President-elect Obama says don't worry about the federal budget deficit. "The consensus is this: We have to do whatever it takes to get this economy moving again -- we're going to have to spend money now to stimulate the economy. ... [W]e shouldn't worry about the deficit next year or even the year after; that short term, the most important thing is that we avoid a deepening recession."
It must be music to a politician's ears when a "consensus" tells him not to worry about deficits. He can spend without limit. So Obama talks about a "stimulus package" that he says will rebuild the infrastructure and "green" the energy industry. That won't happen, of course. Government performance consistently falls far short of its goals. Forgive me for again pointing out that President Jimmy Carter's Synthetic Fuels Corporation cost taxpayers at least $19 billion without giving us an alternative to oil and coal.
Obama hasn't put a price tag on his stimulus package yet, but speculation begins at $500 billion, with some people -- like Paul Krugman, the recent Nobel-prize winner -- saying that's way too small. "I'm still not sure ... whether the economic team is thinking big enough."
Krugman is the main cheerleader for a new New Deal, but one done "right" because Franklin D. Roosevelt was too timid: "the truth is that the New Deal wasn't as successful in the short run as it was in the long run. And the reason for FDR's limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious."
Krugman echoes John Maynard Keynes's complaint: Roosevelt's budget deficits were too small. Krugman is right about FDR's deficits being relatively small. As University of Arizona economist Price Fishback wrote recently, "Once we take into account the taxation during the 1930s, we can see that the budget deficits of the 1930s and one balanced budget were tiny relative to the size of the problem."Indeed, the deficits run by Roosevelt were comparable to those run by his predecessor, the allegedly do-nothing, laissez-faire Herbert Hoover. Both administrations spent heavily, but both also raised taxes substantially.
Of course, neither was able to fix the economy. On the contrary, their policies made a depression the Great Depression, extending it many years and even generating a depression within a depression in 1937. As Roosevelt's treasury secretary noted, "After eight years of this administration we have just as much unemployment as when we started."
But Krugman and others suggest that since the New Deal ran moderate deficits and the Depression persisted, then Roosevelt should have run bigger multiyear deficits -- and so should Obama. "[I]t's basically money we owe to ourselves. ... The best course of action, both for today's workers and for their children, is to do whatever it takes to get this economy on the road to recovery,"
This is the wrong lesson to learn from the 1930s. The New Deal didn't fail because its deficits were too small. As Amity Shlaes shows in "The Forgotten Man," the New Deal failed because it interfered with the market's natural regenerative processes. By raising taxes, hamstringing producers with arbitrary regulations and creating uncertainly about what the government would do next, business people were unwilling to invest and hire workers.
Obama must realize that government has no wealth of its own and that commandeering scarce resources from the private sector only stifles the economy. Deficit spending does this two ways. When the Treasury borrows money, it outbids private borrowers who would have put the money to productive use. When the Fed creates money, it depreciates the dollar, shifts purchasing power from the people to special interests, and -- by tampering with the price signals -- creates an unsustainable recovery that will collapse and throw people out of work when the inflation stops.
The 2009 deficit is projected to be $438 billion. Obama's "stimulus" could take it up to a trillion and beyond. That's just the beginning since the Democratic Congress's spending wish list and Medicare's $35 trillion unfunded liability loom.
We should all worry about the deficit.