President Obama Forgot Finance 101

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President Barrack Obama recently announced a one year stimulus plan of $450 billion to boost the economy. The plan consists of tax cuts and some additional spending to help boost the slow economic growth. However whether it is to make the deficit hawks happy or to play the populist card, Obama announced a plan to offset the stimulus package.

 

Obama has planned to make the plan “deficit neutral” by increasing revenue by ~$470 billion (the extra $20 billion is supposed to add a “margin of safety to the plan). Below is a chart of the details:

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However, there is one huge problem called the time value of money. The President stated “And the American Jobs Act is not going to add to the debt — it’s fully paid for. I want to repeat that. It is fully paid for.  It’s not going to add a dime to the deficit.

 

All politics aside this defies the rules of basic economics. To my knowledge not one media outlet has covered one basic fact

 

Is this $450 billion in tax increases going to have same value in a decade? Will the $45 billion raised in 2023 dollars be even close to the figure which it is today’s dollars?

 

Unless we get into a Japan type of scenario, which this plan is meant to avoid, the $450 billion will be worth a lot less than the $45 billion that Obama plans to raise over the next ten years. This is called the time value of money.

 

So I leave the question open, did the President’s economic advisors forget such a simple fact? Do they assume that interest rates will be zero for the next ten years? And if so why are they passing this plan? Or do they know this plan won’t pass and no one in the media will call them on it (it has worked great so far)?

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