Change in Deficits From Reagan to Trump

Here is a chart showing the change in deficit from the first year of a president's term to the first year of his successor's term, the difference between what he inherited and what he left. It covers a span of 36 years. A negative number means that the president made the deficit smaller and a positive number means that he made it larger.

Reagan inherited a deficit of $419 billion and left George H. Bush a deficit of $252 billion. The deficit was $167.2 billion smaller by the time George took office, hence the -$167.2 in the graph above for the first bar.

Bush 1 turned the $252 billion he inherited into a $365.8 billion legacy for Clinton, increasing the deficit by $113.8 B.

Clinton turned this deficit into a surplus for his successor, reducing the deficit by half a trillion.

George W. Bush turned that surplus into the biggest deficit in history, a swing of nearly $1.6 trillion.

Obama whittled down the $1.4 trillion deficit he inherited into a still sizable $590 billion.

Trump is projected to increase that $590 billion into nearly $849 billion this year.

3 of the last 4 Republican presidents have increased the size of the deficit and both Democratic presidents have reduced it, suggesting that if you actually care about deficit reduction, you would not vote for Republicans. You can hate big deficits or love Republicans but you can't honestly do both.

Trying to Make Sense of Why Republicans Can't Make Sense of Deficits

It's not clear whether Republicans have given up on caring about the economy or if their ideology blinds them to what even sharp high school students can see. What I do know is that a horde of friends who - presumably fed by Fox news or other conservative news outlets - were loudly fretting about deficits during the recovery are now mum about the deficits that will follow from Trump's new tax cut.

One of the simplest things we know about economies is that when unemployment is high you should increase the size of deficits and when unemployment is low you should lower the size of deficits. This is so obvious that it hardly merits mention and yet Republicans seem to miss this point. I don't know if it is because of a paradigm filter, crass disregard for the larger economy, or simple opportunism that comes from disregarding any goals but tax cuts.

Deficits stimulate the economy. That said, there are deficits that are good stimulants and deficits that are poor. The best deficit comes from spending money on things like infrastructure that will leave an economy more able to grow. Ideally, a deficit stimulates the economy short term and lays the foundation for higher productivity in the future.  The worst deficit just adds more money to wealthy people who are unlikely to spend much of it. (If your net worth is $3 million and you get another $10,000 in tax cuts, you are less likely to spend any of that money than someone whose net worth is $10,000.) Good or bad, a deficit stimulates the economy, although to different degrees.

As trade makes up a bigger part of the economy, deficit spending it more likely to drive up asset prices like stocks and homes; rather than see a rise in the price of apples, you might see a rise in the price of Apple stock.

(Yes there are other factors. No I'm not going to cover those here.)

Why does this matter? Well, you can't just say that it is good or bad to increase the size of a deficit. If you suffer from high unemployment, increasing deficits is great; if you are enjoying low unemployment, increasing deficits is bad. Atop that, deficits that build the economy's capacity (borrowing to invest in building freeways or high speed rails or basic research or education initiatives) are better than deficits that just create a temporary blip in spending (e.g., tax cuts).

The year before George W. Bush took office, unemployment averaged 4%, its lowest since 1969. It seems safe to say that the economy was at full employment. What did George W. Bush do once he took office? He cut taxes to stimulate the economy. What happened? The price of homes - assets - and the mortgage back securities that financed their purchase went up. Spectacularly. This stimulus created a bubble and bubbles burst. The year before Bush took office unemployment averaged 4% and the year after he was in office it averaged 9.3%. Stimulating an already strong economy turned out to be disastrous.

The first year of Trump's presidency, unemployment will average 4.4%, its lowest since Clinton's last year in office. What does Trump do? He is cutting taxes to stimulate the economy. This could feed a bubble in asset prices ... a bubble that will pop more spectacularly than it otherwise would have. Stimulating a weak economy can create a strong one; stimulating a strong economy can create a bubble.

The Republicans who hollered about deficits during the Great Recession are now creating a deficit in a time of full employment.

It seems as though Republicans like deficits in good times and hate them in bad times.

The question is, why? This is not a difficult concept to grasp and yet Republicans refuse it.

I can only think of a few reasons.

One, they want tax cuts more than they want a healthy economy. They really do think it's possible to live like the rich in banana republics, comfortable even when the larger economy is bad, and as long as they get their tax cuts they don't really care about the larger economy.

Two, they don't believe that macroeconomic policy makes any difference, instead believing that individuals make all the difference. (It is true that individuals make a difference; some do well in bad economies and some do badly in good economies. It is not true that recessions hit because the percentage of lazy people in an economy suddenly doubles, because of changes in individual behavior. The strategies to get near the top of a group are different from the strategies to move a group's median income up.)

Three, they can't distinguish between individuals and a community when it comes to who should get a loan. It is true that you don't want to loan to a guy who is out of work and you'd be happy to loan to a guy with a great job. In that sense they are right that deficits are "safer" when the economy is good. But of course debt is very different for an economy than it is for an individual or household. Even a household engages in deficit spending when times are bad and pays down debt when times are good; if you are unemployed you borrow from your savings or friends; if you are fully employed you save. The banker may rather loan to the guy with a job but it is the guy who is temporarily out of work who most needs the loan. It may seem safe to create more debt in the economy when times are good but that stimulates spending that threatens to create bubbles.

What will be the result of the Trump tax cut? The economy will get worse. Not immediately. Immediately it will get better because the start of bubbles are the best part; it's the busting of bubbles that is miserable.

The Simple Solution to the US Trade Deficit with Germany

If you spend more each month than you make, you will run a personal deficit.

If a country buys more than it sells, it will run a trade deficit.

One of the simplest determinants of whether or not a country is spending more than it makes is determined by its government accounts. If a government has a surplus, the country will tend to have a trade surplus; if a government runs a deficit, the country will tend to have a trade deficit. Generally - but not always - the government is big enough that it will cast the swing vote, if you will, as to whether the country as a whole spends more than it saves and, thus, runs a trade deficit or trade surplus.

Trump has called the Germans very bad because the US runs a trade deficit with Germany. Germany's government ran a government surplus of about $27 billion last year. The US federal government is projected run a deficit of about $400 billion and Trump's proposed budget would probably increase the debt by about $1.7 trillion over the next decade. Our government deficit loosely translates into a trade deficit.

Assuming that Trump has more influence over the US federal budget than he does over German consumers and companies, if he were sincere about reducing the trade deficit he would reduce the federal deficit.

Or he could send angry tweets that insist the real problem is Germans who save too much rather than a US government that can't agree on how to finance its spending.

Using the Iraq Invasion as a Pattern for Deficit Reduction

The push for radical reform in the budget process reminds me of the Iraq invasion.

Like Saddam Hussein's rule, the deficit is a real problem that makes people with a conscience and reason uncomfortable. This is reality. And then, from this thread of reality, the right-wing weaves a cloth of deceit as follows.

1. Make the real problem suddenly urgent. For no good reason, we had to oust Saddam now. Same with the deficit that the Republicans ignored for roughly a decade.
2. Ignore the problem that "solving" this problem will create other, bigger problems. Occupying Iraq was incredibly expensive, complicated international affairs, and got us into a situation from which there was no easy way out. Reducing the deficit when unemployment is over 9% and the economy is already growing slowly will create similar complications.

And then you simply manipulate the media into the belief that no other issue matters. With Iraq, the neo-cons won once they got everyone to believe that the only thing that mattered was that you had a strong opinion. Their victory did not start with getting people to side with them. Their victory began with getting people to think that this - of all issues - was the one that mattered. So it is with the deficit reduction. Because everyone would agree that Saddam should be removed or that the deficit should be reduced. That is not the question; the question is whether it should happen now and whether it should happen at the expense of any other option or whether this is the best thing for the country.

There are other similarities as well. Blowhards drown out experts. They insist there is only one way to make this happen (shock and awe or budget cuts without tax hikes). They replace nuance or discussion with sheer repetition. I'm sure you could think of other examples.

I fear that the right will again do their damage. Pity. One might have thought that with a Democratic president and Senate, it would have been more difficult for them to destroy the Republic. Still, destruction is always easier than building; just ask the Americans first involved in the defeat of Saddam's army and then involved in building the country.

Metaphors are Like a Bad Idea and Stuff (or, why the Government is not like a household)

Metaphors are more like poems than mathematical equations. Love is like a heat wave is easy to rhyme, but it collapses under scrutiny.

Governments are like a household and have to live within their means is a metaphor and while it makes something complicated seem simple, it, too, collapses under scrutiny. (When do we reach the retirement phase of our government is like a household and all stop working? And why can't we be like other families and just sit down to a pleasant dinner some day without all this arguing?)

There are lots of dangers with this metaphor as a substitute for thought. The most obvious is that if a government behaves like a household, it just makes things worse.

Any household with good sense will spend lots when it is making good money and will act more frugal when times are tight. If mom gets laid off, we buy our clothes at Goodwill instead of the mall. If mom gets promoted, we travel to the Caribbean instead of Phoenix. This makes perfect sense.

Governments are different. Remember Joseph's first job out of prison, working for the Pharaoh in a role akin to Prime Minister? He got that job by interpreting the Pharaoh's dream and warning him that Egypt would have 7 years of prosperity and then 7 years of famine. His advice was to save a portion of the corn every one of the good years and then dispense it out in the bad. Joseph basically told the Pharaoh to act completely backwards from what a household should. When times were good, save and be frugal, Joseph said. When times were bad, raid the storehouse and spend more liberally. This works.

Now the opposite of Joseph's advice would be what we've seen in the advice of talk show hosts in the last 10 years or so. When employment rates were low and the economy was growing, they cheered government tax cuts and the onset of wars that increased spending. Like a household, it made sense to them that government would act flush when the economy was relatively flush. But this was not such a great thing. For one thing, the government stimulating an already growing economy helped to create one of the biggest housing bubble in history. Now, when times are bad, the radio talk show hosts are saying that the government should tighten its belt. Most states have already done that and eliminated government jobs, adding to job market woes. We might yet escape a double-dip recession, but it will - best case - be one of the slowest and weakest recoveries on record. By contrast, China and South Korea engaged in far bigger stimulus (as a percentage of GDP) and came off of a far more fiscally conservative period before the global recession and already those economies are growing at a multiple of ours. A recession is no time to be worrying about a deficit.

So, when government is run like a household and ignores Joseph's advice, boom times become bubbles and bad times become busts. (Every depression in the US followed a time of paying down federal debt. Read more in this great article by Jim Luke.) When the private sector is again thriving, it would (contrary to intuition) be a good time to raise taxes and cut government spending, reducing the deficit. For now, though, the deficit is an abstract problem that can be deferred for a year or two. Sure, we're spending down the storehouse of corn now but you do that in bad years.

The government is no more like a household than love is like a heat wave. But still, it is your turn to do the dishes.

Read this Post or I Shoot the Puppy

National Lampoon had a magazine cover years ago with the picture of a dog with a gun to his head. The magazine cover was, "Buy this magazine or we'll shoot this dog."

Eric Cantor (from the Latin meaning, can't do, referring to someone who obstructs progress), has essentially become a financial terrorist, holding the state hostage to his tax cutting demands.

Not raising the debt limit means insisting that the budget be instantaneously balanced. Cantor refuses to raise taxes a penny, so he's essentially demanding that the federal budget be cut by about 1/3 or more. The implications of this are many, but here are the highlights:

1. The deficit is about $1.5 trillion a year. The American economy is about $15 trillion. So, Cantor is threatening to eliminate about 10% of the total number of jobs in the US economy, more than doubling unemployment in a time of already high unemployment. This means that folks at the EPA will be let go, as will military personnel, government contractors, research scientists (some on government grants and some actually employed as government scientists), etc. Unemployment would, overnight, jump from about 9% to nearly 20%.

2. The implications of the above is a ripple effect into the private sector and into local governments. Dry cleaners by the air force base, sandwich shops by the Pentagon, and car rental staffs around the country are just a few of the thousands of businesses that will layoff in response to a severe drop in demand from former government employees and contractors. This, alone, would raise unemployment another 2% to 10%.

3. It is hard to imagine that the government would be able to quickly respond as described in the first bullet. This means that the budget will also be "balanced" by stopping payment on government debt. The implications of this include (paradoxically) a huge surge in interest payments as agencies lower the rating on government debt. A default would ripple through credit markets, raise interest rates on most every kind of loan (most are tied to government rates), and trigger a fresh round of mortgage defaults, and further contraction in hiring and expansion from a private sector that has just begun to (slowly) expand in this year. This, alone, would raise unemployment by another 2% to 10%.

4. Worse, this would ripple out from the US to the rest of the globe. The 2008 financial crisis destroyed trillions in wealth and millions of jobs. This Cantor-induced default on debt payments would screw up credit markets around the world, particularly the already shaky euro market.

In short, what Cantor would do is plunge us into a depression just as we're (barely) recovering from a recession

One thing that Cantor does make clear, though, is that this determination to reduce the size of government does not come from a vision of economic prosperity, an actual belief that the economy will thrive in response to smaller government. This is, instead, an ideology that has to do with a belief in little or no government rather than a commitment to a healthy and growing economy. Like the Taliban, Cantor is committed to an ideology that has nothing to do with normal measures like poverty reduction, rises in income, or low unemployment.

Cantor has the world economy hostage. One can only hope that voters will realize what a calamitous mistake this is when he next comes up re-election. Then maybe he can go in to real estate and see how much success he has selling houses only to families who can afford down payments that are 100% of the purchase price, avoiding debt and living within their means.

The American Job Market - A Self Inflicted Wound

Excerpts from The Economist.  Government policy to reduce the deficit and move towards fiscal responsibility is proving economically reckless. It is now costing us jobs and putting us at risk for a double-dip recession.

After producing job gains averaging 220,000 per month in the three months to April, the economy added just 54,000 in May, below expectations. The private sector did a bit better, adding 83,000 jobs, but that was well off the healthy rate of hiring enjoyed earlier in the year. The unemployment rate rose to 9.1%, from 9.0% in April.
America's job woes have also been self-inflicted. Private firms have added over 1.7m jobs in the past 12 months, but the government has shed nearly half a million over the same period (not counting the loss of temporary Census jobs last year). Local governments alone have cut 446,000 positions since September of 2008. Some of those government jobs losses reflect a sensible rationalisation of workforces. Too many of them reflect the damaging effect of pro-cyclical budget cutting due to balanced-budget rules in cash-strapped states. More federal aid to states might have dampened the reductions, easing the drag on national growth.
The ongoing debt-ceiling battle is an additional source of uncertainty. Legislators continue to bicker over how and how much to trim from the federal budget in exchange for an agreement to raise the nation's statutory limit on borrowing. Failure to raise the ceiling by August will trigger default. Just yesterday Moody's, a ratings agency,threatened to downgrade America's debt rating if a deal on the ceiling weren't reached by next month.
In a global economy this volatile, the American economy is going to have a rocky month here and there. But American government officials are doing themselves no favours. Federal Reserve officials are overly concerned with inflation given the outlook for slowing global growth. Now is no time for policy tightening. And elected representatives in Washington are playing with fire. By cutting too much spending in the short-term and turning the debt-ceiling fight into a political battle, Congress risks making a large unforced error. The economy is simply too vulnerable at the moment for politicians to make those kinds of mistakes.

The Deficit's Root Cause

The deficit is pretty simple. The federal government spends more than it collects in taxes.

It's worth asking why Americans feel entitled to both low taxes and high levels of government spending. Maybe the root problem is simply one of growth in incomes. Or rather, a lack of growth.

Between 1900 and 1999, wages grew from $4,200 to $33,700. That's a lot. Faster growth than at any time in history. Ever. This allowed for two things: households got a steady growth in take home pay even while paying more in taxes and getting more government programs like public education and social security.

Yet the phenomenal wage growth slowed late in the century. From 1900 to 1980, wages grew 2.2% a year.

In the 1980s, when Reagan's policies supposedly had such a positive impact on the economy, wage growth slowed to 1.8%.

In the 1990s, when Clinton's policies supposedly had such a positive impact on the economy, wage growth slowed further to just 1.6%.

In the first decade of the 21st century, it got worse. Wage growth dropped into negative range, to -.3%.

These might sound like small differences, but percentages have a way of quickly compounding. By 2009 wages were about $44,000. They would have been $62,000 had wages grown at the same rate in the 30 years after 1980 as they had in the 80 years before 1980. 

Slower growth means that wages are about $18,000 a year less. That's a difference of 40%.

What does this have to do with deficits? 

You could make the case that politicians have been giving tax cuts because the work place is no longer giving raises. American workers expect their take home to raise every year. For that to happen when wages don't go up, taxes must go down. 

One big reason for the polarization in politics is the sharp division on how to deal with lower incomes. The left wants to mitigate the pain of lower incomes with government spending; the right wants to do it by lowering taxes. 

As long as wages continue to stagnant or drop, this polarization - and the painful choices - will only get worse. 

It might be worth thinking about how to jump start income growth again. Any other solution will leave Americans feeling poorer for the simple reason that they are. 

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For more on wages in the 20th century, look at Donald M. Fisk, American Labor in the 20^th Century, http://www.bls.gov/opub/cwc/cm20030124ar02p1.htm

America - Where One CEO can Afford to Buy an Entire Senate

This week, alpha males squared off against each other: Oil company CEOs and US Senators. Given that nothing confers respect like money, it was no contest.

So far this year, the five oil companies represented (Shell, Chevron, Exxon, Conoco, and BP) have made profits of $36 billion. More interestingly, each American CEO made more than the entire American senate before which they appeared.

Combined, the 100 Senators made $17.4 million last year (each makes $174,000).

Chevron's CEO made $16.3 million, Conoco's CEO made $17.9 million and Exxon's made $29 million.

America is nothing if not predictable. It doesn't matter that the oil companies are so profitable when the the deficit is so large. Their $2 billion in tax breaks will continue.

Senator Schumer asked, did any one of these CEOs want to go on the record as saying that perhaps their tax cuts were less important than any other, single program or issue? This after reminding them that cuts to education, health care, and social security were likely.

Not a single CEO could see how any of those programs were more important than their tax breaks.

Let me make an obvious but important point. These CEOs are not paid to show an interest in the American economy or the American people. They made it clear that if the marginal cost of producing oil in Texas were higher than producing it in Indonesia, they would shift production overseas. Their loyalty is to company profits.

A tax break of $1 will benefit Exxon. That dollar may be used to create a job in Saudi Arabia or Houston. Or be paid in dividends to an investor in Japan or San Francisco. There is no guarantee that the money will benefit the American economy. In fact, there is a guarantee that the money will be dispersed globally.

That, it seems to me, is worth remembering.

A Nation in Denial

Here's a curious little fact.

In Obama's 2010 budget, he's showing mandatory expenses at $2.184 trillion. (Mandatory includes things like social security, medicare, and interest on the national debt.) He's projecting revenues of $2.381 trillion. So, $197 billion is left for all discretionary spending. Unless, of course, we want a 1.2 trillion deficit.

Let's say that we balance the budget without adding taxes. We'd have to cut all discretionary spending by more than 85%. This would mean, for instance, that defense spending would drop from $664 billion to $95 billion, a level we haven't been at since before World War 2. The National Science Foundation - the investment our $13 trillion economy makes into basic research - would be a mere $1 billion, or about what Exxon makes in an hour.

People like to talk about the good old days before the time of so many taxes. Of course, they forget that in those good old days life expectancy was about 47 years, income was a fraction of what it is now, and people had yellow teeth. Assuming they had teeth.

George Bush took us to war and gave us a tax cut. We bought it.

Barack Obama got elected by promising universal health care and a tax cut. We bought it.

We're the ones in denial here, not the politicians. They know that they have to give us our programs and tax cuts or we boot them out.

If a politician promised to raise taxes and cut programs by enough to balance the budget he or she would lose the election. (And anyone who thinks you could balance the budget with just raising taxes or cutting programs is obviously a beneficiary of the new medical marijuana laws.) It's that simple.

Obama has appointed a commission tasked with creating recommendations for moving towards a balanced budget. Elected officials can't talk honestly about what needs to be done, so the bitter truth is left for appointed officials to say. Because you can't stay in office and talk honestly about the deficit. Not if you want to be elected by a polity in denial.

Sacred Cow Sausage

Hopefully we won't take our deficit problem too seriously this year but once the recession is clearly behind us, it will be important to address. Very important.

Right now, the problem seems intractable. When a problem can't be solved, it is time to look in new places for solutions.

Currently, there are three places that are considered sacred for budget cuts, three places we don't even consider as sources for potential savings.

1. Defense. We still spend money as if preparing for a large-scale conventional war. We fund weapon systems long past their "not feasible" expiration date. We don't know the difference between war and occupation. But if you want to lose an election, simply mention the possibility that we might want to decrease - rather than increase - defense spending. We will not get to a balanced budget without changing the assumption that defense spending is sacred. We don't have to spend more on defense than the rest of the world combined and it makes up about a trillion of our three trillion budget. I don't know how you ignore this if you are serious about balancing a budget that is off by about a trillion.

2. Social security. Technically off-budget and its own category, but still leaves a large carbon, I mean fiscal, footprint. When it was introduced, social security kicked in around the time that the average person died: life expectancy and retirement age weren't so very different. Today? Very different. This is simple. For my generation, we have got to raise retirement age by 1 to 5 years. This will make a huge difference in the money collected by and paid out from social security. We can't pretend that the rules for when people retire remain unchanged as life expectancies increase.

3. Medicare and all health care. People are bankrupt by medical costs and this is wrong. Millions are not covered and this, too, is wrong. What else is wrong? Covering expenses that are, say, under $1,000 or even $2,500. This creates overhead for billing, adding costs to health care. It makes us less price sensitive (imagine that filling up your gas tank had a set co-pay of $5 whether you were buying it at $2.50 a gallon or $5.20 a gallon) for services whose price would be lower if subject to price competition. And it makes us feel entitled rather than careful about casually using health care. If we did not cover services under some threshold, we could greatly reduce the cost of administration and coverage. Health care - like defense and security - should be a right. That ought not to be construed to mean that every piddling service we need is something we should pay for through the roundabout means of taxation and government reimbursement.

Right now, we can't seem to reduce the deficit, much less balance the budget. When your current set of assumptions preclude your goal, it is time to challenge the assumptions.

Oh, and one other thing. Even challenging spending on these sacred cows will not be enough. We will have to raise taxes. We may as well make the slaughter wholesale.

Ill-Timed Fiscal Responsibility

Imagine the kid least clear on the topic getting to deliver the lecture in class and you get a sense of what happens to economics in a modern democracy.

Democrats are talking fiscal responsibility now. They've heard from their districts that Americans are aghast at our level of deficit spending. And, of course, Republicans have been harping on deficits ever since spending plans have shifted from the military to health. This is terrible timing.

Geithner and Obama have both signalled that they're aware of the need to reduce deficits and that they dare not do it too soon at the risk of tilting us back into a recession.

When the economy was expanding, the Bush administration ran chronic deficits and hardly a word was said. This was ridiculous. Large deficits during good times guarantee huge deficits in bad. And deficits in good times just fuel speculation, price inflation, and new ventures that cannot be sustained. It is during good times that we ought to speak out against deficits but it is during good times that a people feel they can afford to take on such debt.

During bad times, there is a sense that we spent our way into financial trouble and this reckless spending ought to be stopped. Americans in particular have always been uneasy about credit. Few remember that commercial credit met as much opposition in the late 1800 and early 1900s as homosexuality meets today: the apostle Paul wrote more clearly and as often about avoiding debt as he did homosexuality. We get very moral about debt during bad times. This is unfortunate, like getting squeamish about blood during surgery.

Deficit spending is necessary during bad times and is - at best - an annoyance during good. Economics is, of course, continually subordinate to popular opinion in a democracy, so what makes for good policy matters little. Lots of people claim that medicine is a conspiracy but the individual who believes in modern science and medicine can still visit a doctor: if enough people see economic policy as a conspiracy rather than the best we know, all of us get banned from seeing the doctor. Talk show hosts who fell asleep during economic lectures will fume and sputter and callers will chime in with their outrage and these kinds of people will send letters, organize voters, and set policy.

Keynes was a genius but there are lots of coffee shop diners who understand economics better than he did (and, presumably, understand physics better than Einstein). For the record, Keynes recommend government surplus in good times and deficit in bad. Right wing talk show hosts recommend the opposite. You take a guess as to who can be trusted more.

The Right's Sudden Interest in Deficits

The Obama administration gets the honor of presiding over the biggest deficit in history. This year's deficit is an outrageous amount - $1.4 trillion, or about 10% of GDP. The right pretends to be sincerely outraged at this. They are not. The right could care less about deficits - as their re-election of dubya proves.

Obama inherited a deficit of $1 trillion and added to that another $400 billion to offset what looked to be the worst downturn since 29. Just a few years in, Bush had turned Clinton's last year surplus of $128 billion into a deficit of $377 billion - a reversal of about $500 billion. $400 billion in 2009 vs. $500 billion in 2003? If critics are outraged at Obama today, where were they in 2003?

If Bush had continued with Clinton's fiscally conservative budgets, continuing to run a surplus rather than chronic deficits, two things would have happened. One, the bubble would have been less pronounced. Might not have even happened. George Bush stimulated an already growing economy. It is no surprise that prices of equities and homes ballooned given his one-two punch of tax cuts and spending increases. Two, the government would have had much greater ability to stimulate the economy a year ago when GDP did drop. Imagine deficit spending from a position of surplus rather than huge deficit. How many more options would we have had? And the stimulus would not have been done with the constant worry of currency devaluation, or spending backfiring as government borrowing crowds out private borrowing.

So, next time someone you know starts in about how awful it is that Obama is running up such a huge deficit, just inquire, "Have you flip flopped on deficits? Wasn't a vote to re-elect Bush and Cheney affirmation of Dick's little quip that deficits don't matter? Now they do?"

Changing the Rules of War

I'd like to propose a new rule for war. Why not limit battle to those who are over 75?

This would have at least three benefits. One, it would mean no longer cutting short the lives of the young. Two, it would create a new kind of arms race: rather than just spend on defense, countries would be motivated to spend on health care, doing all they could to keep the 75 and older crowd vibrant, strong and healthy. And it would mean that when you spent more on war you would almost automatically spend less on retirement, helping with deficit reduction.

Of course, that would mean that the world's toughest job would be the new job of carding heavily armed soldiers to confirm that they really are over 75.

[And thanks to Sarah for posting a picture of her son in uniform, thereby provoking this thought.]

Spending Our Way Into a New Economy

Conservatives argue that Roosevelt's Keynesian policies were ineffectual because it was not until the country mobilized for World War 2 that the economy turned around. The lesson that Christina Romer, the chairman of the White House Council of Economic Advisers, has drawn is that Roosevelt did not do enough. "The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem," she said. "This is a lesson the administration has taken to heart."

Roosevelt made a puny attempt at stimulus spending, whereas World War 2 did, and Obama will, make an heroic attempt at stimulus spending. This should hearten us.

What if the truth of the World War 2 economic recovery was more complex? What if it was not just a simple matter of spending more money but was from spending money in a particular way?

After World War 1, the Allies could not even make sense of German patents without German engineers and scientists. War with the Nazis, decades later, was a stimulus of a specific kind. Americans did not just spend money on factories and production. We spent money on research and development, higher education, and furthering fields like computers , cybernetics, production systems, and chemistry. Our reaction to the advances of German engineering and science was a specific kind of stimulus: it helped to usher us into the information age and helped to create the management and production techniques that helped to make American corporations dominant in the business world and the institutions most emulated across the world.

The deficit spending of World War 2 did not just save the world from tyranny. It helped to create a new kind of economy.

It is not that the U.S. is no longer an information economy. It is that the American economy is now a part of a global information economy. This has changed things enormously.

The point is not to stimulate the old Information Economy, stimulating domestic consumption and investment that it likely to go into foreign production capacity and goods in this global economy. The goal instead should be to help to create a new economy, just as we did during World War 2.

At the risk of sounding trite, it is not time to repair the garment that fits us and our time less well. It is time to create a new garment that we've grown into. It is not enough to stimulate the Information Economy; we need to create a new Entrepreneurial economy instead. We probably do need deficit spending to do this. But not deficit spending mindlessly spent on what worked in the 1930s and 40s.

The Entrepreneur's GI Bill

Obama's new plan will create a deficit of $1.5 trillion. This is the difference between taxes collected and money spent in just a single year. Outside of the US there are only 6 (six!) countries with GDPs that are bigger than this. This would be a mind boggling sum were it not so mind numbing.

I am going to repeat myself here. We're spending all this money in the hopes of a multiplier effect - in the hopes that the money spent by the government will trigger money spent by businesses and households - that will jump start the economy. But if that is the goal, why not go after it more directly?

I am having trouble letting go of the idea of a movement to fund new businesses that would be to our time what the GI bill was to the explosion of knowledge workers after World War 2.

If we are going to spend such a massive sum, why not be more direct in going after what we want? If we give households money, they are as likely to buy cars from Japan as wheat from the US. Even businesses are likely to subcontract work overseas. One of the problems rarely mentioned in this age of globalization is how much of a stimulus package might leak abroad.

We want jobs. Why not use the stimulus money to create companies that would provide these jobs?

The GI Bill really was instrumental in helping to create a new economy where professionals with advanced degrees did more to stimulate GDP growth than did captitalists and factory workers. People who would not have otherwise gone to college - who could not have afforded it - got degrees and careers that their parents could not have imagined. By creating so many knoweldge workers, the GI BIll helped to create the innformation age.

Why not look back in 30 years at the amazing companies that were started by the infusion of start up capital that triggered the creation of companies that found new industries and created new wealth? People who would not have otherwise started companies could become the new generation of entrepreneurs. This would not just stimulate consumption but two other things vital to a sustained economic solution to our current plight: new jobs and wealth. By creating so many entrepreneurs, this new stimulus package cold help to create an entrepreneurial age.

Ultimately, our twin deficits (trade deficits and government deficits) will not go down until we begin to produce more and begin to create wealth faster than we deplete it. Why not replace deficit spending with investment in our one remaining economic strength: innovation and entrepreneurship?

I love Biden and Barack. But until they can tell me why their plan of tax cuts and government spending is a better use of money we don't have, I'm going to wince every time I hear about their stimulus plan. As it now stands, it just makes me nervous.