Now that the worst of the financial crisis is behind us, one would think the budget deficit might start to come down. Actually, no. Obama’s proposed budget sets a new deficit record — $1.6 trillion this year compared to $1.4 trillion last year.
The President thinks he can help the economy with more deficit spending. But debt is the reason we have a jobs problem in the first place. We’ve accumulated more debt than our incomes can support (see chart at bottom) so the economy is trying to pay it down, leading to less spending and higher unemployment. Adding to the debt pile only makes the employment picture uglier in the long-run.
In his blog entry introducing the budget, Office of Management and Budget Chief Peter Orszag tries to argue that the administration is working to close the deficit. Meanwhile the spin from the White House is that this budget marks the beginning of a “new era of responsibility.” Of course that’s not at all what we’re getting. Orszag even trots out the line that we can grow our way out of debt:
Economic recovery – on its own – would take our deficits from 10 percent of GDP to 5 percent of GDP.
But GDP — a measure of spending — can’t grow unless we’re spending more. Seems to me the only way for aggregate spending to grow faster than government spending is for the private sector to spend more. But households are tapped out. They’re saving more to repair already busted balance sheets.
We’ve published the following chart here at Reuters, which illustrates a key talking point for deficit doves:
At 10%, the deficit is far smaller as a share of GDP than during WWII. We’ve spent far more before, the argument goes, so it’s no trouble to spend so much today. One problem with this argument is that it ignores unfunded liabilities for Medicare and Social Security. If the budget was calculated according to the same accounting principles that apply to corporations, the deficit would look much worse. We had no such unfunded liabilities in the ’40s.
The argument is also incomplete. Americans’ total debt burden amounts to much more than what the federal government owes. Including private debt makes the picture look far worse than the ’40s:
It was easier to service higher public debt in the ’40s because de-leveraging during the Depression had wiped out most private debts.
Debt is the problem. We (should have) learned that after the Depression, yet we’re piling on more in a misguided effort to prop up an economy that desperately needs to de-lever.
Obama certainly inherited a mess, but driving us deeper into debt only compounds the unemployment problem.