Barack Hussein Obubble: the moniker fits, now that the grand Keynesian scheme of refloating the world economy on a tide of government debt has come undone. Global stock markets fell 3 percent to 4 percent overnight because American incompetence and American weakness have combined to make the world a dangerous place in which to risk money.
What ails the market is a simultaneous breakdown of Washington’s economic and strategic policies.
We have drawn repeated attention (“Who Will Bail Out the Bailer-Outers?,” May 10) to the Bernie-Madoff-like Ponzi scheme on which the Obubble was founded. America runs a budget deficit close to 12 percent of GDP, unprecedented in peacetime, with a savings rate of under 3 percent. The trillion and a half dollars of federal debt that must be sold annually to finance this deficit are sold to banks, who buy them with cheap funds provided by the Federal Reserve and a great deal of leverage. Two-thirds of the deficit is financed by the banking system, and half of it is financed by banks overseas. The whole world repeats the exercise.
Chains (and chain-letters) break at the weakest link, and the weakest link was Greece, followed closely by Spain, Portugal, Ireland and Italy. European banks bought these countries’ debt with enormous leverage, which turned into the European equivalent of America’s subprime disaster. America’s subprime disaster, to be sure, is not yet over; all that has happened is that American banks have made excellent money buying Treasury securities with very cheap money. Charles Morris called it a “long con” yesterday at the Daily Beast:
At bottom, the muddling through strategy assumes that we can get the economy back on its old footing—rising house prices, more borrowing, higher mall traffic. Everyone knows that’s not sustainable, but the hope is that once everything is ticking along we can—oh so gradually!—pay off our debts, recover the old industrial mojo, stand up to China in export markets.
It’s what The Grifters called a ‘long con.’ Great if it works but very hard to pull off. At the moment, it looks very shaky. Household net worth is 19 percent lower now than it was at the end of 2007. Consumer debt has dropped only a little. The banks are gobbling up the stimulus dollars, and savings-eating zombies still stalk the land. Few of the real underlying problems, like low savings rates, have been truly addressed. Zero interest just makes them worse.
When financial market participants doubt the viability of the long con, they demand a risk premium for lending to banks that are lending to governments that are bailing out the banks that are lending to governments. The cost of funds to banks is rising, by a relatively small margin, to be sure (from a quarter of a percent to slightly over half a percent). That doesn’t seem like much, but since the banks only get three-quarters of a percent buying 2-year Treasuries, the rise in the bank risk premium threatens to undo the whole Obubble. And the rising cost of funds for heavily indebted southern European countries means that the carrying cost of their debt will be entirely insupportable.
The other proximate cause of the market crash overnight is North Korea’s bellicosity. That is the immediate result of the Obubble administration’s stated policy of withdrawing America’s presence from global affairs. When the cat’s away, the mice kill each other, as I wrote in a “Spengler” essay last October. If the Korean peninsula looks frightening, think of a nuclear-armed Iran rampaging around the oil-producing regions from the Caspian Sea to the Persian Gulf.
What ails the market is a simultaneous breakdown of Washington’s economic and strategic policies. And until there is a decisive change in Washington, things will get worse.
May 25th, 2010 | 10:49 am
‘Barack Hussein Obubble’. Wow. Now we can get our fill of snappy Mark Levinisms from First Things. Who woulda thunk it? Now I just wait for ‘libs’ and ‘Repubicans’. Then it’ll be a real thinking-person’s journal….
May 25th, 2010 | 11:12 am
Did you notice that sometimes terrorist groups take credit for violence which they did not inflict? Similarly, your group is attempting to take credit for this dip in the market because threating Obama with reduced campaign contributions isn’t working. Nice try but it’s still your move. We are waiting.
May 25th, 2010 | 11:44 am
I seem to remember that George W. Bush was also radically Free Lunch and Free War. Are there similar protestations of his undisciplined profligacy in the FT archives?
FT is becoming increasingly coupled with the neo-cons at National Review. Which is a shame. It should have a voice of its own.
May 25th, 2010 | 11:47 am
SteveM FT is becoming increasingly coupled with the neo-cons at National Review. Which is a shame. It should have a voice of its own.
I can appreciate the criticism but I don’t understand the “neo-con” part. Why is opposition to Obama’s incompetence “neo-connish”? Isn’t that something that almost all conservatives agree on?
May 25th, 2010 | 11:48 am
I forgot, North Korea never did anything bellicose before January 2009.
I hope it’s not a low blow to refer to some past predictions of an economic and political nature:
“The same financial markets that swooned in July while Israel fought Hezbollah have forgotten the meaning of risk. The question the world should ask George W Bush is, “If you so dumb, how come you ain’t poor”? The US economy and US markets are looking more buoyant than ever.” — Jan 9, 2007
“Things may not look too bright for the US president right now, but George W Bush is poised for the strongest political comeback of any US politician since Abraham Lincoln. Republicans will triumph in November’s congressional elections because by then Bush will have bombed Iran’s nuclear installations, and Americans will rally around him again.” — April 10, 2006
Rosy and triumphalist predictions up until markets started getting nervous in July 2007. Now that there is a Democrat in the White House, it’s gloom and doom all the way.
May 25th, 2010 | 12:18 pm
Re: Joe Carter “Why is opposition to Obama’s incompetence “neo-connish”? Isn’t that something that almost all conservatives agree on?
Of course. But it’s the selective disparagement of the “Obubble” that is neo-conish.
BTW, Obama is indeed a nitwit, (as was Bush). And liberals should be in opposition to Obama’s policies too. Because a wrecked economy and a flat broke government transcend political orientation. (However the Beltway crowd somehow always walks away rich.)
May 25th, 2010 | 1:28 pm
SteveM,
I don’t believe for a second that Obama is a nitwit (although I suspect he’s not nearly as brilliant as he and his acolytes think he is). I do believe he is naive and divorced from reality, protected as he was by the academic leftist cocoon of elite universities and skybox liberalism. His foreign policy is a catastrophe, but I believe it results from the anti-western academic leftist view of the world rather than from incompetence.
Nor do I believe Bush was a nitwit. He was a victim of his management style, stubborn misplaced loyalty (to Harriet Meyers, Donald Rumsfeld, Alberto Gonzales, Michael Brown, among others), and circumstance (Hurricane Katrina, the culmination of two decades of bad policy in the financial collapse on his watch).
And I don’t know who you consider “neocons,” but as a regular reader of the Weekly Standard and Commentary, I’ve seen disagreement among so-called “neocons” about Bush, and even individual “neocons” like some of his policies and dislike others. The term “neocon” has come to have the all-purpose-insult-drained-of-any-specific-content quality of the word “fascist” as used by some on the left.
May 25th, 2010 | 2:07 pm
Re: Fred “I don’t believe for a second that Obama is a nitwit…I do believe he is naive and divorced from reality…”
Researchers claim that there are perhaps 5 flavors of intelligence. Apart from IQ, Obama (and Bush) are deficient in maybe 3 of them. I.e., their obvious analytical and problem solving deficiencies that you point out indicate that.
It’s clear to me that America can’t run trillion dollar deficits forever. Why isn’t that clear to Obama. It’s clear to me that wars aren’t free. They have to be paid for. Why wasn’t that clear to Bush? Nitwits.
American elites use academic pedigrees as proxies for wisdom, (being able in all 5 flavors.) Elena Kagan’s competence to serve on the SCOTUS? Who knows? But she got her tickets punched. So that’s all that matters.
Harvard probably “trained” more over-inflated wreckers of American fiscal and foreign policy than any other institution.
The neo-con reappraisal of Bush is too little, too late. It should have happened 6 years ago. Moreover, the NRO and WS crowd still lionize Dick Cheney. The guy who said deficits don’t matter.
And that the term “neo-con” marginalizes, well it deserves to be marginalized, because it’s adherents are often mindlessly reactionary, just like the sclerotic liberals who became mindlessly reactionary 40 years ago.
I visit FT hoping to get away from that.
May 25th, 2010 | 2:55 pm
“And that the term “neo-con” marginalizes, well it deserves to be marginalized”
I suppose one could make that argument, but since you’ve pretty clearly demonstrated that you neither know nor care what the term even means, that will require some other author.
May 25th, 2010 | 3:01 pm
SteveM
I don’t buy the notion of multiple intelligences. It’s pure political correctness. If we can pretend there’s 5 or 7 or 9 or 142 kinds of intelligence then we can pretend that nobody’s really any smarter than anybody else: “You’re not a moron you’re just ‘differently intelligent.’” Obama’s naivete and Bush’s stubborness are character flaws that have nothing whatsoever to do with intellect. I would agree though, that intellect does not necessarily correlate in a direct way to good leadership, policy, or statesmanship (at least up, or down, to a point).
The final paragraph of your last comment does nothing to clarify who, or what set of ideas, you call “neocon.” Which specific adherents to the label do you consider sclerotic reactionaries and why?
And as far as the wars are concerned, is it your contention that we should have let the Taliban continue to rule Afghanistan? And Bush’s big mistake in Iraq was not the invasion itself, but his buying into the lunatic notion that a collection of knuckle-dragging medieval savages with a 10,000 year tradition of brutal tyrants lording over supine populations was somehow capable of democracy and the rule of law. Before 2006, the war was having a beneficial effect (Syria out of Lebanon, Khaddafi giving up his WMD) to the point where Jon Stewart was worried about high schools being named after Bush. It was trying to turn an Arab sow’s ear into a democratic silk purse that caused it to go to hell. So of course the war wasn’t free, but had it been handled properly (killing Saddam, setting up a Saddam lite, and getting the heck out) it would have been worth the cost. Even now, encouraging our enemies and discouraging our allies by a precipitous departure from Iraq would ultimately cost more than the war itself.
May 25th, 2010 | 4:25 pm
Hey, you know what would be cool? If someone actually engaged Goldman’s ideas instead of harping on IQ or slinging accusations of demogoguery.
Bush and Obama are both spending, but for far different reasons. Bush’s spending was not some grand Keynsian scheme to save world economies from collapse. You can agree with it or not, but he was fighting a war and that tends to be expensive.
I think Goldman’s point is that no one is addressing root causes of the economic situation. How could they, really? You can’t ask the profligate to take charge of the reform. By ‘profligate’ I don’t mean the Dems or Republicans, but the whole kit-and-kaboodle, the system, the Matrix, the whatever.
Who is the person who is going to start taking responsibility, the person who will say ‘No’? I would place more hope in GWB than Obama to be this guy.
We are a nation without identity, without spirit, without a notion of sacrifice. It ain’t lookin’ good.
What I’d like is someone who is educated in economic matters (like Goldman) to explain to me how the whole thing is going to unravel, because I think we all know deep down that it will. Maybe not today, or next month, or next year, but it’s goin’ downtown.
So please engage Mr. Goldman on his ideas. You think it ain’t goin’ down? Say why. Economics is not voodoo (I hope). Articulate an argument and go, baby. I’d love to hear that we’re not going down in flames, cause I’d love to raise my kids in a stable republic.
May 25th, 2010 | 5:26 pm
Re: Umberto
Great comments. And that was my point. Goldman with his Obubble schtick politicized what from the FT perspective should be an assessment of the systemic pathologies that transcend both political parties. FT should be above schtick.
At this point, I don’t care which Party is more rotten. They are both rotten. The question FT should explore is how people of faith can engage politically in such an environment.
As for Brian and Fred above, they should cheer lead at NRO where war is always featured on the menu.
May 25th, 2010 | 5:50 pm
Steve: I accept your concession that you have no idea what the term “neocon” means and don’t know how to use it other than to refer to “stuff SteveM doesn’t like”.
May 25th, 2010 | 5:55 pm
America runs a budget deficit close to 12 percent of GDP, unprecedented in peacetime, with a savings rate of under 3 percent. The trillion and a half dollars of federal debt that must be sold annually to finance this deficit are sold to banks, who buy them with cheap funds provided by the Federal Reserve and a great deal of leverage. Two-thirds of the deficit is financed by the banking system, and half of it is financed by banks overseas. The whole world repeats the exercise.
Commercial banks currently hold about $1,000 bn worth of Fannie Mae and Freddie Mac issues and about $500 bn of Treasury securities.
http://www.federalreserve.gov/releases/h8/current/default.htm
Total assets of commercial banks are about $11,800 bn, so this sum represents about 13% of their total assets. That has not changed much in recent years.
The outstanding public debt of the United States is currently around $12,000
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm
The issues of Fannie Mae and Freddie Mac amount to about $4,200 bn, so commercial banks are currently holding 9% of the sum of outstanding issues of the U.S. Government and the sponsored enterprises.
Borrowings by commercial banks from the Federal Reserve now amount to about $77 bn.
http://www.federalreserve.gov/releases/h3/current/h3.htm
Liabilities of commercial banks are currently in the neighborhood of $10,400, so this amount would be < 1% of total liabilities. A year ago, commercial banks owed about $558 bn to the Federal Reserve.
Miscellaneous public agencies, Fannie Mae, and Freddie Mac currently own about $800 bn worth of mortgages, or 5% of outstanding mortgage debt. The Federal Reserve currently holds about 25% of the outstanding Fannie Mae and Freddie Mac issues derived from their mortgage pools (the pools accounting for about 30% of outstanding mortgage debt). That amounts to about $1,100 bn, or about 8% of outstanding mortgage debt.
It ought be noted that the economy contracted at an abnormally rapid rate from August of 2008 through April of 2009. At that point, the contraction ceased. Given that the stimulus was supposed to consist of public works projects with comparatively long lead times (a good deal longer than 10 weeks), it would seem that the end of the economic contraction is not attributable to expansionary fiscal policy derived from the stimulus.
Elimination of public sector deficits accounting for 10% of domestic product is a feat that has been accomplished multiple times in European countries over the last 25 years, generally in stages over four or five fiscal years.
May 25th, 2010 | 5:59 pm
Goldman with his Obubble schtick politicized what from the FT perspective should be an assessment of the systemic pathologies that transcend both political parties. FT should be above schtick.
You and I are of one mind on that. I often agree with Gateway Pundit (though I do not care for his style of expression), but partisan political writing would have been considered inappropriate in this forum in Fr. Neuhaus’ day. Ditto financial news and commentary, with or without Mr. Goldman’s song-and-dance.
May 25th, 2010 | 6:26 pm
Brian – Neo-Con: Free Lunch and Free War.
There, you happy?
May 25th, 2010 | 10:36 pm
“Bush’s spending was not some grand Keynsian scheme to save world economies from collapse. You can agree with it or not, but he was fighting a war and that tends to be expensive.”
I’m not sure how to make sense of this comment. Defense spending is now higher than it was during the Bush years. Are you calling for a reduction in defense spending or saying that we are no longer fighting a war?
Moreover, the Bush deficits were caused not just by defense spending but also by tax cuts. Bush’s head of the Council of Economic Advisers Greg Mankiw defended these tax cuts at the time on the basis of orthodox Keynesian principles.
The recession we currently face is far worse than the dot-com recession of 2000-1. That makes the need to Keynesian stimulus far greater than the need was during the Bush Administration.
As for David Goldman, if he can post a link to an article written before mid-2007 that slams the Bush Administration for its huge deficits and Hamlet-esque reluctance to take on North Korea and Iran, it would be of interest. Let’s see his harshest critique of the Bush Administration and compare it to the above language.
May 25th, 2010 | 11:24 pm
Art Deco . . ., but partisan political writing would have been considered inappropriate in this forum in Fr. Neuhaus’ day.
I’ve pointed this out several times over the last few weeks, but I’ll say it again. The idea that FT never engaged in partisan politics when Fr. Neuhaus was around is a weird revisionist trend that has no basis in reality.
I suppose everyone must have missed Neuhaus’ article titled “Obama and the Bishops” where he criticizes the bishops and the “Catholic fronts for the Obama campaign.” (http://www.firstthings.com/onthesquare/2008/11/obama-and-the-bishops)
Search through the FT archives and you’ll see plenty of such “partisan politics” occurring when Fr. Neuhaus was EIC. It’s perfectly fine to criticize FT for engaging in such commentary. But let’s not pretend that it started in Jan. 2009.
SteveM Neo-Con: Free Lunch and Free War.
So FDR was a neo-con?
May 26th, 2010 | 12:34 am
“So FDR was a neo-con?”
Irving Kristol called FDR a hero of the neo-conservatives along with Teddy Roosevelt and Ronald Reagan in his article “The Neoconservative Persuasion.” Most mainstream neo-cons have never seriously considered rolling back or dismantling the New Deal.
May 26th, 2010 | 12:34 am
Typical leftist argument tactic: false equivalency and rely on short term memory and spent stamina.
The deficit spending under Obama lies in a whole different ball park than deficit spending under Bush, in terms of amount and ratio. It isn’t even comparable. Obama has spent more in one year than Bush did his entire eight. Look it up.
And BTW – many, many conservatives were upset with Bush’s spending (and said so at the time), although more of the anger should have been directed at the feckless GOP congress.
As far as the war, it isn’t productive to debate its results as though the left was innocently standing on the sidelines. For sure, the left never bothered to offer anything beyond platitudes, but its consistent and opportunistic campaign to destroy American morale had consequences – which we still have to live with to this day.
Also, Obama may be smart, dumb, incompetent, whatever, but when a US President implicitly encourages a foreign head of state to insult the citizens and the honor of the country he is supposed to represent, what does that make him. The answer to that is what has horrified so many on the right – and that outrage is supposed to cross beyond political boundaries. The fact that it is not, is ultimately why we are in for a very rude awakening.
I submit that many are mistaking the final erosion of the social contract for “politics as usual”.
May 26th, 2010 | 1:50 am
Typical leftist argument tactic
If this is addressed to me, it’s both an ad hominem and a false assumption.
The deficit spending under Obama lies in a whole different ball park than deficit spending under Bush, in terms of amount and ratio. It isn’t even comparable.
So what accounts for the difference? If you are going to claim the difference was caused entirely or primarily by Obama’s economic policy, that would be a false claim. The October 2009 CBO report attributed the change in deficit in the following manner:
1) $245 billion due to TARP and GSE bailouts
2) $200 billion due to stimulus spending
3) $87 billion due to other spending (military, planned increases in SS and Medicare, etc)
4) $100 billion due to additional tax cuts
5) $320 billion due to recession cutting revenues
Add these together and you get a total effect of $952 billion which is about the estimated change in the deficit between 2008 and 2009. Of these 5 items, the only that can really be said is due uniquely to Obama policy is number 2. All the others were either purely economic factors (like 5) or else things that would have happened under McCain or any other responsible President (1 was the policy of both Bush and McCain while 3 is uncontroversial and any Republican probably would have done 4).
So you have around $200 billion out of a total increase in the deficit of $950 billion or 21% that can be attributed to Obama. This leaves aside the question of whether stimulus spending is good or not (I think it is necessary at times like this).
As far as I know, no reputable economist seriously disputes the CBO numbers on this.
And BTW – many, many conservatives were upset with Bush’s spending (and said so at the time), although more of the anger should have been directed at the feckless GOP congress.
Sure, my comment was not about “many” conservatives. It was about David P. Goldman. I looked through the archives of his columns and all I could find was a fist-pumping expression of jubilation at the economy’s performance in 2007. If he excoriated Bush for the deficits of his administration (deficits that were projected — again, by the CBO and every reputable economist — to continue indefinitely into the future) I haven’t seen any of these criticisms.
The point is that even without a global recession, stimulus spending and bailouts, we would still be facing a pretty large and growing deficit. Many conservatives pointed this out repeatedly at the time. I’m curious if Goldman was one of them.
May 26th, 2010 | 3:24 am
more of the anger should have been directed at the feckless GOP congress.
I should say that while Congress certainly shares in the blame for the Bush deficits, the attempt to shift blame away from the Bush Administration does not work.
If you were to do an attribution analysis of the deficits from 2001-2008 (and I believe it’s been done) you would find three big factors behind the deficits: wars in Afghanistan and Iraq, tax cuts and the 2001 recession.
Now, the wars and the tax cuts were both explicitly Administration policies — you can’t shift responsibility for these spending decisions onto Congress. The recession hurt revenues in 2001 through 2003 but wouldn’t have had much impact in 2004 through 2007.
One thing I hope there can be consensus on is that whatever people think of running deficits during a recession, there is even less justification for running deficits during normal economic times. As I point out, the cost of the wars was not enough alone to tip the economy from surplus into deep deficit. It was the unprecedented combination of tax cuts and war-time spending that did that.
There is a very strange attempt here to absolve George Bush of the direct economic consequences of policies that his Administration explicitly pursued and enacted during his tenure.
May 26th, 2010 | 5:44 am
I’ve pointed this out several times over the last few weeks, but I’ll say it again. The idea that FT never engaged in partisan politics when Fr. Neuhaus was around is a weird revisionist trend that has no basis in reality.
And you would have uttered falsehoods in doing so. (btw, I picked up the March 1990 issue at World Wide News on St. Paul St. in Rochester and bought one every month until it occurred to me to get a subscription. I subscribed religiously for a dozen years or more. I am as familiar as anyone with Fr. Neuhaus usual m.o.).
Fr. Neuhaus and Dr. Neuchterlein did not endorse candidates and seldom said much about topical political questions except in so far these were a manifestation of discussions ongoing within the Church and the protestant congregations, or a manifestation of the friction between the teachings of the Church on moral and ethical questions on the one hand and the common-and-garden practices of mundane life or elite attitudes on the other, or an example of secular politicians putting the Church under siege. A piece of commentary he wrote about 11 years ago taking the Clinton Administration to task over the bombing of positions in Serbia and adjacent territories was the rare exception. They bloody well did not employ a business columnist, much less a bad one, and you are well aware of that.
May 26th, 2010 | 8:56 am
It seems that there are two points that are being slightly conflated here. The first is whether Mr. Goldman is being partisan, and overly so. The second point is related to his economic perspective.
It’s easy to conflate the two, because economics can be so abstract and gauzy that we can ascribe whatever points we want to our party of preference. I think Mr. Goldman’s point is that we need to initiate some form of fiscal discipline that is divorced from Keynsian ‘wishful spending’, or perhaps a mixture of Keynsian economics and fiscal discipline. What is evident is that the fiscal discipline is lacking.
It could be that this is a normal ‘tax and spend’ cylce that will be paid off by future growth. It could be that there are underlying problems that will inhibit future growth, such as demographic imbalance and political instability. I’d love to hear more on this point. Some think that immigration will provide the demographic balance, and that American innovation will provide another burst of growth. I’m not so sure.
As for Mr. Goldman’s partisanship, I think that it’s evident, but not unfounded. He has a perspective that is uncommon amongst economists, especially in his attention to the demographic problem. You hardly hear about this anywhere else than in his columns. In any case, he is not merely (in my opinion) spouting partisan rhetoric. He has a point.
I’d love to hear more from economists on the numbers. Does anyone have a counter-point to Art Deco’s analysis?
May 26th, 2010 | 9:22 am
I don’t want to get into this argument about neo-cons and deficits, but I have to agree with the people who are saying that Goldman’s ridiculous “Barack Hussein Obubble” rhetoric is not the style of Fr. Neuhaus. Of course Neuhaus engaged in critique of or praise of the bishops at various times; that was in keeping with First Things’ mission regarding religion in the public square. What he wouldn’t have done is to become so crassly political as to call people petty names because of some personal grievance. Too often, the blogs on the site are becoming outlets for the bloggers’ personal right-wing political views in the form of personal insults against disfavored politicians rather than sticking to substantive critique on issues like abortion or poverty-reduction of the sort in which Fr. Neuhaus engaged.
May 26th, 2010 | 9:57 am
He has a perspective that is uncommon amongst economists, especially in his attention to the demographic problem.
I’m sorry but I have to disagree on this point. Two of the most renowned experts in the area of public finance are Peter Orszag and Alan Auerbach. Both of them are very aware of demography and do not shy away from the subject. If you read Auerbach and William Gale’s paper “The Economic Crisis and the Fiscal Crisis: 2009 and Beyond” you will see that it confronts the demographic problems head on and works these into its analysis. I can’t think of any reputable economist who fails to take the demographic shift in the U.S. seriously.
As to whether current policy is fiscally irresponsible, one has to first take notice of the CBO numbers I posted above. About one third of the increase in the deficit is simply due to taxable incomes collapsing. I think it was Hoover’s Treasury Secretary Andrew Mellon who was accused by Hoover of being a “liquidationist” and wanting to slash spending during the Great Depression in order to balance the budget. Unless you advocate such a (in my opinion, highly irresponsible) course of action, this part of the deficit has nothing to do with policy.
As for the rest, only about 20% was due to the stimulus package in 2009 while the remaining 40+% is due to TARP and the GSE bailouts (which, again, was a bipartisan measure believed by most people knowledgeable about the financial sector to be necessary), tax relief of $100 billion and relatively normal increases in spending.
I don’t see where one looks at these numbers and finds evidence of extreme fiscal irresponsibility. The only seriously controversial item is the $200 billion in stimulus spending (plus maybe the $100 billion in tax cuts and credits) and whether one finds that irresponsible is going to depend on whether you think Keynesian fiscal stimulus is a good idea or not.
CBO projections show that the budget will return to its pre-Obama course within a few years once the economy gets back on track. The debt will be a lot higher but the long-term impact on the budget will be minimal. That’s not to say this is a rosy scenario: read the Auerbach and Gale paper for more information. But the point is that the long-term deficits and demographic problems we have pre-dated Obama and were problems that Bush largely punted on.
The first priority ought to be dealing with the recession. Once the economy turns to normal, though, it will be very important to address to the long-term imbalances in the budget through some combination of terminating the Bush tax cuts and raising SS and Medicare taxes or cutting benefits.
May 26th, 2010 | 1:06 pm
“Brian – Neo-Con: Free Lunch and Free War.
There, you happy?”
If by “happy” you mean laughing hysterically that you think this is some meaningful definition of neoconservatism and/or conveys any single piece of information content other than that you are a silly and unserious man, then yes, I am happy.
May 26th, 2010 | 5:15 pm
The TARP program was a discrete piece of expenditure, not an ongoing committment.
It should be noted that Obama’s proposed budget for FY 2010-11 incorporates nominal spending levels which exceed those of FY 2007/08 by about 30%; nominal domestic product may exceed that of FY 2007/08 by 5%, so it does represent a considerable redistribution of resources to the public sector.
I think we are now safe in saying that the stimulus was not necessary to arrest the economic contraction. Innovation in monetary policy, automatic stabilizers, and TARP sufficed.
May 26th, 2010 | 5:18 pm
About one third of the increase in the deficit is simply due to taxable incomes collapsing.
Quit with the ‘collapse’ nonsense. ‘Decline’ will do.
That aside, ideally that would have been the source of most of the increase beyond FY 2008-09, not one-third.
May 26th, 2010 | 9:54 pm
The TARP program was a discrete piece of expenditure, not an ongoing committment.
Which is true, but not relevant to the question of why the deficit increased by almost $1 trillion between 2008 and 2009.
It should be noted that Obama’s proposed budget for FY 2010-11 incorporates nominal spending levels which exceed those of FY 2007/08 by about 30%…
The change in spending between 2010 and 2011 is 3%. The change between 2010 and 2009 was around 5.8%. These changes were due mostly to mandatory spending and interest on the debt. Spending increased drastically from 2008 to 2009 for reasons I already highlighted above.
I think we are now safe in saying that the stimulus was not necessary to arrest the economic contraction.
No, we are not safe in saying so. For one thing, look at the cross-country experience with fiscal stimulus.
ideally that would have been the source of most of the increase beyond FY 2008-09, not one-third.
Above, you seem to agree that TARP and automatic stabilizers were a necessary element in stopping the recession. These are not free. If you cut out stimulus spending, the recession would have been responsible for 42.6% of the deficit. If you cut out stimulus spending and tax cuts, you get 49%. Not “most.” Unless in your ideal world you also cut automatic stabilizers, planned increases in military, SS and Medicare spending and TARP. I’m sure you can do the math yourself.
May 27th, 2010 | 5:32 pm
Mark,
The economic contraction stopped cold in the 2d quarter of 2009. That is too soon for the stimulus to have had any effect.
May 27th, 2010 | 5:56 pm
The federal budget for Fiscal Year 2007/08 incorporated outlays of $2,900 bn, as seen here.
http://www.gpoaccess.gov/usbudget/fy08/pdf/budget/tables.pdf
The Presidents proposed budget for Fiscal Year 2010/11 incorporates outlays of $3,800 bn, as seen here:
http://www.whitehouse.gov/omb/budget/fy2011/assets/tables.pdf
That amounts to a 31% nominal increase at a time when net growth in real output is likely to be minimal and increases in prices are likely to be minimal.
Expenditure attributable to automatic stabilizers is reported here:
http://www.cbo.gov/ftpdocs/114xx/doc11471/05-27-AutomaticStabilizers.pdf
The estimates are that automatic stabilizers sum to 2.3% of domestic product, or about $330 bn. Again, the increase in planned expenditure over the three years in question is $900 bn.
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