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President Obama’s Budget: Hardly a “Grand Bargain”

Like malfunctioning clockwork, President Barack Obama's new budget proposal has arrived (a little late) to provide us all with some comic relief. Aptly referred to as a "fantasyland" by POLITICO's David Nather, President Obama's budget hikes taxes, expands federal interference in education, increases the minimum wage, and bails out another federal agency. Sound appealing?

• Nobody should be surprised that the president wants higher taxes. Ever since House Republicans compromised on taxes to avert the "fiscal cliff," President Obama has made it very clear that he expects future budgets and deficit-reduction deals to hike taxes, as well.

Specifically, he raises another $583 billion in new taxes on high-income Americans and he proposes a 94 cent hike on the cigarette excise tax, thereby raising it to $1.95 per pack. From the president's point of view, current federal baseline spending of $3.618 trillion isn't enough. He wants to bump it up to $3.78 trillion, and he wants us to pick up the tab.

• President Obama suggests using $71.2 billion of this new revenue to fund "universal preschool" across the country. Regardless of your thoughts on the merit of preschool (which is certainly debatable), this is just another example of federal overreach in the realm of education. Traditionally, states and local governments exercised control over education, but the federal government has grown increasingly involved in recent decades, and with harmful effects. Once again, the president displays his disregard for federalism and disdain for federal restraint.

• Apparently feeling that the unemployment rate is too low, President Obama also calls for a hike in the federal minimum wage, from $7.25 to $9.00. Most economists will tell you that raising the price floor in any market (including the labor market) will reduce the quantity demanded while increasing the quantity supplied. In other words, unemployment will go up. How much? As economist Russ Roberts argues:

"Economists have done an immense amount of work trying to measure these effects and the overall impact on the poor. The overwhelming consensus has been that minimum wages serve the poor very poorly. The standard finding is that a 10% increase in the minimum wage reduces employment among low-skilled workers from 1% to 3%."

Just for the sake of reference, President Obama is proposing an increase in the minimum wage of more than 20%. For a more complete understanding of the impact of minimum wage hikes, I suggest reading this article by FreedomWorks' Patrick Hedger.

• The budget also provides for a $943 million taxpayer bailout of the Federal Housing Administration, which is losing money hand over fist due to high-risk loans made in 2007. It's incredible to think that we're still on the hook for bailing out failing and mismanaged federal agencies, especially housing-related ones. Haven't we seen this movie before?

• Fortunately, it's not all bad news. President Obama's lengthy budget does contain one notably positive item: the implementation of "chained CPI" in Social Security, which will require a bit of an explanation. Each year, Social Security benefits increase on the basis of cost-of-living adjustments, which are meant to prevent inflation from reducing the real value of those benefits.

There are different ways to calculate inflation, and therefore the size of the cost-of-living adjustments. Right now, the government uses the "consumer price index" (CPI) to calculate inflation. However, many economists believe that the CPI tends to overestimate annual inflation significantly. As a result, Social Security benefits increase by more than the inflation rate.

Chained CPI is a more accurate variation of the consumer price index, and using it to replace the current CPI method would make the annual cost-of-living adjustments serve their intended purpose, instead of working as a back-door means to increase entitlement spending. Unsurprisingly, many among the left haven't embraced this portion of the president's budget. Senator Elizabeth Warren (D-MA) decries the proposal and insists, "...we cannot allow [Social Security] to be dismantled inch by inch."

In other words, she considers improving the inner workings of Social Security equivalent to "dismantling" the program. If Senator Warren wants to increase Social Security benefits beyond what's necessary to mitigate the effects of inflation, I would suggest that she propose an actual law to that effect, instead of relying on a flawed technical mechanism within the program to do it. It's not only dishonest, it's ridiculous. At least President Obama was willing to accept this common-sense reform as part of his budget.

President Obama's budget is still, for the most part, awful. I have only highlighted a few of the many substantial problems with it. He proposes tax hikes, new spending initiatives, and further government expansion. His budget never balances, and he barely addresses entitlements, which are the primary driver of our rising national debt. To put it simply, the United States would be made worse off by enacting his plan.

Of course, the president will never have the opportunity to sign his budget into law. Indeed, his previous proposals have failed to garner even a single vote in either the House or the Senate. Two years ago, the Senate rejected his budget with a vote of 0-97. Last year, the Senate issued an even more resounding repudiation with a vote of 0-99. The House voted it down with a tally of 0-414, for good measure.

Perhaps President Obama will finally shame a few Democrats into supporting his budget this time around, but I certainly wouldn't bet money on it. Given the challenges confronting us, the president's plan is a serious disappointment.