Tuesday, January 06, 2009

Trillion Dollar Deficits

On the same day that President elect Barack Obama indicated that Americans can expect their federal government to run up annual trillion dollar deficits for several years, I finished reading Amity Shlaes' terrific look at the Great Depression, The Forgotten Man.

A few thoughts:

1. In the last year of the Clinton administration, the entire federal general budget was less than $2 trillion. That the Obama administration now thinks that we need deficits of half that amount for the foreseeable future is staggering.
2. The disclosure confirms and advances what I have perceived to be an ongoing trend in Washington: no one any longer cares what anything costs. This means that new entitlements, including health care reform, may be passed without any regard to their costs. This is not sustainable policy. At the risk of sounding alarmist, it would lead the country to financial ruin.
3. One hopes that Mr. Obama's much praised economic team will warn him that someone has to buy all of those treasury bills representing U.S. borrowing. If Americans have been concerned about the amount of American debt being financed by foreign governments, they should become more concerned. In addition, much of the current recession has been caused by the freezing of the credit markets. Increased U.S. government borrowing means that the government is competing for those scarce credit dollars.
4. Ms. Shlaes argues that the New Deal prolonged the Depression primarily for two reasons: a) the fact that investors will not make long term investments in an uncertain environment was aggravated by the constant tinkering and course reversals of the Roosevelt administration; and, b) public investment in make work jobs is not as efficient as private enterprise in expanding economic opportunity. It would appear that the economic ideas propelling the Obama administration risk repeating these same errors. Given the uncertain environment, who is going to invest in health care? Transportation? Energy? The Obama administration may be helping further a crisis by the very solutions that it is contemplating.

By the way, I thought Ms. Shlaes' book was brilliantly done. It is a must read for these times.


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