Obama’s crazy “Gang of Six” plan to cut $4 trillion in the next 10 years out of the federal budget is nutty. Everyone I read says that that’s guaranteed to cause a recession or a depression. Some say it is a recipe for 10 years of recession or depression.
Obama has drunk from the Koolaid of the deficit hawks. According to Obama, when the government spends too much money by engaging in government spending, it “crowds out” private investment and thereby raises interest rates.
So if we cut government spending and the government stops borrowing so much money, that money will be freed up for the private sector. Government spending takes money out of the economy when it spends. If you reduce government spending and borrowing by $400 billion a year over the next 10 years, you will have an extra $400 billion for the economy and for the private sector to spend and borrow.
It’s looks sensible on its face, but in reality it makes no sense at all. Further, government has been running high deficits for some time now, and interest rates have been near zero. Nor is there any inflation on the corner. If you read nutty blogs like Zero Hedge, the deficit hawks there are always yelling that the sky is falling. Rising interest rates and inflation are right around the corner.
But they’re always right around the corner and never happening. There’s nothing to worry about. There has been some inflation in gas prices, but that’s been caused by excessive speculation in the commodity markets in London. Demand for gasoline is sinking, and supply is the same. There is no supply-demand reason why the price should be going up.
Nor is there any theory explaining that whatever small inflation we have now is being caused by borrowing or deficits. That’s because it isn’t being caused by borrowing or deficits. We have a demand problem. Demand is dead in the water. The economy is so screwed that it can’t even supply jobs for 10% of the population. That’s hardly an economy operating at full employment or at full capacity. In fact, a lot of our capacity is lying vacant due to poor demand. In such a scenario, not only is there is there no inflation but there is also none on the horizon.
The last ten years have proven the “crowding out” theorists wrong over and over. Look at Japan. Their debt is 210% of GDP. Supposedly they should have sky high interest rates and skyrocketing inflation. That they don’t is of no consolation to the deficit hawks. They keep screaming that these catastrophes are right around the corner for Japan.
Japan’s interest rates, instead of being through the roof, are near zero. They have been very low for years now. There is no inflation in Japan. Instead they have the opposite – deflation. The deficit hawk notions that high deficits lead to high interest rates and inflation like day follows night have been proven to be wrong.
Yet this is Barack Obama’s philosophy.
And that $4 trillion he wants to cut? That was the price of the Bush tax cuts. If we would have let the Bush tax cuts expire, that would have resulted in the entire $4 trillion in savings that he wants to get by cutting.
The debt problem was run up and will be run up by a variety of things. Most importantly, it is being driven by the rotten economy. Research shows that at the moment, the deficit is being driven almost entirely by a decline in tax revenues, which is caused directly by the downturn. To the extent that Obama’s plan wrecks the economy for the next 10 years, it will continue to drive deficit spending by declining tax revenues.
In addition, Bush deliberately ran up the deficit in order to create a debt crisis down the road. He admitted as much in statements and interviews. He started two wars that he declined to pay for. He instituted massive tax cuts which deprived the state of needed revenue. And he put in a prescription drug plan with no cost controls that he also refused to pay for. The drug plan is a great idea, but it needs cost controls and it needs to be paid for.
Most of the deficit run-up in the next decade is projected to be over the wars and the Bush tax cuts. A lesser amount will be due to lousy economy. TARP and the stimulus added nothing to the debt or deficit.
By instituting George Bush’s insane reactionary theories, Obama has done tremendous harm to the liberal label at the same time that he has tried to wreck the Democratic Party. Obama is trying to undo 100 years of progressive change.
That he is doing so under the banner of a liberal shows that the label has next to no meaning anymore. If liberal means to undo a century of progressive change, then liberals are just reactionaries, and the label has no meaning. At the same time, he is ruining the Democratic Party. Without the crown jewels of the Great Society and New Deal, the Democratic Party is nothing anymore. It’s just another Republican Party. The damage that Obama is causing to the Left is breathtaking and appalling.