06 January 2009

How Much Deficit is Too Much?

There was an interesting op-ed by Andrew Parasiliti in the Washington Times yesterday. In it, he addresses the ideas of President-Elect Obama about the need for yet another off-budget economic stimulus package. Parasiliti observes:
in thinking prescriptively about the economy, is there not also a lesson from the current crisis that bills eventually come due, and that when you spend more than you take in, there is a day of reckoning?

That was the experience of those Americans who bought houses they could not afford, and who are now facing foreclosure or painful economic decisions. Shouldn't it also be the lesson of the U.S. government that we need to stop living beyond our means? It is unrealistic either to imagine "growing" out of a deficit of this projected magnitude or that there will be a return on the TARP expenditures anytime soon. The day of reckoning for these massive deficits will eventually come in the form of tax increases or printing more money, and the resulting weakened dollar and inflation that goes along with the latter option. In sum, the recovery will be running on even more borrowed money from foreign creditors and on borrowed time. Our savings and retirement accounts will know no long-term security as long as we carry such massive deficits and we are taking no steps to address them.
Hear, hear. I was uncomfortable with TARP, uncomfortable with talk of bailing out the auto industry, and I will continue to be uncomfortable with Obama's proposed American Recovery and Reinvestment Plan. Why? because we are literally spending trillions of dollars that we do not actually have.

Yes, we have more borrowing power than most other countries on earth, but credit always comes with a price, and if we don't learn that now, our country could face severe consequences for it before too long.


Anonymous said...

All of that is true, but I think the consensus of basically all the experts at this point is that, while families respond to an economic crisis by tightening their belts, the State HAS to respond by spending, or it will increase the problem--as Hoover did, cutting government spending during the beginning of the Depression.

The real problem is that Bush entered office with a surplus, then created more debt than all the other US Presidents combined. And now we have no choice but to keep spending, or watch the economy--and with it, government incomes--collapse.

I think the more relevant question is how can we spend the money so it actually helps the economy, rather than pays for rich peoples' perks. And, just as importantly, we need to spend money making the US a producing nation again, not a service/loan recycling economy.

luaphacim said...

I think Hoover gets a bad rap for what happened in the 1920s and '30s -- I'm not convinced about the correlation between his actions and the economic condition of the nation. Nor am I convinced that FDR's New Deal should necessarily receive the credit for reviving the economy in the late '30s. I understand the Keynesian need for "inducement to invest," but I don't think legislators should blindly accept that tenet and respond by spending as much money as they can on "stimulus."

Regardless of whether Keynesians are correct in their assessment of the situation, it makes me very uncomfortable to see the Obama administration carrying on Bush's tradition of fiscal irresponsibility. I have no problem with $300 billion in tax cuts (which is part of Obama's plan), but I think if this happens, government spending should be cut commensurately.

My bottom line concern is that I fear we are just rolling the problem back another generation, and if I have learned anything from my assortment of jobs over the years, it is that rolling problems back just intensifies their negative effects and makes the cleanup that much more difficult.

luaphacim said...

(And by the way, thanks for the comment! We shall have to get together and make with the playing of games sometime. :-) )

Anonymous said...

We should definitely play games sometime soon!

Have you read what Krugman's been saying about the stimulus? A lot of experts are saying, basically, that reducing deficits are good precisely because we need to be able to increase them during times of national crisis. We'll need a balanced budget, but to get that during a recession would be a disaster--as evidenced by the states that are cutting education, rehabilitation, and social safety net programs--would be a total disaster.

The key will be to spend the funds well.

luaphacim said...

I certainly agree that increased government spending has the ability to stimulate economic growth, and I also agree that cutting spending in a recession can cause problems in the short term.

It would be nice if, after getting the economy going again, the government would take serious steps to cut off many of its nonessential bureaucratic functions and make significant cuts in areas like military spending (along with taking foreign policy steps designed to reduce our role as global police-person). The problem is that spending will NOT be cut, and then the next time we are in a situation like this, it will be worse because we have
a.) less credit available to us
b.) interest obligations on the $1 trillion from this go-round, IN ADDITION to the interest obligations for our previously accrued national debt
c.) a more bloated bureaucratic infrastructure that was created to administer the bailout and then never put to rest when it should have been

The problem is that money has a time value, and as a debt with compound interest grows older, its amount grows exponentially. Therefore, if the government's long-term expendable income is even a little bit less than the amount of interest accruing on its debts, it needs to either find a new source of income or reduce expenditures.

It's all well and good to stimulate the economy in an effort to create more wealth, but if the result simply pushes back the problem, and we don't take serious steps to create a long-term solution, then we are just exacerbating it with our short-term stopgap measures.

In short, I wouldn't have a problem with Obama's -- or any politician's -- plans to use SHORT-TERM debt to stimulate the economy, but I have serious issues with increasing our permanent national debt when it seems we are already fighting a losing battle against the interest ticking away in Times Square.