Problem set

Obama’s dreamy math doesn’t add up

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Maybe Barack Obama was daydreaming about another four years in office when former US President Bill Clinton brought down the Democratic convention last September by stressing the importance of arithmetic. In the first State of the Union address of his second term on Tuesday night, the president outlined an economic wish list that equates to a bigger role for Uncle Sam. It’s hard to see how the new spending would add up.

Although fiscal reform has gripped Washington, Obama focused on rebuilding the middle class by expanding government. Some new proposals, like creating manufacturing hubs, sound sensible. Others are less obviously prudent, like increasing the minimum wage by almost a quarter. Precious few were cost-free.

Though the president offered few numbers in what is typically a broader-minded speech, suggestions like public pre-school and incentives for companies that hire unemployed Americans would rack up billions in new federal expenditures. And, it doesn’t sound like his payment mechanism has much changed: additional taxes on the rich.

After raising rates on wealthier Americans in January, Obama now wants to close additional loopholes. For most of those affected by the recent increase, eliminating all deductions could reap nearly $800 billion more for Washington over the next decade, according to a back-of-the-envelope Breakingviews calculation using 2010 Internal Revenue Service data, while optimistically assuming the potentially lower resulting investment doesn’t harm growth.

Deficits would be pared, but the extra revenue would only represent about half of at least $1.5 trillion needed just to keep the federal debt-to-GDP ratio stable. This also assumes $1 trillion in automatically triggered cuts that neither party much wants are implemented. It doesn’t, however, account for any of the additional stimulus spending the president called for in his speech. What’s more, he’s keen to mostly leave Social Security and Medicare alone despite the long-term funding problems forecast for both programmes.

With Republicans ready to block any new spending, that leaves only Obama’s few budget-neutral, politically uncontroversial ideas. Among them are free-trade deals, a few healthcare tweaks and forcing some colleges to slow tuition growth. Any way it’s sliced, the president’s budget, deficit and tax math simply doesn’t work out for the US economy.