The Obama Crash

President Obama loves to say that he saved the economy. On multiple occasions he has pointed out that when he took office, unemployment was still rising and that the economy has turned around and is now creating (a few) jobs. He claims that he kept a recession from becoming a depression.

Since he is taking sole credit for it, he must be crediting the stimulus package passed during the first few weeks of his administration for this feat. Someone taking a longer view might give more credit to the Bush administration for passing the TARP. Bush also bailed out some of the "too big to fail" institutions. Obama can take credit for turning around GM and Chrysler although he used some of the money from Bush's TARP for that.

Regardless of who did what, this is only a temporary respite. There are problems on the horizon that will be much more difficult to fix than the 2008 crash. Our country's national debt is exploding and Obama seems oblivious to the implications.

Keep in mind that the debt is different from the deficit. The debt is the total amount that our government owes to its creditors. The deficit the the amount that the government spends minus its income (if the income is greater then it is a surplus). Since our government almost always runs a deficit, we never pay off any of the debt. We simply pay the interest. This is already one of the biggest items in the budget.

For decades this was a minor problem. It became a hot topic during the 1992 campaign when independent Ross Perot bought TV time and used a pointer and some simple charts to attract attention to the deficit. Under long-term pressure to control the deficit, President Clinton and a Republican Congress made tax increases and budget cuts and actually balanced the budget for a time.

With the attacks on 9/11/2001, a recession, and the start of long-term foreign wars, the deficit came back. At the same time, President Bush and Congress increased the rate of government growth. This caused record, but manageable deficits.

Several things have changed in the last couple of years. The recession cut income. The TARP, the bailouts, and the stimulus all increased spending. The Obama administration and a Democratic Congress made several other moves to increase spending. The 2010 budget grew by several times the rate of inflation. The Health Care bill was presented as deficit reduction but that relies on future Medicare cuts that are unlikely to happen. Even with the cuts, it only reduces the deficit for a short period. Long-term, it will add to the deficit.

Social Security hit a milestone this year. Since the 1980s, it has produced a surplus which went into the general fund and offset the deficit. This year it ran a deficit which means that money has to come out of the general fund to pay off Social Security benefits (technically Social Security is being paid by redeeming special bonds but the money for this comes from the general fund). This adds to the deficit and the new debt being incurred.

Within the next few years Medicare and Medicaid will also start to run deficits and drain the general fund. There is also pressure for the federal government to bail out states that are in trouble. The federal government does not have any more money than the states but it has powers to borrow or print cash that the states do not have.

All of this will result in exploding debt. Our deficit is already high enough (63% of GDP) to cause a crisis in some countries. A deficit of 90% nearly always causes a crisis.

So what is the Obama White House doing to head off this crisis? Virtually nothing. Yes, Obama appointed a commission to look into the deficit but it has no authority.

What will this mean in the long run? It will be painful. It will mean cuts in services and increased taxes. Greece is already facing this. So is California. It will be more painful for the federal government than either of these examples. Greece is getting help from Germany and the European Union. California is getting help from the federal government. There is no one large enough to bail out the US (with the possible exception of China).

We need to start acting now but President Obama is a prisoner of his preconceptions. He sees the government as a creator of jobs so the growth of government (and the deficit) is a good thing during a recession. He also listens to economists like Paul Krugman who insist that deficits do not matter. They point out that the deficit during World War II reached 100% GDP but was paid off a few years later. What they do not admit is that the economic conditions of post-WWII are completely different from the present. Among other things, the government was financially stretched to the breaking point by the end of the war. The government immediately started decommissioning troops and cut spending as soon as the war ended. A significant portion of the workforce (women) voluntarily stopped working so that there would be more jobs for veterans. Finally, the war left Europe and Asia's manufacturing capacity shattered which the US was fully intact.

Nothing that I have written here is new or unknown. This is what motivates the Tea Party protesters.

We have two choices. We can start implementing austerity budgets on both the state and federal level and trying to control the deficit or we can ignore the problem and continue to spent until we have a crisis. The second approach appeals to a president who is bent on being "transformative". Eventually the crisis will come. If Obama manages to be elected to a second term then there is a good chance that he will be in office to deal with the fruits of his labors.