Goodbye, Mr. Keynes

So Obama appears to be floating a 3 year spending freeze starting at the beginning of the next fiscal year.

There are some caveats. This will only apply to non-defense discretionary spending, or about one-eighth of the entire budget. Obama is being rightly mocked for this across the blogosphere and in the media. Personally,  I think that enacting a budget freeze now while touting it as the administration's focus on fiscal responsibility is kind of like Tiger Woods not visiting a mistress during a tournament and claiming that it shows his deep commitment to monogamy.

I'd also note that it's conveniently set to expire right when the proposed health reforms kick in, another in a endless serious of accounting tricks.

My more serious question, however, is this: Whose economic model is the Obama administration working off of now? For over a year, we've been pummeled with Keynesian stimulus plans, with rhetoric about how government must stimulate demand, how the huge deficits are needed right now so that the government can be the consumer of last resort. Paul Krugman has been beating the drum from the very beginning about how we need even more stimulus than we already have. 

Now, apparently, the Keynesian view is out of fashion in the Obama administration. So what view is now driving their thinking?

2 Months Old & Deeper in Debt

My wife had our first child in mid-October. Thanks to the brilliant leadership of our political class since World War II, she was introduced to this world already on the hook for $38,606.24 in debt. The major offenders responsible for this? In order of declining culpability, they are Congressional Democrats, Ronald Reagan, and George W. Bush, Congressional Republicans.

Why do I order them as I do?

While Reagan significantly ramped up defense spending, he also cut taxes in an attempt to "starve the beast." However, he didn't have the political will to actually take on the Congressional Democrats who held a large majority in the House of Representatives (a 277-158 split in 1980) on the domestic spending front. So began a long series of large deficits, averaging about 4% of GDP over his two terms and peaking at 5.88% in 1983, with a tax increase thrown in for good measure along the way. I was too young to notice them at the time (though I have a vague recollection of a "Unemployment hits 10%" TV news story from the early 1980s).

I'm fairly certain that these deficits combined with the healthy economic growth the USA experienced under Reagan convinced politicians on both sides of the aisle that, in the immortal words of Dick Cheney, "deficits don't matter." And so, under George W. Bush, we had Congressional Republicans again cutting taxes while significantly ramping up both domestic and military spending. Deficits under Bush II averaged a bit over 2% of GDP. I thought these deficits were terrible and unnecessary, but I also thought the rhetoric from Democrats regarding them was a bit overheated.

And perhaps those deficits didn't actually matter. After all, the USA is currently able to sell its Treasuries at ridiculously low rates (the 10-Yr bond is yielding about 3.8% as of today). If the country grows faster than the deficits do, things will probably hold together, assuming tax revenues as a percentage of the economy hold steady (which, for the most part in the USA, they seem to). And the further we get from those deficits, the more that inflation erodes their actual value. After all, $38,000 will be worth a lot less when my daughter is actually contributing to the tax revenues (in theory, if inflation is at historical trends).

So what spurred this post? The prospects for future deficits is very frightening. The Obama administration projects deficits of over $9 Trillion for the next decade. This would represent deficits of a bit over 6% of GDP for the next decade, far worse than Reagan's. It would add an additional $29,344 to my daughter's total burden, nearly doubling the amount of debt she is responsible for, even with Obama's optimistic assumptions about economic growth over that span. Scariest of all, even with the strong growth Obama forecasts, after a decade, his administration does not project us to be close to closing the deficit, a major sin in the neo-Keynesian economic view his administration purports to be working from. His projections show a deficit of 4% of GDP in 2004, about Reagan's average, which is frightening. Unsurprisingly, the Democratic establishment does not seem to care about the deficits, a major change of heart from the previous 8 years. In fact, many Democrats are calling for even larger deficits, or more "stimulus."

Already, since birth, Obama's deficits have added $1308.99 to what she owes. And yes, I attribute current deficits to Obama, as he supported most of Bush's financial rescue machinations, as well as supported the terribly-crafted Democrat-interest-group-rewarding "stimulus" bill.

I wonder how much longer the United States can roll over its debt at such low interest rates. I also wonder where the free cash to finance them will come from. Does the world have the appetite to stomach an additional $9 trillion in debt over the next decade? I am skeptical, and I am nearly certain that the answer is no at current interest rates.

Given the long term budget issues with Social Security (check the pathetic performance of the trust fund over the past year here) and Medicare (the latter of which is not remotely addressed by the current health care "reform" bill), I am very pessimistic about the long-term prospects for the health of the US economy.

Debt at birth: $38,606.24
Debt at 1.5 months: $39,915.23