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Pres. Barack Obama’s fiscal policy could be summarized by St. Augustine’s famous prayer, “Give me chastity and continence, but not yet.”
After pushing through a $787 billion stimulus bill, Obama plans to cut the deficit in half during the next four years. If this longer-term deficit-cutting is such a priority, it’s a puzzle why Obama celebrated a stimulus bill with $200 billion in spending in 2011 and thereafter.
The stimulus was supposed to be a massive, short-term boost to the economy but, on the terms of its Keynesian supporters, is neither massive nor short-term enough. According to the Congressional Budget Office, it spends $120 billion in 2009. Even if all this spending is optimally allocated to increase jobs and get money circulating in the economy — i.e., in the best-case, laughably unrealistic scenario — it’s a pittance compared with the $1 trillion drop in aggregate demand in the economy that it is supposed to fill.
In 2010, it spends more, $220 billion. This is still not nearly enough to make up for a drop in demand during the next two years that Obama budget director Peter Orszag says will reach $2 trillion. The stimulus has another $140 billion in new tax relief — mostly rebates — during the next two years, but Keynesians argue that this relief won’t stimulate demand because it will mostly be saved. The experience of last year’s $168 billion stimulus-inspired rebate suggests they are right.
Obama has run into the problem that usually plagues big fiscal-stimulus plans: It’s impossible to spend “enough” money quickly, so the headline number is inflated to suggest a much bigger short-term bang than actually exists. (This is why Keynesians can insist their theory has never failed, just never been truly tried.) The price for the attention-grabbing headline number is still substantial in the long term, one reason we are looking at $1 trillion deficits — to borrow a phrase from the Clinton years — “as far as the eye can see.”
Why talk about cutting the deficit while increasing it under the theory that it’s the best possible medicine for a weak economy that will — if past financial crises are a guide — underperform for a long time to come? Because we can’t continue to run deficits larger than any we’ve seen since World War II without courting dire consequences. Consider this alarming sentence from a recent Brookings Institution paper: “Recent trends in credit default swap markets show a clearly discernable uptick in the perceived likelihood of default on 5-year U.S. senior Treasury debt, a notion that was virtually unthinkable in the past.”
So Obama must insist he is going to get the deficit under control, conveniently by doing all the things he already wanted to do: scaling back the Iraq War, raising taxes on the rich, and further nationalizing (“reforming”) health care. The first two at least reduce the deficit; the latter is a poorly disguised budget-buster. When has government ever expanded its health-care programs and achieved a cost savings? Only a system of de facto rationing and price controls, two things Obama never mentions when he talks of all the health-care savings that will be achieved by preventive care and better technology, might do it.
What of measures that a liberal Democrat wouldn’t ordinarily undertake, that speak to Obama’s post-partisan pragmatism? Obama has said repeatedly that he wants to control entitlements. “Social Security, we can solve,” he told the Washington Post with a dismissive wave of his hand before taking office. His plan was to form a commission to study the program, the typical Beltway expedient in such ticklish cases. But he has shelved even the commission idea for now under pressure from Nancy Pelosi and Harry Reid.
It’s much easier to host a “summit” on fiscal responsibility, as Obama did on Monday, playing to his strength of earnest, high-minded gab. He wants to make tough, politically difficult choices — just not yet.