A State of the Union Roundup

 | Feb 13, 2013 | 9:30 AM EST  | Comments
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In his State of the Union address Tuesday night, President Obama began by addressing the aspect of rising corporate profits and his goal of a "rising, thriving middle class" -- and then he then focused much of his time on the federal budget. Why such a big emphasis on the budget in his speech, and so early in the speech? Well, the nonpartisan Congressional Budget Office projects that, if current laws remain in effect, by 2023 debt will likely comprise 77% of gross domestic product -- leading to dwindling national savings, a lack of financial flexibility for lawmakers and a heightened risk of fiscal crisis. Should the last item transpire, says the CBO, it would impair confidence to such an extent that "the government would be unable to borrow at affordable rates."

As Obama recognizes, every dollar the government borrows to fund the deficit is money a company can't use to expand its business, or a mortgage that a would-be homeowner can't get. He cited the need for a "balanced" approach to cutting the deficit, but said we need to "work to pass a budget that replaces reckless cuts with smart savings and investing in our future." While he noted that we "must keep promises we've already made" with regard to entitlements, he also acknowledged that "modest" entitlement reforms would be necessary in such programs as Medicare -- which will face rising medical costs associated with an aging population.

He also cited a need for "bipartisan" tax reform, citing the need to close "loopholes" and saying he is "open to other ideas." Economic growth is the primary goal, he said, with deficit reduction as secondary agenda -- likely made more possible with a growing economy.

But just how "modest" are those entitlement reforms and precisely how much will be saved by closing those "loopholes?" I do agree that the emphasis should be on Medicare; future spending in that area will be a driver of our budget deficits, per the CBO and other researchers. We also need to raise tax revenue -- because if we don't touch entitlements or increase taxes, that would necessitate us to cut defense spending in half and then eliminate the entire rest of the federal government.

Separately, Obama called for a $50 billion infrastructure spending package in order to address the nearly 70,000 "structurally deficient" bridges in the U.S. While he did not mention how we would pay for this program, such a program would be a means toward rehiring the legions of construction workers without work -- a sector with a 16.1% unemployment rate. It may also improve productivity if it reduces transportation costs into the future. But, since it is likely to increase the deficit, I am not sure how politically doable this proposal is.

Moving on to my pet theme -- education -- we can plainly see why this is an important issue, given the far lower unemployment rates among those with college degrees vs. those without. But Obama's speech wasn't just about getting people to college. He also emphasized support for preschool, and said he wants to improve high schools so it's possible to procure employment with just a high school diploma. In Germany, he noted, high school graduates earn the equivalent of an associates' degree from a technical school.

Here in the U.S., many of the unemployed do not have the technical skills for high-tech manufacturing jobs, which now often require an associates' degree -- so such a change would create a workforce that allows both the middle class and our manufacturing sector to grow. I would ask how we'll pay for these education initiatives, though Obama did note that every dollar we invest in the youngest of children leads to $7 in savings elsewhere, from reductions in teen pregnancy and crime to higher wages -- and higher tax revenue.

In the meantime, for workers unable to move beyond minimum-wage jobs, Obama notes that such pay would mean poverty for a two-child family -- so he proposed raising the federal minimum to $9 per hour. This topic circles back to his desire to increase wages as a percentage of GDP, presumably at the expense of corporate profits.

But, beyond this, taxpayers are providing welfare to nearly 15 million people whose primary source of income is from a job, according to data from the Department of Agriculture (PDF). Fewer people in poverty would reduce the overall ranks of working Americans dependent on government benefits. So, if we raise the minimum wage, that shifts the burden of providing income to some poverty-stricken households from taxpayers to their private-sector employers.

Also, needless to say, a raise in the minimum wage would benefit overall consumer spending. So, when we provide welfare to working Americans, it may be logical to conclude we are also supporting corporate profits and executive pay.

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