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It would be nice to have a chart like this that is extended to show the projected rate under Obama. The liberal meme that "Reagan almost bankrupt the nation" is a joke, once the facts become apparent.
Posted on 04/14/2009 6:57:06 AM PDT by sickoflibs
WHEN DICK CHENEY SAID, "Deficits don't matter," economists took that as proof of the economic illiteracy of the Bush administration. But it turns out there is a case to be made that Cheney was onto something
On the deepest level, the vice president was echoing, in slightly exaggerated form, an idea put forward a few years ago by Irving Kristol, the Godfather of the neoconservatives who have had such a wide-ranging effect on Bush administration policy. Kristol wrote then, and still believes, that "We should figure out what we want before we calculate what we can afford, not the reverse."
On the political level, treating deficits as a non-issue also proved a successful strategy. After all, despite the torrent of red ink that splashed across the national budgets during his first term, George W. Bush was reelected by a substantial margin. Among John Kerry's other failures was his attempt to saddle the president with the label "profligate."
Which brings us to the economic level. The deficits that Bush ran up in the years in which the country was teetering on the verge of a serious recession had the beneficial effect of righting the economy. In that sense, deficits not only didn't matter, but were a force for economic good.
But that was then, and this is now. The economy, growing at an annual rate of 3.5 percent to 4.0 percent, is hardly in need of further fiscal stimulus. Yet the budget that the president sent to Congress last week promises deficits as far ahead as the eye can see--if the eye is practiced in reading these massive documents.
The president claims that his $2.57 trillion budget is the first step on the road to fulfilling his campaign promise to halve the deficit by 2009, even if Congress agrees to make his tax cuts permanent and enacts still more reductions. That claim is completely unfounded. Indeed, if the White House team that drafted this budget were subject to Sarbanes-Oxley, criminal indictments would be flying.
Start with the fact that most of the spending reductions the president proposes will be rejected by Congress. The budget calls for the elimination or curtailment of some 150 programs. But last year the president proposed eliminating 65 programs for a savings of $4.8 billion--and Congress agreed to eliminate only four programs for a savings of less than $200 million. Although Congress is under some pressure to keep spending down, it is under even more pressure from the farm lobby, the business lobby, the veterans' lobby, the poverty lobby, and the oldies' lobby, to mention only a few groups that will fight Bush's cuts.
But even if the budget is adopted, it will not begin to cut into the federal deficit, for several reasons. First, spending on the largest items--Medicare, Social Security and the military--is scheduled to increase. Second, the budget does not include any money beyond this year's outlays for the wars in Iraq and Afghanistan. Third, it does not include the trillions that will be required if the president succeeds in persuading Congress to allow some participants to divert to private accounts a portion of the money they are now paying into the Social Security system.
On the other hand--and in all fairness--we can't ignore the fact that previous Bush budgets were also pronounced DOA--and then adopted within the spending limits the president had proposed. Moreover, the projected budget deficit is not threateningly large, relative to GDP. Larry Lindsey, Bush's former chief economist, points out in his latest client advisory that "The projected 2006 budget deficit of 3.0 percent of GDP is reasonable if the economy continues to grow."
And grow it seems likely to do. The Institute for Supply Management reports that the manufacturing sector expanded in January for the twentieth consecutive month, due in part to renewed international competitiveness flowing from the lower dollar, and in part to a scramble to restock depleted inventories. My own tour of shopping malls from Phoenix to Chicago to Washington revealed that retailers had been caught by surprise by the strength of Christmas and post-Christmas sales. While not bare, the shelves have large empty spots.
The housing market remains strong; the unemployment rate is a low 5.2 percent; over two million new jobs have been created in the past year; the service sector is growing; inflation is low, as are long-term interest rates; and U.S. companies are increasingly optimistic, "bolstered by unprecedented cash flows," according to Goldman Sachs. The budget deficit may be larger than we would like, and Dick Cheney may have been overstating things a bit, but so far it hard to say that his view of budget deficits is clearly wrong.
The trade deficit is another matter. Alan Greenspan stopped in London last week to speak at Chancellor of the Exchequer Gordon Brown's latest entrepreneurship bash, and to assure one and all that the market is gradually taking care of that problem. The dollar has fallen, giving American manufacturers an edge over their European competitors and making some imports more expensive. Short-term interest rates in the United States are now above those in euroland and Japan. Added to the more rapid growth being experienced in America, this rate differential will make investment in America even more attractive than it has been. I am less certain than the Fed chairman that we have seen the end of the dollar decline, but it would be foolish to bet against a man who has got things right through years of international and domestic turmoil.
In short, all may not be for the best in a best of all possible worlds, but almost everything seems to be--unless you are a euroland exporter, caught between a falling dollar, China's refusal to allow the renminbi to rise, and the appalling regulatory and tax environment in much of Europe.
Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.
Oh, deficits do matter, from a monetarist, keynesian or international balance of payments perspective. And even from an austrian perspective.
Monetarists and keynesians essentially both believe in counter-cyclical policy - loose (inflationary for monetarists, budget deficits for keynesians) when the economy is in a downturn, tight during growth. But both agree that perpetually loose or perpetually tight policy is by definition not counter-cyclical.
From an internation perspective, the current global financial system requires US trade deficits and budget deficits. Nixon & Kissinger moved to world from gold-backed dollar reserves to dollar reserves based on a promise of US trade deficits (instead of dollars being convertible to gold, they are convertible to the ability to export to the US and invest in the US), US budget deficits (providing a safe investment vehicle for sovereign funds and foreign investors) and US oil imports (propping up the demand for dollars by requiring dollars in order to buy oil).
The essence of the Triffin Paradox is the unsustainability of the system. Ongoing growth in US budget deficits, trade deficits and energy imports make the US economy vulnerable. But any reversals in US budget deficits, trade deficits, and energy imports makes the entire global system and the dollatr’s value vulnerable.
Exactly right.
Most government expenditures replace superior private expenditures. When the government provides charity, it replaces more effective private charity. When the government provides insurance, it replaces more effective private insurance. Of course, I could go on and provide a long list.
One common element is moral hazard. Government programs, in their legislative and administrative simplicity and inflexibility, create faulty incentives. For example, government charity encouraged out-of-wedlock births. Women only received aid if they had children and no father to support them. More children, more aid.
Another common element is that people spend their own money best. For starters, only you know your true desires. How much do you really want that make and model of car? How much do you want particular features? You are the only one who knows.
Spending someone elses’ money, on some elses’ behalf is not as effective. When people in government spend the taxpayer's money, they are not frugal or wise. It's not their savings they are depleting; they have no alternative uses to consider. When their department gets a bigger budget, that indicates that they are doing more "good" and are more important - a faulty incentive within government. Government spending on defense, justice, and (probably) roads, is unavoidable. The government should be restricted to its proper role. The government which rules least, rules best.
I call it the MAD (Mutual Assured Destruction) global economic system. Loan us back our money for nothing or you will have no jobs.
Under Obama next year it will go to almost 27%!! That is higher than at any time since WWII.
I would think that the % will accelerate in it's increase as more anti private sector legislation is passed and govt grows. As the govt portion of the GDP grows it will reach a point where it is impossible for it to be funded. IIRC, the highest % the govt has been able to take of GDP in taxes is 19.5%.
True, but there is another ting going on. Obama is gaming the system. He has loaded all the expenses he can for next year, creating a truly horrific budget, so that in later years he can tout the improvement in deficits. He has a lot of gall talking about 'cutting the deficit in half' when his 2012 deficit will be twice the 2008 deficit. The 'half' is half of the huge $2 trillion deficit he created for this year and next.
I learned from this that Irwin M. Stelzer is as deluded as Cheney was.
Good post. And I hadn’t seen the Triffin Paradox used outside of its relation to the Kennedy-Johnson era.
Thanks for the chart. A liberal I know recently stated that Reagan “almost bankrupt the nation!” I asked him what he thought Obama was doing now. It would be interesting to see annual deficits as a percentage of GDP for the last 30 or so years.
It would be nice to have a chart like this that is extended to show the projected rate under Obama. The liberal meme that "Reagan almost bankrupt the nation" is a joke, once the facts become apparent.
See my chart in #20. I looked but cannot find a similar chart that has %age of GDP deficit, but it sure can be constructed from the CBO budget estimations.
It would also be good to have the chart show spending and taxes both... a chart like this that extends into Obama years ...
http://www.heritage.org/research/features/BudgetChartBook/fed-rev-spend-2008-boc-C1-Federal-Spending-Is-Growing.html
More on Obama’s budget from Heritage:
http://www.heritage.org/Research/Budget/bg2249.cfm
Link to the chart from #20:
http://blog.heritage.org/wp-content/uploads/2009/03/wapoobamabudget1.jpg
Deficits matter if they increase the public debt to unsustainable levels. However, this data point justifies the Cheney view somewhat, as public debt remained tame under Bush:
I was genuinely surprised to see that public debt is only 38%, or below the 50 year average.
How can that be with all this talk of huge deficits and fiscal recklessness?... the answer lies in 2 facts. #1) Under bush the economy grew fairly well from 2002 to 2007. Depite the current recession, we are larger economy than in 2002.
#2) the fact that a lot of the debt is in the Soc security IOUs. The USA is a bit like GM was back 10 years ago. Our debt wasnt bad but we have a large pension liability coming due. For USA thats the boomer retirements.
The coming wave will drive huge spending increases unless it is stopped:
http://www.heritage.org/research/features/BudgetChartBook/fed-rev-spend-2008-boc-P4-Entitlements-Alone-Will-Eclipse.html
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