Learning Deficits
Will Obama's transformative budget survive? As his press conference last night illustrated, it runs a serious risk of drowning in a swamp of cant.
The budget is getting strafed by politicians in both parties for its deficits and debt. (the deficit is the annual shortfall between revenue and spending; debt is essentially the accumulation of net deficits over time).
Republicans, having joined Rush Limbaugh in betting that Obama fails, have done most of the ranting. Sen. Judd Gregg, lead Republican on the Senate budget committee, fulminates that if we pass Obama's budget, "this country will go bankrupt. People will not buy our debt. Our dollar will become devalued."
Richard Shelby, top Republican on the banking committee, warns Cassandra-like that Obama's budget will put the country on "the fast road to financial destruction." Eric Cantor, the hyperbolic House Republican Whip, brings it down to his favored level, railing about wasteful spending like "money that goes to remove pig odor."
Conservative Democrats are chiming in also. Evan Bayh has formed what must be the twentieth new democratic rump group, arguing that "families and businesses are tightening their belts to make ends meet -- and Washington should too." Kent Conrad, Democratic head of the budget committee, is pushing for deep cuts in spending on domestic programs. "Moderate" Senators are expressing growing opposition to the president's spending plans. Even the Chinese, America's biggest creditor, are wringing their hands about US deficits, suggesting perhaps a new international currency might be needed to replace the dollar.
Before this babel completely drowns out reason, a little common sense might be useful.
1. The newfound Republican fiscal probity is worth less than a drunkard's morning after regret.
For the last decade, they merrily embraced the Dick Cheney dictum that "Reagan taught us that deficits don't matter. They doubled the national debt when the economy was growing, exactly at the height of the business cycle when they should have moved budgets into balance and reduced debt burdens. Fully $1.4 trillion of the largest annual "Obama" deficit -- the $1.8 billion the CBO projects for FY 2009 that ends this October -- was bequeathed to him from George Bush; the remainder comes from worsening conditions and the Obama stimulus spending to put people back to work..
Now as the economy verges on a depression, Republicans are indicting Obama for raising spending and deficits. This is like a gambling addict squandering the family fortune in a Las Vegas blowout and then scolding his wife for borrowing money to keep the kids in college. Had Republican leaders any sense of decency, they would just shut up and let adults address the mess they have left.
2. The greater worry in the short-term is that the deficits may be too small, not too large.
We've just suffered what Warren Buffett calls an "economic Pearl Harbor." The accelerating downturn is turning into a global collapse. Consumers are cutting back; businesses laying off workers; exports have plummeted. The Fed has already cut interest rates to near zero. The only thing lifting this economy is deficit spending at the federal level. Senators intoning the comfortable mantras of the last years like Even Bayh can't seem to grasp that we're in a big-time trouble. If we took his advice, and cut federal spending and deficits, it would simply contribute to a downturn that is already the worst since the 1930s.
That's why the high-church of economic conservatism, the International Monetary Fund, is calling on countries across the world to borrow more to stimulate the economy, not less. And that's why all the talk about deficits in the out years -- six, eight, ten years from now -- is simply a dangerous distraction. The Congress isn't passing the budget for a 2019. It is passing one for next year, and it should be spending more, not less, to put people to work and get the economy going. Once the economy recovers, we can act to bring deficits down to a sustainable level.
3. We can afford to take on the debt
Before joining Judd Gregg in rending garments and mumbling darkly about the end of the world, legislators would be well advised to inhale deeply, calm themselves and look around. The Congressional Budget Office predicts budget deficits will total some $9.3 trillion over 10 years (Obama's budget which is more optimistic about the pace of recovery projects $6.97 billion). That's a lot of money.
But this is a very big economy at $15 trillion a year and hopefully soon growing again. Bill Gates undoubtedly carries more debt than I or you do. But the burden of that debt -- the carrying charges in relation to his income or the debt in relation to his assets -- is far less than mine or thine. He can afford to take on more debt.
After years of conservative misrule, the US isn't in as good shape as Bill Gates, but it isn't broke either, particularly in comparison to other industrial nations. The current US public debt is about 40% of our annual economic production (GDP). It's been far higher -- reaching as much as 109% of GDP coming out of World War II. Post-war growth brought the burden down to about 25% GDP until Reagan gave us over to the seductive supply-siders and doubled the debt burden to about 49% GDP. Clinton brought it down to 33% and Bush drove it back up to about 40% even though the economy was growing.
Under Obama's plans, the national debt will rise as a percentage of the economy to about 65-67%. That's a big change. But the reason countries carry low levels of debt is so they can borrow when trouble comes. And this is the mother of all trouble.
But what is notable about that increase is that it will leave the US carrying only about the same debt burden that Germany, France and Canada were carrying -before they began adding to it in the current economic downturn. According the analysis of the Central Intelligence Agency in 2008, Germany's public debt was at 65%, France at 66%, and Canada at 64%. The Italians, always somewhat more fiscally dissolute, were at 106%. Sober Japan, coming out of its lost decade, carried a public debt that was182% of its country GDP.
None of these countries are going bankrupt. The Euro isn't turning into toilet paper. The Japanese haven't boarded up the country. We are urging all of these countries to borrow and spend more to help counter the downturn. We can afford the Obama deficits and more if necessary to lift us out of what looks increasingly like a global depression. (And that's why if the Chinese are looking for a new currency to supplant the dollar, they'll have to invent it.)
4. The most dangerous deficit is our public investment deficit.
Fact is we can't really afford to cut the public investments Obama would make in education, new energy, health care and 21st century infrastructure. For too many years, we've starved basic investments to pay for adventure abroad or top end tax cuts at home. Now we have a national security imperative to invest in new energy, reduce our dependence on foreign oil and begin to address catastrophic climate change. We can't compete as a high wage economy in a global economy without providing our children with a world-class pre-K to college (or advanced training) education. We must make the changes needed to provide Americans affordable high quality health care while getting health care costs under control. And we've paid the costs everyday of allowing our basic infrastructure to decay -- from unsafe water to gridlocked roads to falling bridges to the outmoded electric grid.
Obama's budget and recovery plans run up deficits to put people back to work while making a down payment on investments vital to our future. His domestic spending plans are, if anything, already too austere, reducing domestic discretionary spending to a lower percentage of the economy than under Reagan or Clinton or the Bushes. He argues correctly that we have to make investments in these areas to move our economy to sustainable growth, and away from the disastrous bubble economy that has now exploded in our faces. It is notable that his Republican critics don't dispute him on this point. They simply stand firm against any tax increases on the wealthy, while calling for cutting spending to reduce the deficits -- without ever offering a budget of their own to let us know exactly what it is they think should be cut.
The lesson? Let's make certain we spend enough to get this economy going. Once we do that, we must guard against making Roosevelt's mistake of trying to balance budgets too quickly, driving the economy back into the pits, as he did in 1937. Ignore the hyperventilating about America's pending bankruptcy. But let's make certain we stop spending money on pig odor, or whatever it is goofy Eric Cantor is whining about.
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Gregg: U.S. couldn't even join EU due to debt levels
"We won't even be able to get into the EU if we wanted to," Gregg said this morning on MSNBC, "because our government is so large and so huge."
The European Union's Stability and Growth Pact (SGP) adopted in 1997 requires a budget deficit to be less than three percent, and requires a national debt beneath 60 percent of Gross Domestic Product (GDP).
http://briefingroom.thehill.com/2009/03/26/gregg-us-couldnt-even-join-eu-due-to-debt-levels/
Republicans behave as if they've never purchased a house. That's big debt folks! Or taken out a car loan. Big debt. Or a college loan. Big debt. Their argument holds absolutely no water at all. Kind of like their budget today -- a budget with no numbers in it!
No debqd
We conservatives mostly keep our debt to a minimum and certainly are concerned about bankrupting our kids and grand kids future. If you a young person, pay attention to what is going on. They are PUNISHING the JOB CREATORS and having inefficient Govt. create the jobs. This is madness and will lead to Japan's lost decade.
They called it 'Sophistry' in Socrates' day. Today it 's a Robert Borosage opinion piece. And amazingly he argues this point: Why not borrow clearly more than we can possibly ever repay to prop up a societal lifestyle that is fully unsustainable? A counterintuitive counterintuitive! Someone please pass Borosage a violin. Music making during a firestorm seems right up his alley.
Excellent. Concise, forceful, informative, and entertainingly written. This is an article to spread around. Well done. In other words, 'I wish I'd said that.'
Sha, la, la, la, la, la live for today
Don't worry bout tomorrow
Hey, hey, hey, hey, hey
1. The newfound Republican fiscal probity is worth less than a drunkard's morning after regret.
Sure
2. The greater worry in the short-term is that the deficits may be too small, not too large.
Incontrovertible
3. We can afford to take on the debt
Probably right, though Borosage ignores private debt and the fact the we have a very negative current account balance.
4. The most dangerous deficit is our public investment deficit.
Here's where we run into trouble
- Yes we probably have under-invested in infrastructure
- Budget seems to prioritize services (e.g. ed, health care) over "hard investment" (e.g. roads, rail, electrical grids)
- Much of this is not "public investment" (e.g. much of health care is consumption)
- In any event it's hard to argue that we "under-invest" in health care and education when we spend more per capital in these sectors than any other OECD country
you have to be kidding - don't hyperventilate?
every budget since Washington to Bush amounted to under 6 trillion and now doubling maybe tripling down on the Bush insanity is okay?
you screamed about personal freedom being given up in the name of security/terrorism under Bush.
with all that the current administration is proposing/doing how much personal liberty and financial freedom are you losing with every piece of new legislation the congress enacts.
this is not the change people where looking for.
there will be a back-lash to all this "taking advantage of a crisis"
the people are not as ignorant as you think they are.
example watch the number and growth to the TEA PARTY protests.
the dems will be voted right out office in 2010 at the rate they are going!!!
talk about a bunch of drunken sailors you guys are a bunch drunken thugs
how come Dodd, Frank, Pelosi, etc. are not giving back the hundreds and hundreds of thousands of dollars they got from AIG, Fannie and Freddie, and every UNION in the country.
LETS BE FAIR.
they are all corrupt and in bed together
the people are the only ones who ever get screwed
If you agree with the above post hang a tea bag from your rear view mirror. Attend a Tea Party on April 15th. Let's "Rock the vote"
I don't know where you got that 37% figure but its not backed up by your source. In fact the CIA Factbook states that the US public debt is at 61% (in 2007).
Check it out for yourself:
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2186rank.html
And the Japanese debt is so high because they spent a decade trying to spend their way out of a recession caused by banks going under after collecting bad debts. Hmm.. does that sound familiar?
How can you possibly look at that chart of Japan and their Debt to GDP ratio and NOT come to the conclusion that we are heading towards a long down turn in our economy. I think it took Japan 10 years. At least we will start voting them out in 2010 and get back the Prez in 2012.
(Please NOT Palin!)
Obama's budget would leave a deficit of $749 billion in five years' time, according to congressional estimates — too high for his Democratic allies — and would grow to unsustainable levels exceeding 5 percent of the economy by the end of the decade.
Unbelievable. Spend first... tax later. To suggest that government spending, mandates and waste is what this country needs defies logic and history.
I say go ahead Democrats. I want the moderate Dems to jump on board the "irresponsibility train" and join the spend and tax crowd.
It won't take long for the country to move back to Republicans as the answer to the mess you all are supporting and creating.
Even Europe with thier socialist based governments can't believe what the US is doing. European leaders are calling Obamas direction "The Road to Hell"
http://www.ft.com/cms/s/0/1d3fa8fa-1975-11de-9d34-0000779fd2ac.html
Capitalism > Socialism >Communism... Keep it going Democrats...
Please, ONE lunatic man from the Czech Republic, who's own government by the way just went under, and who just happens to be on the six month rotating EU leadership, does NOT translate into "European leaders".
European leaders cringe, and are regretting ever including some of these eastern countries into the EU, because of the embarrassment that some of their out of control, post-communist leaders bring with them.
They do NOT share Topolanek's rhetoric, and in fact many of them contacted our gov't to make certain we understood that.
other european heads of state/central banks may not be using such inflamatory language, but thats the only thing you got right.
there actions, on the other hand, speak volumes: they are not exactly lining up behind obama's policies or leadership.
even the prime minister of luxembourg has been rebuffing obama on a weekly basis
"This is like a gambling addict squandering the family fortune in a Las Vegas blowout and then scolding his wife for borrowing money to keep the kids in college."
This is IT, in a nutshell. Even the most willfully ignorant should be able to understand it with this analogy, of course, they'd have to be intellectually honest first.
Excellent blog Robert, thank you!
The groceries and kids college cost trillions. The gambling addict lost a small fraction of what is being proposed. This is like criticizing the gambling addict for losing money and stepping up to the same table with bigger chips.
Well, there you go, being intellectually dishonest.
A treasure, Bob! Emailed a number of links to this one. Funny how facts speak for themselves, but never loud enough to be heard on their own merit.
The most asinine thing I've heard all year was Congressman John Boehner saying - We can't borrow our way into prosperity. Jezz, businesses do it all the time. It's the reason why we have banks. It's called investment.
When businesses borrow, they have to have a plan to pay it back. Barack wants $9.2 trillion and it keeps on growing.
Please, sir, will you kindly address the president in a more respectful manner. He should be referred to as President Obama or Mr. Obama. And before you go there, I was never disrespectful in address to former President Bush, though I frequently criticized his policies.
The problem is the inefficiency of Govt. Ave job cost to create is $436000 each. That is just unsustainable and will cause a long term financial problem. They are also treating ALL BUSINESS PEOPLE like criminals and discouraging the small to big business person from taking risk as they are afraid of what bull*^&# idea to "help" next. You have to respect and help the job creators or THERE ARE NOT JOBS!
Why not put a user fee on the US border? This could reduce the US deficit and pay for infrastructure, personnel, and equipment for the Dept of Homeland security. The Republicans want to put user fees on all US highways, why not the border? I already pay highway tolls in my area, why not the US border? Mexico charges user fees on highways near the US border. We are spending money to save the Mexican government from the drug cartels with our taxpayer dollars. We could reduce drugs entering the United States and guns entering Mexico and pay for it with user fees on the border.
NOW IF THE BLUE DOGS DEMOCRATS DON'T CLEAN UP THEIR ACT AND GET ON BOARD WITH THE DEMOCRATIC PRESIDENT OBAMA, WE NEED TO START CALLING THEM WHAT THEY ACT LIKE...DIRTY DOGS! YES I SAID "DIRTY DOGS" DEMOCRATS!
Sorry, failure on your part to understand political realities. While Presidents are elected by "the nation", congess is elected at the state level. If the blue dogs go along with the Presidents plans, they will quickly be out of office. If they "clean up", as you describe it, the slots will be filled with Republicans after the next elections. They simply come from districts that are fisically more conservative than Chicago, so they vote as those who sent them to want them to. Horrible thought, huh, that the country may have more than one point of view? BTW, what's with the yelling?
It seemed to be okay to spend $10-$14 BILLION per month when the republicans were in power to fund an immoral war. Sure would be nice to have that money back right now! I'm so completely fed up with these nay-sayers! These are things we HAVE to do!
Thank you for a straight forward explication of several salient points of deficit spending, grounded in sound economic theory rather than political dogma. These simple and rather obvious principles are so often demagogued by Republicans and even so-called fiscally conservative Democrats, its no wonder many people find them contrary to "commonsense" even though they actually represent theoretically well-founded economic wisdom. Fortunately, President Obama appears to understand these principles. Hopefully reason will overcome simplistic, populist demagoguery in Congress and the President's Budget will be passed without being FUBARed.
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