businesses Aren’t Investing in the U.S.



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Businesses aren’t investing in the U.S. because of a lack of consumer demand, International Paper CEO John Faraci told me on Friday’s Kudlow Report. “I think this was all about consumer spending and demand,” he said. “You know, the problem we have is there’s inadequate demand to create jobs. We know how to respond when there is demand.”

The U.S. Commerce Department estimated that gross domestic product expanded at a 2.2 percent annual rate in the first quarter, falling short of analyst expectations for 2.5 percent growth and coming in well below the fourth quarter’s 3 percent rate.

Faraci said consumer spending has been dampened partly because the nationwide housing market has yet to recover. “Until it does,” he said, “we’re not going to see the kind of consumer spending you would expect coming out of a recovery.”

When I asked Faraci why companies are not investing, he once more pointed to demand that has not materialized. “Productivity has obviously been very good, so we’re creating more capacity with less resources,” he said. “But at the end of the day, this is really about responding to demand, whether its automobiles or packaging products we make for a whole variety of industries and end users.”

“We’re investing in India. We’re investing in Russia. We’re investing in Brazil,” Faraci added. “Not to ship products back here, but because demand exists in those markets. At the end of the day, this is really about responding to demand. We’re not going to go out and invest unless there’s demand.”

Don Peebles, CEO of Peebles Corp., a real-estate developer, agreed with Faraci that housing remains a drag on the economy. Where a strong market, cheap money, and high leverage fueled growth before the financial crisis, Peebles said “the housing market is not [now] able to carry the economy.” According to Peebles, “Americans’ wealth has been decimated as a result of the lost value in their homes.”

Peebles also acknowledged that rising health-care costs and uncertainty over taxes are a challenge. But he added that the number-one issue is access to capital.

Rounding out Friday’s business panel was Mort Zuckerman, founder of real-estate investment trust Boston Properties and publisher of the New York Daily News and U.S. News & World Report. Zuckerman blamed the housing-market collapse, as well as health-care costs and an “inadequate, badly structured stimulus program,” for today’s lackluster growth picture.  

“Clearly,” Zuckerman said, “you should’ve had a GDP growth now of somewhere between 6 and 8 percent, with the degree of monetary and fiscal stimulus.”

Watch the full segment here:

Geithner Goes Over the Edge



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Is Tim Geithner the most politically partisan treasury secretary in history? Certainly sounds like it these days. As the government’s chief financial officer, he’s spending a lot of time firing campaign barbs at various Republicans and their policies.

Geithner has blasted Mitt Romney by name on several occasions. He frequently attacks Representative Paul Ryan and the GOP budget. And he recently fired a broadside at top-Romney economist Glenn Hubbard, who is presently dean of the Colombia Business School.

Responding to a Hubbard op-ed in the Wall Street Journal — which calculated that the president’s spending plans would require an 11 percent tax increase on people earning less than $200,000 a year — Geithner said, “That’s a completely made-up, remarkably hackish observation for an economist.”

Hubbard a hack?

Read my full column here.

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Obama’s 2.5 Percent Stall



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Wall Street headlines are full of fears of a springtime stall for the already subpar economic recovery. And if that weren’t bad enough for Obama’s reelection chances, a spate of new polls show Mitt Romney’s economic-approval ratings are far outdistancing the president’s.

Even while the headline surveys basically show an Obama-Romney tossup, it will be very difficult for Obama to pull out a victory this fall. Traditionally, incumbents who poll below 50 percent are in trouble. And with Obama consistently in the mid-40s, he has a tough uphill climb ahead.

Read my full column here

An Interview with Mitt Romney



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In my latest interview with Mitt Romney, the former Massachusetts governor emphatically defends his own business success against Obama’s class-warfare/Buffett Rule/Romney Rule attacks. Don’t look for Mitt to back off from his free-enterprise vision. 

He also told me he will go after HUD and DOE for budget cuts and consolidation, along with a slew of other agency cuts.  He also will roll back tax deductions for upper-earners while he lowers marginal rates by 20 percent across-the-board. He does not want more stimulus from the Fed. And he thinks blaming speculators for high energy prices is completely wrong.  

He would roll up his sleeves to deal with taxmageddon immediately during his transition if elected. And wants his veep to be able to lead the country as president if that were necessary. He believes women can meet that requirement, as well as men. 

Watch the full interview below:

Obama’s Misleading Reagan Reference



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In President Obama’s latest class-war, tax-the-rich gambit, he has stooped to a new low with misleading and out-of-context quotes from Ronald Reagan. Apparently, the president is now trying to use the Gipper for cover while he attacks Mitt Romney with the so-called Buffett Rule.

In an address this past week, Obama cited a couple of Reagan speeches from June 1985, in which the former president quoted a letter from a wealthy executive who grumbled that he paid less in taxes than secretaries or bus drivers. Obviously, Obama was trying to draw a parallel with Warren Buffett’s complaint that his tax rate is lower than his secretary’s, and to the resulting Buffett Rule, a proposed 30 percent minimum tax on millionaires. With a tongue-in-cheek flourish, Obama referred to Reagan as “that wild-eyed, socialist, tax-hiking class warrior.”

Read my full column here

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The Economy Is Not Collapsing, Nor Will Stocks



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Despite the disappointing jobs report for March, it’s very difficult to make a realistic case that the economy is falling off a cliff, or that some kind of double-dip recession is on the way. Or that a Ben Bernanke QE3 is likely.

Sure, the 120,000 gain in nonfarm payrolls — roughly half of expectations — is causing a downgrade in growth psychology. Ditto for the 31,000 drop in household employment. But if you smooth out these numbers over three months, payrolls have averaged a 212,000 increase, while small-business household jobs are still up a big 415,000.

But let’s not forget other data points: ISM indexes in the mid-50s are still reasonably strong. Consumer confidence has been rising. Jobless claims have been falling. Car sales are solid. And chain-store sales are beating expectations. It still looks like a 2.5 to 3 percent economy.

Read my full column here

A King Dollar Tax Cut



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You wouldn’t know it from falling stocks, but the Fed’s apparent decision to hold off on future bond buying, or QE3, in response to an improving economy may turn out to be a very bullish omen for the equity market and the economy.

In fact, less stimulus from the central bank sets up a potential tax-cut effect. Here’s why: Limits to the Fed’s $3 trillion balance sheet will bolster the value of the dollar.

The beleaguered greenback has fallen roughly 40 percent over the past ten years as a result of the Fed’s interventionist go-stop-go policies. Since the banking crisis of 2008, the dollar has dropped 8 percent.

But as the Fed ended QE2 last year, and as its bond-buying “operation twist” comes to an end in June, the dollar has started rising. In response, gold prices have been falling significantly. Slower money creation will do that.

And along with gold, oil prices are now slipping lower, with West Texas crude approaching $101. Still too high, but much less scary. Wholesale unleaded gas prices also could fall in response to the drop in crude, which might take the pressure off retail gas at the pump. If that’s the case, and the King Dollar scenario plays out, the recent energy-price shock could reverse, imparting a mild tax-cut effect on consumers and businesses.

Although Bernanke & Co. do not target the dollar, a stronger greenback is the surest way to bring down energy and food prices, which all too often have plagued households and the economy.

The Joint Economic Committee has estimated that the cheap dollar has contributed about 45 cents to the rising gas price. Lately, with the drop in crude oil, nationwide gas prices could be starting to level off at just over $3.90 — even though refiner closings and bottlenecks in some parts of the country have pushed that price much higher.

No, a stronger dollar won’t offset the failure to implement the Keystone Pipeline. But it could provide some motorist relief at the pump.

The point is, if the Fed quits printing new money, the value of dollar money will go up. And the inflation tax will go down. Despite Ben Bernanke’s economic worries, the Fed is beginning to see that the economy is at least growing by roughly 3 percent. That’s not fabulous, but it’s not bad either.

The latest ISM surveys for manufacturing and services, the decent 209,000 ADP employment report for March, and pretty good car sales all suggest that the first-quarter economy was just as good as the fourth-quarter economy. And these economic stats are moving the Fed away from more easing moves. Hence, King Dollar is recovering at least a bit.

The dollar view on the economy and stocks is a minority case, but a very important one that should not be overlooked. During prior stock market booms, particularly in Reagan’s first term and Clinton’s second term, King Dollar rose and gold fell, oil prices came down, and foreign capital sought out dollar investments in the U.S. because of the reliability of the currency.

For investors, a strong dollar helps.  

There Obama Goes Again



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As Ronald Reagan famously said, “There you go again.”

Of course, Reagan was blaming Jimmy Carter for launching false attacks during a debate. And that line was so effective, it not only helped Reagan win the debate, but a presidential election that would change American history.

But “there you go again” can apply equally to President Obama. Once again this week, the president was out on the campaign trail bashing and oil and gas companies. And he continued to spread major falsehoods about this industry, which I guess is the polite way to put it.

Read my full column here.

Romney’s in a Sweet Spot If the Supremes Overthrow the Mandate



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If the Supreme Court overthrows the individual mandate, doesn’t Mitt Romney say “I told you so” and emerge as the big political winner?

All along he’s been arguing that only states have mandate power, and that the federal government under the commerce clause, or any other law, is guilty of massive regulatory overreach with Obamacare.

While fending off criticism from Rick Santorum and others about the Massachusetts mandate, Romney has always said it was a state issue, not a federal one. And if the Supreme Court agrees, it would have to give the former governor a leg up in credibility with Republicans and the general public.

President Obama, meanwhile, would emerge as a big political loser. Obamacare was the central signature domestic economic plan for his administration. What else does he have to show for nearly three and a half years in office? An $800 billion stimulus plan that didn’t work? A tax on rich people? An assault on oil and gas companies?

Besides Obamacare, what can the president really point to as an accomplishment?

The other big winners in the event the mandate is overturned are business and the economy. Talk to almost any CEO and they’ll tell you that the tax-, regulatory-, and insurance-cost threats from Obamacare have stopped them from hiring. Or, if they have made new hires recently, they’ve gone a lot slower than would have been the case without Obamacare. Remember how many companies asked for Obamacare waivers this past year. That shows their distaste for the legislation.

Of course, there’s still the huge tax cliff coming early next year, when virtually the entire tax code is upended. But Obamacare, with all its tentacles, has been a huge growth impediment. The Supreme Court could remove that jobs barrier, not to speak of the potential fiscal bankruptcy suffered from the gigantic costs of new Obamacare entitlements.

Mitt Romney’s job in a post-Obamacare world is to show voters what his alternative would be. In a recent op-ed in USA Today, he begins to set this out: tax benefits for individuals purchasing insurance outside their workplace; more competition and consumer choice for insurance plans; medical-malpractice reform; interstate insurance options; and state-determined insurance protection for those with preexisting illnesses. All this is a good start. Rather than a government-run health-care reform, Romney is pushing a market-run reform, which has long been a Republican idea.

So we’ll see in a couple of months how the Supremes decide the Obamacare case. But Romney, the likely GOP nominee, is well positioned to take advantage of a scenario where the Obamacare federal takeover is rejected.

Romney’s Tough Conservative Positions



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The late William F. Buckley Jr. naturally put it best when he said, “The wisest choice would be the one who could win. No sense running Mona Lisa in a beauty contest. I’d be for the most right, viable candidate who could win.”

Bill Buckley’s Law applies to Mitt Romney today. And it’s worth noting Rush Limbaugh’s recent update to the dictum. Following Romney’s terrific Illinois victory speech on Tuesday, Rush said flatly, “A conservative alternative to Romney is Romney.”

As the tough primary season ventures on, Romney has clarified and evolved his views into tough conservative positions. 

Read my full column here

Ryan’s Supply-Side 2012 Budget



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There are a lot of really good things in Paul Ryan’s new budget, which is a stark contrast to the Obama budget. Ryan cuts spending by over $5 trillion, lowers the deficit by over $3 trillion, and brings the debt-to-GDP ratio down to 62 percent. All of these are ten-year totals.

Ryan also cuts back on small entitlements, block-granting them to the states. Then, of course, there’s the new and improved Medicare-reform plan.

But what I really like about this year’s Ryan budget is his singular emphasis on pro-growth, supply-side tax reform.

Working with Dave Camp, Ryan has laid out a great blueprint for Mitt Romney and the whole Republican party. In particular, while listening to the budget meister at a small luncheon for conservative journalists and think-tankers in Washington on Monday, what I heard again and again was an emphasis on economic growth.

This is not to say Ryan is not worried about spending, deficits, and debt, which of course he is. But his reform message to limit government really spends a lot of time on tax simplification, ending cronyist carve-outs and loopholes, and of course dropping the personal and corporate rates.

Growth solves a lot of problems. All those GDP ratios for spending, deficits, and debt look a lot better when the GDP denominator is rising rapidly. Not through inflation, but through new incentives to promote real growth.

Unfortunately, the first cut of the Ryan budget is based on CBO static estimates of growth and revenues. That is a budget-committee obligation. But I’m told that on Thursday we will get a different set of numbers based on dynamic scoring of lower tax-rate incentives. I’m guessing the growth difference is 3 percent static and 4 percent dynamic. Dropping tax rates as much as Ryan does, which reminds me of Reagan-era tax reform, could probably produce even more growth. Therefore, the budget could be balanced in a much shorter period of time with much lower debt ratios.

Let’s see what the second set of numbers brings.

King Dollar Will Cut Oil Prices



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No matter how much President Obama protests, the simple fact is that he continues to oppose and mock and disparage oil and gas drilling. He is a prisoner of the environmental left, and he remains on the wrong side of energy history.

And that’s exactly why he has a 59 percent negative rating on the economy, according to a recent poll, even though jobs and other indicators have actually picked up. It’s about $4 or higher gas at the pump. Polls overwhelmingly show that Americans want drilling in ANWR and offshore, and that they want hydraulic fracturing of shale for oil and gas. They also overwhelmingly want the Keystone Pipeline (by roughly 70 percent). And they believe the government can act quickly to lower gas prices in the short run.

But the president scoffs at all this. 

Read my full column here.

Fed Hooey



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I didn’t want to let the latest cockamamie Fed idea for “sterilized” bond buying pass without a comment. A Wall Street Journal story explained that somehow the Fed will buy more long-term bonds, print new money, and then borrow the money back so it doesn’t cause inflation. It’s all a lot of hooey. Typical Fed tinkering. They can’t seem to help themselves. The dollar has already fallen about 1 percent since this story broke. Gold has jumped.

If you buy into the Fed’s argument, it will inject cash in return for new bond purchases. Then it’s going to take the cash out by selling Treasury bills to the very same dealers who bought the bonds. These are called reverse repos. Or, the Fed will somehow force the banks to put the original new cash into bank accounts called “term deposits.”

So we’ve got bond buys, reverse repos, and term deposits. And it’s all supposed to net out to no QE3, no pump-priming, no more money-creating. It’s too clever by ten.

And the Fed is catering to the easy-money crowd on Wall Street that wants the central bank to keep driving the stock market higher and higher.

Hooey.

The key role of the Fed should be to maintain the current and future value of the dollar, a.k.a. King Dollar. In fact, the best thing the Fed could do is appreciate the dollar by about 20 percent. That would drive down energy prices, including gasoline, and boost real consumer incomes.

This strong-dollar approach would be a rule-based monetary policy in direct contrast to the easy-money fine-tuning and tinkering which has gotten the economy periodically into calamitous circumstances. Actually, with 2.5 or 3 percent economic growth, including a modest bump up in jobs, the Fed should be normalizing interest rates. For example, the Taylor rule would set the fed funds rate somewhere between 1 and 2 percent, not zero, with no furtive bond purchases.

Bernanke & Co. has become the all-time Keynesian manipulator. If Mitt Romney becomes the next president, let’s hope he opts out of this and instead turns to a hard-money policy: King Dollar, preferably linked to gold. 

One-on-One with Mitt Romney



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I interviewed Mitt Romney yesterday for a special edition of The Kudlow Report. Throughout our talk he stayed on message for growth, jobs, less debt, and smaller government. He reaffirmed that “he won’t set his hair on fire,” meaning no splashy, off-message statements to distract from his fundamental economic push. He acknowledged that the primaries have made him a much tougher, better candidate, and that he is now more prepared to carry the fight to Obama. He emphasized his 20 percent supply-side reduction in income-tax rates. And interestingly, in response to a question, he said he would take a look at indexing the capital-gains tax for inflation. That’s a pro-growth idea supply-siders have pushed for many years. I hope he finally adopts it. 

Watch the full interview below (in two parts):

Romney’s Upper Hand



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Mitt Romney snatched victory from the jaws of defeat in Michigan by unveiling a pro-growth, 20 percent tax-cut plan and by resetting his limited-government spending cuts and entitlement reforms. In other words, he delivered an economic-growth package. It served him well.

It may not have been the only factor in his victory last week, but it put him squarely in the voter zeitgeist. And it may be apocryphal on Super Tuesday in Ohio, where he has come back to dead even after being down double digits. 

Read my full column here

Mitt Gets the Supply-Side Approach



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When former President George W. Bush cut taxes, including his 2003 reduction in tax rates on investment, he always referred to it as putting more money in people’s pockets. I don’t want to be unfair, because the 2003 tax cuts were his best policy move. But Bush was never a supply-sider. Putting more money in people’s pockets is a demand-side argument.

Contrast that with Mitt Romney’s tax-policy speech today at the Detroit Economic Club, where he touted his new across-the board 20 percent reduction in personal tax rates. The language is crucial: “By reducing the tax on the next dollar of income earned by all taxpayers, we will encourage hard work, risk-taking, and productivity by allowing Americans to keep more of what they earn.”

This is supply-side language. It is incentive language.

Many of us have been asking whether Romney understands the incentive model of growth. Namely, keeping more of what you earn, invest, or risk provides a bigger reward. And those rewards translate into a fresh tonic for economic growth.

Ronald Reagan understood this when he famously told people that he quit working as an actor because he only made about 10 cents on the extra dollar earned from the extra movie. Mitt Romney seems to understand this incentive model.

His tax-cut plan is not perfect. Instead of retaining all six brackets of the personal income tax, I wish there were only two brackets or maybe three for a modified flat tax. But it’s clear that Romney understands the incentive value of his 20 percent marginal rate cut. He is satisfactorily answering the question that I and others have posed about his understanding of the supply model.

Reward more and you’ll get more. It’s not just a one-time benefit of more cash. New tax incentives at the margin change economic behavior for the better.

I will have more to say on the Romney plan overall, and about how it contrasts hugely with Obama’s massive tax-rate hikes. But for now I am satisfied that Mitt gets the supply-side approach. 

Barack ‘All of the Above’ Obama



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President Obama fought back against rising oil and retail gas prices in a speech in Florida on Thursday. But it was a curious speech. He started out by mocking Republicans, stating that GOP candidates are licking their chops as gasoline prices rocket up. He said, “They are already dusting off their three-point plans for $2 gas. I’ll save you the suspense: Step one is drill, step two is drill, and step three is keep drilling.”

Very clever. It’s kind of what Newt Gingrich said in this week’s Arizona debate.

But here’s the curious part. Obama said, “If we’re going to take control of our energy future; if we’re going to avoid these gas-price spikes down the line, then we need a sustained all-of-the-above strategy that develops every available source of American energy — oil, gas, wind, solar, nuclear, biofuels, and more.”

That’s a Republican policy. 

Read my full column here.

A Bolder Romney Tax-Cut Plan Is Coming



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Team Romney tells me there will be a bolder tax-cut plan released either at the debate tomorrow night (if Mitt gets it in) or more formally at his Detroit Economic Club speech on Friday. I’m embargoed from releasing details until tomorrow. But I can say that the new plan will be across-the-board with supply-side incentives from rate reduction, and that it will help small-business owners as well as everyone else.

Dave Camp Spanks Tim Geithner



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Michigan Republican Dave Camp, the chairman of the powerful tax-writing Ways and Means Committee, gave Treasury man Timothy Geithner a tough spanking this morning. In a hearing on the president’s budget, Camp stated that nearly $2 trillion in tax increases will take more money away from employers, investors, and savers, and would push the top rates close to 45 percent. Camp noted that the bottom half of earners pay no federal income taxes, and that 70 percent of income taxes are paid by the top 10 percent, a group which includes the small businesses that are so important to job creation.

Why should Uncle Sam take nearly half of their income?

Camp then honed in on the Obama proposal to triple the tax on dividends from 15 percent to nearly 45 percent. The chairman went on the say, “Because dividends are paid out of income that has already been taxed at the corporate level and then are taxed again in the shareholder’s hands, this proposal would push the total federal tax rate on dividends to 64 percent.” (Italics mine.)

Camp next hammered Geithner on corporate tax reform. As in, “Where is your plan?” As in, “The U.S. will have the highest corporate tax rate in the industrial world.” Camp asked Geithner why the U.S. is at a competitive disadvantage in the world marketplace. (I would note that while the U.S. corporate rate is 39 percent, Canada’s combined federal-provincial corporate tax is 25 percent.) Camp could have added that Team Obama is going to have a corporate tax plan, and that it will raise $350 billion, including $150 billion for something called a “global minimum tax,” a new tax that has nothing to do with tax reform.

Finally, Camp hit Geithner on the debt problem, stating that our total debt load is now 102 percent of GDP — certainly a warning point for future economic growth.

I’m glad Dave Camp is on the warpath. One thought: He should report his bold corporate-tax-reform plan out of committee and onto the floor, where the GOP House can then pass an exemplary pro-growth, corporate-tax reform to turn up the heat on the White House and the Democratic Senate. 

Obama’s Class-Warfare, Tax-the-Rich Budget



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If you shake out the Obama budget in terms of bold headlines, it’s really a class-warfare, tax-the-rich budget. Layer upon layer of tax hikes are piled on successful investors, small-business owners, and corporations.

The capital-gains tax goes from 15 percent to 24 percent (including Obamacare). The dividends tax goes from 15 percent to nearly 40 percent, and that’s not including the double tax on corporate profits embodied in dividends and capital gains. The Bush tax cuts for top earners are repealed. There’s the 30 percent Buffett-rule minimum tax on millionaires. The carried-interest tax for private equity, hedge funds, and other investment partnerships goes from 15 to 39.6 percent. The estate tax jumps to 45 percent. State and local bond interest deductions are severely limited. Oil and gas companies get hit. So do banks. And there’s probably more stuff in there I haven’t read yet. (Jimmy P. lays it out nicely.) Paul Ryan’s press release calls it a $1.9 trillion tax hike, with $47 trillion in government spending over the next decade and the fourth straight year of trillion-dollar deficits.

Some kind of corporate tax reform may be released in a few weeks. But we don’t know much about it. And while it may lower the top rate, it’s going to penalize U.S. firms operating abroad by roughly $150 billion in tax hikes. All in, the Obama budget raises corporate taxes by $350 billion. Just what business does not want or need.

Former Bush economist Keith Hennessey estimates that new proposals would create a ratio of at least 1.2 dollars of tax increases for every dollar cut in spending. Most of the spending cuts would slam Medicare doctors and other health providers. Unlikely to happen. And there is no overall entitlement reform. Somehow the Obama budget is being offered as a substitute for the $1.2 trillion in spending cuts from the supercommittee. But the slam down in defense remains a huge problem.

There is no $4 trillion in new deficit savings, because $1.2 trillion was already scored by the supercommittee. Plus, another $1 trillion was already counted as savings from the wind-downs in Afghanistan and Iraq. And $800 billion comes from interest savings, not program cuts.

So maybe there’s $1 trillion in spending reduction over ten years. But as the details trickle out, that’s a big maybe. Compare that to $47 trillion of total spending increases and at least $1.5 trillion of tax hikes.

The deficit for the coming year, which is $1.3 trillion, would be 8.5 percent of GDP. More important, budget spending remains at over 24 percent of GDP. Debt held by the public for 2013 would be $12.7 trillion, or 77.4 percent of GDP. In terms of ten-year totals, spending would rise by $47 trillion and deficits by $6.7 trillion.

Really, this is a budget that says we must raise taxes in order to raise spending. It’s a 1 percent vs. 99 percent budget. But if these tax hikes ever went through it would be a 100 percent whack at future economic growth.

Obama chief of staff Jack Lew was wrong yesterday to suggest that a budget passed in the Senate requires 60 votes. By law, budget reconciliation requires only 51 votes. But this budget is dead on arrival. All the Republicans and many of the Democrats are not going to vote for across-the-board tax hikes. That’s a good thing.

But the question now is: What happens next? The U.S. is in a heap of fiscal trouble — on the verge of bankruptcy. What are we going to do about it?

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