Barack Herbert Hoover Obama?

Brad Delong on Obama's absurd macro move

For some time I have been worried about fifty little Herbert Hoovers at the state level. Right now it looks like I have to worry about one big one:

Jackie Calmes: Obama to Propose Freeze on Some Spending to Trim Deficit: President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.

The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.

The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, from air traffic control and farm subsidies to education, nutrition and national parks. ut it would exempt the budgets for the Pentagon.... The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional debt the government is expected to accumulate over that time...

There are two ways to look at this. The first is that this is simply another game of Dingbat Kabuki. Non-security discretionary spending is some $500 billion a year. It ought to be growing at 5% per year in nominal terms (more because we are in a deep recession and should be pulling discretionary spending forward from the future as fast as we can)--that's only $25 billion a year in a $3 trillion budget and a $15 trillion economy.

But in a country as big as this one even this is large stakes. What we are talking about is $25 billion of fiscal drag in 2011, $50 billion in 2012, and $75 billion in 2013. By 2013 things will hopefully be better enough that the Federal Reserve will be raising interest rates and will be able to offset the damage to employment and output. But in 2011 GDP will be lower by $35 billion--employment lower by 350,000 or so--and in 2012 GDP will be lower by $70 billion--employment lower by 700,000 or so--than it would have been had non-defense discretionary grown at its normal rate. (And if you think, as I do, that the federal government really ought to be filling state budget deficit gaps over the next two years to the tune of $200 billion per year...)

And what do we get for these larger output gaps and higher unemployment rates in 2011 and 2012? Obama "signal[s] his seriousness about cutting the budget deficit," Jackie Calmes reports.

As one deficit-hawk journalist of my acquaintance says this evening, this is a perfect example of fundamental unseriousness: rather than make proposals that will actually tackle the long-term deficit--either through future tax increases triggered by excessive deficits or through future entitlement spending caps triggered by excessive deficits--come up with a proposal that does short-term harm to the economy without tackling the deficit in any serious and significant way.

As Jackie Calmes writes, this isn't a real plan to control the deficit but a "symbolic" one:

[O]ne administration official said that limiting the much smaller discretionary domestic budget would have larger symbolic value. That spending includes lawmakers’ earmarks for parochial projects, and only when the public believes such perceived waste is being wrung out will they be willing to consider reductions in popular entitlement programs, the official said. “By helping to create a new atmosphere of fiscal discipline, it can actually also feed into debates over other components of the budget,” the official said, briefing reporters on the condition of anonymity.

As another deficit-hawk points out: it would be one thing to offer a short-term discretionary spending freeze (or long-run entitlement caps) in return for fifteen Republican senators signing on to revenue enhancement triggers. It's quite another to negotiate against yourself and in addition attack employment in the short term. The fact that the unemployment rate is projected to remain stable over the next year means that there is a 30% chance it will go down, a 40% chance it will stay about the same, and a 30% chance that it will go up--and whatever it turns out to do, the administration's budget has just given it an extra bump upwards.

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Jonathan Zasloff:

Obama’s Self-Inflicted Lobotomy Proceeds Apace « The Reality-Based Community: I’m trying to think of what could possibly be a worse plan.  Let’s see: we might be entering a double-dip recession and unemployment is in double-digits, and you are going to freeze spending?  What in God’s name are they thinking? Perhaps the worst thing about this is how it cedes the ideological ground to the Republicans.  At some point someone must make an argument for government.  I think it was former Senator Paul Simon who said: “give the voters a choice between a Republican and a Republican and they will choose a Republican every time.”

What next?  The rotting corpse of Andrew Mellon as Treasury Secretary?  Or do we already have that?

 

Mark Thoma concurrs Obama Wants to Limit Government Spending Despite High Unemployment and a Fragile Economy

I can't disagree at all [with Delong]. This is pretty disappointing.

The long-term budget problem is due to primarily one thing, rising health care costs. Everything else is dwarfed by that problem. If we solve the health care cost problem, the rest is easy. If we don't solve it the rest won't matter.

This was an opportunity for Obama to explain the importance of health care reform and how it relates to the long-term debt problem. Why not emphasize this?:

Sam Stein: Orszag Calls Senate Health Care Bill Biggest Cost-Container Ever Considered: The health care bill before the Senate would cut costs and reform health-care delivery more than any piece of legislation in American history, White House budget director Peter Orszag declared on Wednesday. "The bottom line is the bill that is currently on the Senate floor contains more cost containment and delivery system reforms in its current form than any bill that has ever been considered on the Senate floor period," the Office of Management and Budget director told reporters...

Instead we get cheap political tricks that are likely to backfire. How will this look, for example, if there's a double dip recession, or if unemployment follows the dismal path that the administration itself has forecast?

This seems to be a case of the former Clinton people in the administration (or wannabees) trying to relive their glory days instead of realizing that those days are gone, the world is different now and it calls for different solutions.

I wasn't in favor of having so many Clinton administration people in this administration, and nothing so far has caused me to change that assessment. They're nothing but trouble.

 

Bruce Bartlett Is Obama Repeating the Mistake of 1937? 

With the announcement that Obama plans to freeze non-defense discretionary spending in his new budget, I can safely predict a blizzard of liberal attacks drawing a comparison to 1937, when Franklin Roosevelt sharply tightened fiscal policy and brought on an economic downturn. In anticipation of something like this, I wrote a Forbes column two weeks ago on this very topic, which I reprint below. 

According to press reports, the Obama administration plans to put forward a budget on Feb. 1 containing significant deficit reduction measures. Some liberal economists are warning that it is grossly premature to implement deficit reduction. Indeed, they believe that additional fiscal stimulus is necessary to prevent a double-dip recession. They argue that there is a danger we will make the same mistake that Franklin Roosevelt made in 1937, which crippled the economy's recovery.

 

To evaluate the relevancy of 1937 to current economic and fiscal conditions we first need to review a little history of the Great Depression. First of all, it's important to remember that what we call the Great Depression was not a continuous downturn; it was really two back-to-back recessions. According to the National Bureau of Economic Research, the first ran from August 1929 to March 1933 and the second from May 1937 to June 1938.

 

According to current Commerce Department data, real gross domestic product fell sharply in 1930, 1931 and 1932, and modestly in 1933. But GDP rebounded strongly in 1934, growing 10.9% that year, 8.9% in 1935, 13% in 1936 and 5.1% in 1937. But in 1938, real GDP fell 3.4%.

 

For many years, economists thought this "secondary recession" was inherent in the nature of the business cycle. Today, however, economists generally believe that the only thing that caused the 1937-38 downturn was disastrously bad government policy.

 

Although right-wingers like to portray FDR as a giddy big spender whose profligate ways made the depression worse, the truth is that he was by nature quite conservative, fiscally. Indeed, when running against Herbert Hoover in 1932 Roosevelt was unsparing in his criticism of Hoover's spending and deficits. As he put it in an Oct. 19, 1932 speech:

 

"I regard reduction in federal spending as one of the most important issues of this campaign. In my opinion it is the most direct and effective contribution that government can make to business. In accordance with this fundamental policy it is equally necessary to eliminate from federal budget-making during this emergency all new items except such as relate to direct relief of unemployment."

 

Roosevelt vowed that every member of his cabinet would be required to support the economic plank of the Democratic Party's 1932 platform, which said, "We advocate an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than 25% in the cost of the federal government."

 

While it is true that spending and deficits rose sharply once Roosevelt took office, the fact is that they never rose sufficiently to offset the fall in private spending that was at the heart of the Great Depression. This was proven to the satisfaction of most economists in a 1956 article by economist E. Carey Brown, "Fiscal Policy in the Thirties: A Reappraisal." According to my calculations, the deficits of the 1930s should have been at least five times larger than they were.

 

Treasury Secretary Henry Morgenthau, in particular, was always disturbed by the deficits. Rather than promote recovery, as most economists believed, he thought that they retarded it by sapping business confidence. As historian John Morton Blum explains, Morgenthau "was sure that private investors would not risk their capital when economic conditions were uncertain. He was sure that federal deficits created uncertainty by causing fears of immediate inflation and future taxation."

 

In early 1937, Roosevelt was preparing his budget for the next fiscal year, which began on July 1 in those days. Strong growth in the economy and tax increases over the previous three years, especially the institution of a new payroll tax for Social Security, had caused tax receipts to almost double from 2.8% of GDP in 1932 to 5% in 1936. Projections showed that budget balance was within reach with only a modest reduction of spending.

 

Roosevelt was also concerned about the reemergence of inflation. After falling 24% between 1929 and 1933, the Consumer Price Index rose by a total of 7% over the next three years and signs pointed to even higher prices in 1937. Indeed, the CPI rose 3.6% that year.

 

Rather than viewing this as a sign of progress, which had caused the stock market to almost double between 1935 and 1936, Roosevelt and the inflation hawks of the day were determined to pop what they viewed as a stock market bubble and nip inflation in the bud. Balancing the budget was an important step in this regard, but so was Federal Reserve policy, which tightened sharply through higher reserve requirements for banks. Between August 1936 and May 1937 reserve requirements doubled.

 

During 1937, Roosevelt pressed ahead with fiscal tightening despite the obvious downturn in economic activity. The budget deficit fell from 5.5% of GDP in 1936 to 2.5% in 1937 and the budget was virtually balanced in fiscal year 1938, with a deficit of just $89 million.

 

The result was a huge economic setback, with GDP falling and unemployment rising. For this reason, Obama's economic advisers have been warning for some time that stimulus must be continued until full employment has returned. As Council of Economic Advisers chair Christina Romer wrote in The Economist last June:

 

"The 1937 episode provides a cautionary tale. The urge to declare victory and get back to normal policy after an economic crisis is strong. That urge needs to be resisted until the economy is again approaching full employment."

 

More recently, economist Paul Krugman warned that the Fed's talk of an early "exit strategy" from easy money sounds suspiciously like that which led it to tighten prematurely in 1936. He believes that the good economic news of recent months does not yet constitute proof that a sustainable recovery is underway and that the danger of a relapse this year is strong as stimulus spending wanes.

 

Nevertheless, the pressure to at least begin the process of normalization is overwhelming. The Fed has talked openly about new procedures to soak up the bank reserves it has created even as those reserves remain largely idle and unlent. And even Democrats and organizations affiliated with them are urging Obama to get the budget on a sustainable path as soon as possible. John Podesta and Michael Ettlinger of the liberal Center for American Progress recently argued that the primary budget (spending less interest on the debt) should be balanced as soon as 2014, with full balance by 2020.

 

I'm not terribly worried that Congress will reduce the deficit too quickly; too much of the budget is on automatic pilot or effectively off-limits. Entitlement programs like Medicare will continue to grow for years to come and there is no way that defense spending can be reined in as long as we continue to fight two wars in Iraq and Afghanistan, not to mention the likelihood of new domestic security spending in the wake of an aborted terrorist attack on Christmas day. And it's far more likely that Congress will appropriate new stimulus measures than cut back on those already enacted.

 

Moreover, the possibility of a tax increase at this point is very remote indeed. Republicans will fight any such an effort even more intensely than they fought health reform, and it's hard to see any Democrats leading the fight for higher taxes with the party already looking at electoral losses in November. The administration is even backpedaling on plans to allow some of the Bush tax cuts to expire this year. Yet there is no plausible way of significantly reducing deficits in the near term without higher revenues.

 

For these reasons, I don't see any possibility of fiscal tightening beyond that which will occur naturally as economic growth automatically reduces spending a bit, and causes revenues to rise as corporate profits revive. I think there is a greater danger of the Fed tightening too much, too soon or that Congress may go overboard with new financial regulations, but hopefully those dangers can be avoided.

 

One way to achieve fiscal tightening without endangering the recovery would be to enact entitlement reforms now that won't take effect for some years. Anything meaningful, such as raising the normal retirement age, will have to be phased in over many years anyway. Since entitlements have to be reformed at some point, doing so now would demonstrate resolve to get the budget under control while avoiding near-term fiscal tightening that might be premature.

Posted via email from Jim Nichols