The Next Big Oops

Across the society, from cornered municipal officials to the national commentariate, people are preparing the way with palms for the eye-popping stimulus proposals of Obama and Congressional Democrats. A radio report, the other day, explained that the president-elect recognized that the stimulus plan required a tax cutting component, and although, unlike conservatives, liberals see tax cuts as expenditures, alongside a trillion dollar spending plan, a few hundred more billion tacked on to the end hardly registers. Why hasn't anybody thought of the spend-without-reservation federal economic strategy before?

One can almost hear the twenty-second century history books being written: "At that time the flawed idea that government spending needn't be controlled swept the troubled nation like an opiate wildfire."

Paul Krugman, for high-profile example, thinks that both the short and the long term focus should be on nationalizing budgets. "No modern American president would repeat the fiscal mistake of 1932," he writes, "in which the federal government tried to balance its budget in the face of a severe recession." Casting his argument in terms of state-level action, Krugman sees the advantage of federal concentration mainly as being that the federal government can "borrow [its] way through the crisis." Frankly, it's as if Krugman isn't aware that the federal government's financial prospects are affected by the economy:

Think about it: is America — not state governments, but the nation as a whole — less able to afford help to troubled teens, medical care for families, or repairs to decaying roads and bridges than it was one or two years ago? Of course not. Our capacity hasn't been diminished; our workers haven't lost their skills; our technological know-how is intact. Why can't we keep doing good things?

It's true that the economy is currently shrinking. But that's the result of a slump in private spending. It makes no sense to add to the problem by cutting public spending, too.

To any arguments involving the cost of paying workers to utilize those skills or of employing that technological know-how, Krugman would apparently answer: borrow.

Me, I believe the public needs a strong dose of this sort of thinking to counter its current delirium:

Former U.S. comptroller David Walker has long been a leading advocate of fiscal sanity, and I called him today to get his take on the latest CBO budget-deficit projections ($1.2 trillion for next year, trillion-plus deficits for years to come). "If trillion-dollar deficit numbers for several years in a row don’t wake up Washington and America to the nature of our fiscal problems, then I don’t know what will," he says.

Walker says, "For the first time in the history of the U.S., the federal government owes more in liabilities [including unfunded commitments for Social Security and Medicare] than American households are worth." And that gap is widening, he says. "The fiscal hole is getting deeper, and household worth continues to decline." ...

He adds, "We need to realize that the same factors that led to the subprime crisis — too much debt, too little attention to cash flow, ineffective risk management, and waiting to do something until the crisis hits the door — those same factors exist for the federal government’s fiscal situation, with one big difference: No one is going to bail out America."

Walker seems to have missed the lesson about economic rules not applying to the federal government, which can simply wish things to be true.