Robert Reich: President Obama: Forget the deficit (keep spending!)

[babylonsister]

http://www.salon.com/opinion/feature/2009/02/24/reich/


President Obama: Forget the deficit

Don't make FDR's mistake and spend too little -- because we're probably going to need a second stimulus no matter what.

By Robert Reich

Reuters/Kevin LaMarque

President Obama takes a question at the Fiscal Responsibility Summit at the White House in Washington on February 23, 2009.


Feb. 24, 2009 | The president's message on fiscal responsibility -- that he'll cut the current deficit by half by the end of his first term -- is smart politics right now, but it may be dumb politics by November of 2012, and doesn't make much economic sense regardless.

We're in a deepening recession, in case you hadn't noticed. The biggest challenge is to ramp up aggregate demand. Yes, we have to borrow lots from the Chinese and Japanese to do this, and, yes, it's costly in terms of additional interest payments to them. But there's no choice. In fact, if the slump gets worse -- and I have every reason to fear it will because that's the direction we're heading in as fast as you can imagine -- we'll probably have to have a second stimulus. And if the second isn't enough, a third. And so on. FDR's biggest mistake was doing too little until World War II. (No one should interpret this as a recommendation for more military spending -- I'm just saying Obama will probably have to think and do much bigger than the $787 billion stimulus so far.)

Can we continue to borrow and borrow and borrow? Yes, but eventually we'll have to pay higher interest rates to continue to attract global savings, mostly from the Chinese and Japanese. But that's not any time soon. The Chinese and Japanese are not going to yank their money out of Treasury bills because the slump is worldwide and T-bills are about the best and safest place to park savings. Besides, the Chinese don't want the dollar to plunge. They'd be stuck with a lot of paper worth far less than they got it for, and their exports would be in even worse shape than now.

Blue-dog Democrats, Washington insiders who love to prattle on about the dangers of too much debt, Wall Street bond traders, and most of the Republican Party (including, notably, John McCain and Louisiana Gov. Bobby Jindal, the two "front-runners" for the Republican presidency in 2012, at least in terms of media attention) will continue to fuss about the skyrocketing debt. The very word "trillions" when juxtaposed with the word "dollars" is enough to send most people into paroxisms of shock and awe. So it makes political sense to talk now about fiscal responsibility, especially with Obama's first budget emerging this week, along with the likelihood that Geithner will soon ask for additional money for Wall Street.

snip//

If and when the stimulus package is big enough to get us back to full capacity, and if and when we make the public investments necessary to enlarge that capacity -- including the health and the education of our kids and our workforce, including a sustainable energy infrastructure, including public health and the environment -- we'll be in fine shape.

Halving the budget deficit by 2012 is a nice goal but it has little to do with the economic challenge we now face.

[Captain Hilts]

1. Listen to the man. Don't make the mistake of 1937 now. nt

[MarjorieG]

2. Love this man. Never hyperbole or accusatory, just astute.

[Nicholas D Wolfwood]

3. He needs a spot somewhere on Obama's team. (nt)

[Taverner]

4. RR knows his shit

And this is a proven, Keynesian solution

[endersdragon34]

16. Can I ask?

What situation proves it? 30s America doesn't, neither does 90s Japan, so what exactly does?

[fasttense]

5. He is right on the money. Republicons use the budget

deficit, after running it up, as a way of keeping the average American citizen in perpetual poverty and under control of corporations. By claiming the horrors of budget deficits they try to stop spending on social programs that help the middle class and poor. They want to keep our tax dollars for their uber wealthy donors.

[On the Road]

6. Bush Claimed That Lowering Taxes Would Stimulate the Economy

It was of course partly true, except that most of the tax cuts went to the top 1%, where it was least effective.

The flip side of that is that allowing that the tax cuts to expire will not have nearly the impact that one might expect. If the country could climb out of a recession after Clinton's 1993 tax plan, there's no reason it can't happen again.

[bemildred]

7. And stop wasting money on these goddamn stupid wars!

Defense spending if you must, but spend it here.

[Enthusiast]

15. Yes,and uncover the vast

amounts of fraud so at least we are getting something for our money.

[ms liberty]

8. I wish he was Treasury Sec...or anywhere he wanted to be...

I love RR - he always explains economic issues in a way that is easy for non-economists to understand. He's very common-sense

[endersdragon34]

9. So I take it you don't trust the CBO

The CBO has already said the recession would end this year (even without the help of this spending), when should he stop running up a massive debt?

"CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II.

This recession, however, may not result in the highest unemployment rate. That rate, in CBO’s forecast, rises to 9.2 percent by early 2010 (up from a low of 4.4 percent at the end of 2006) but is still below the 10.8 percent rate seen near the end of the 1981–1982 recession.

In preparing its economic forecast, CBO assumes that current laws and policies governing federal spending and taxes do not change. This forecast, therefore, does not include the effects of a possible fiscal stimulus package. On that basis, CBO anticipates that real GDP will drop by 2.2 percent in calendar year 2009, a steep decline. CBO expects the economy to begin a slow recovery in the second half of 2009 and to grow by a modest 1.5 percent in 2010."

Source: http://www.cbo.gov/ftpdocs/99xx/doc9958/01-08-Outlook_Testimony.pdf

P.S. Both the CBO and I are independents, so please don't accuse me of anything alright :).

[RIFF RAFF]

10. I trust RR more than the CBO.

Spending will help.

[endersdragon34]

11. When has it really helped before?

Just like it did for Japan in the 90s...? And I think you missed the point in that. It didn't say that spending won't help, just that most of the spending is unneccessary if it doesn't come this year.

[endersdragon34]

13. P.S.

RR is totally partison, CBO is totally bipartison. I tend to believe those that have no political motivation a lot more.

[depakid]

12. I trust the CBO about as far as I can drop kick an anvil

I would also note that the report was written almost 2 months ago- before these figures came in:

Q4 GDP Down 6.2%, Core Inflation at 0.8%

http://www.forbes.com/feeds/afx/2009/02/27/afx6105741.html

In addition, since Obama's center right economic advisors don't seem to have the ideological stomach (or political fortitude) to do what's necessary to stabilize the banks- one would expect the recession to deepen and drag out longer than it would if the government were to set up a resolution trust like entity to deal with the inevitable. Better now than in July and August.

[endersdragon34]

14. Yeah, why trust people who don't have political ideology in their decisions...

when you can trust a 1.75 trillion dollar deficit instead. And the report seems to have predicted the past two months pretty good, don't you think? It saw continued recession for the rest of this year.