The Obama Watch

A Big Question for 2012

Do federal spending, deficits, and debt promote economic growth and prosperity?

By 3.30.11

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If you listen to President Obama and his Democrat and liberal/left cronies carefully, a clear, consistent message comes through on what they think promotes economic growth and jobs. They believe that the way to promote economic growth and prosperity is through increased federal spending, deficits, and debt.

That is not a caricature of their position. This is precisely what they are saying. And they are true to their words.

Still Another Failure of Keynesian Economics

The policy, in fact, began within 30 days of President Obama taking office, with his so-called stimulus bill that increased federal spending by nearly a trillion dollars, which was supposed to create millions of jobs and promote economic recovery. It was followed by further spending increases that altogether have increased federal spending so far by nearly 30% since 2008, to an all time record.

President Obama's own 2012 budget projects a federal deficit for this year of $1.645 trillion, the highest anywhere in world history by several times over. The President's own budget documents project as well that by next year more debt will be run up in one term under President Obama than under all other Presidents in history -- from George Washington to George Bush -- combined. On March 18, the Congressional Budget Office issued a report concluding that federal deficits over the next 10 years under President Obama's budget would soar by nearly a third more than he estimated, totaling nearly $10 trillion over those 10 years, which would double the national debt again to $21 trillion by 2021.

The national debt is already the highest in history as a percent of GDP except for World War II, and on its current course will soar well past that record (109% of GDP). Indeed, our national debt as a percent of GDP is slated to soar past the level that triggered bankruptcy for Greece (115% of GDP), when the financial markets refused to lend the government enough money to cover its enormous annual deficit.

Yet, Paul Krugman has argued in his New York Times column that all of President Obama's increased spending, deficits and debt were not going to be nearly enough to bring back real economic recovery, and that they all should be increased much more. If the definition of insanity is doing the same thing over and over and expecting a different result, then Krugman's columns literally exhibit raving insanity.

In his State of the Union Address earlier this year, President Obama followed Krugman in arguing for still more federal spending as the key to economic growth, jobs, and prosperity. That includes increased spending for high speed trains, high cost bureaucratic education, and higher and longer unemployment benefits, which former House Speaker Nancy Pelosi tells us produce the most bang for the buck in jobs and economic growth. It includes increased spending for a new energy industry based on corporate welfare and bailouts for economic survival, producing high cost energy that will prevent the rest of the economy from surviving, while he shuts off proven reliable energy sources.

Now when Tea Party Republicans move to cut federal spending, deficits and debt, Democrats and their liberal left fellow travelers cry that will wreck the economy and jobs. With the federal deficit this year at $1,645 billion, and federal spending at $3,819 billion, the Senate's second ranking Democrat, Dick Durbin from Illinois, proclaimed on Fox News Sunday recently that $10 billion in cuts for 2011 was the absolute limit. If those wild-eyed Republicans were allowed to cut any more, Durbin claimed, the fragile economic recovery would be stalled, and America would lose the critical federal spending President Obama and the Democrats believe is essential to maintaining America's competitiveness with China.

Rep. Chris Van Hollen (D-MD), ranking Democrat on the House Budget Committee, predicted on CBS's Face the Nation on February 20 that implementing the GOP's full $100 billion spending cut for fiscal year 2011 would cause a loss of 800,000 jobs. Senator Chuck Schumer (D-NY) claimed the GOP spending cuts would risk a double dip recession.

And regularly on The Larry Kudlow Show on CNBC Robert Reich pops up to argue the same, saying that cutting federal spending, deficits, and debt now would impair the recovery. Recently, Ezra Klein of the Washington Post appeared on the show taking the generational baton to argue as well, so confident of establishment authority, that all the federal spending, deficits and debt were essential to propping the economy up right now.

This is not new Democrat propaganda spin. In fact, it reflects precisely the oldest, establishment, hoary, outdated in fact, Keynesian thinking dredged up from the 1970s and even the 1930s.

When Will They Ever Learn?

Keynesian doctrine holds that economic growth is stimulated by increased government spending, deficits, and debt. That is supposed to increase demand, which is supposed to lead to increased production to satisfy that demand, restoring economic growth. It never worked in the 1930s, as the recession of 1929 extended into the decade long Great Depression.

It was a proven failure by the 1970s, for anyone who was paying attention, as ever worsening cycles of inflation and recession culminated in double-digit inflation, double-digit unemployment, and double-digit interest rates. Under Keynesian economics, recession is caused by too little aggregate demand, and inflation is caused by excessive aggregate demand. Since it is impossible to have both too much and too little demand at the same time, recession and inflation together are not supposed to be possible under Keynesian doctrine, and so the 1970s could not have actually happened. The "Progressive" Left has consequently decreed the 1970s to be cast down the memory hole, and rewritten as a classic time of great prosperity, with anyone who refuses to play along shouted down.

By 1981, President Reagan explicitly scrapped Keynesian economics for the more modern supply-side economics, which holds that economic growth results from incentives for increased production. The result was a 25 year economic boom with no significant inflation, the greatest period of wealth creation in the history of the planet, with more wealth created from 1982 to 2007 than in all prior American history combined.

But President Obama and his Rip Van Winkle Democrats have cast all that down the memory hole as well, and taken American economic policy right back to the 1970s as if nothing has happened since then. The result of this irresponsible, heedless, public policy malpractice has been disastrous for America's working people, African Americans, Hispanics, and youth.

Previously, since World War II, recessions have lasted an average of 10 months, with the longest at 16 months. But by December, three years after the last recession started, the latest unemployment report showed the unemployment rate increasing again, to 9.8%, capping 16 straight months of unemployment at 9.5% or above, the longest such period since the Great Depression.

Unemployment among African-Americans had persisted during that period at 15% or above. Among Hispanics it persisted well into double digits as well. Among teenagers it was stuck at 25%, 45% for black teenagers. These groups were truly suffering a depression.

The total army of the unemployed and underemployed stood at over 26 million Americans. The BLS reported the U6 unemployment rate, which includes the unemployed, those marginally attached to the labor force (discouraged), and those working part time for economic reasons, at 17%.

Historically, the deeper the recession the stronger the recovery. But President Obama's recovery has moped along at less than half the rate of prior recoveries from similarly deep recessions. By December, the economy should have been in its second year of a raging recovery with booming economic growth. Instead, a record 44 million were struggling in poverty, one in seven Americans, the highest for the 51 years that the Census Bureau has been tracking poverty, up 4 million over the prior year. The number of Americans receiving food stamps also soared to an all time record 40 million. CBO projects that Obamacare will ultimately put nearly 100 million Americans on Medicaid, the health care program for the poor.

As economist John Lott summarized at FoxNews.com, "For the last couple of years, President Obama keeps claiming that the recession was the worst economy since the Great Depression. But this is not correct. This is the worst 'recovery' since the Great Depression."

President Obama, rebuked by the November political shellacking, finally relented in December and agreed to extend the Bush tax rate cuts for two years, for everyone. And that has allowed the breathing room for the long overdue recovery to now begin to sprout, with unemployment declining to 8.9% in the latest report.

The Voters Have a Hammer

But the economy still has a long way to go before traditional, booming, American economic growth is restored. The labor force participation rate remains stuck at its lowest level in 25 years. With the same labor force participation as before the recession, the unemployment rate would be 11.5% today. Those who have given up and dropped out of the labor force are still not working.

Even worse, the economy has just received a reprieve rather than a permanent stay of execution. President Obama is still pledging to raise the top tax rates of virtually every major federal tax in 2013 for singles earning over $200,000 per year and couples earning over $250,000, the bulk of the nation's employers and investors. The Obamacare tax increases go into effect that year as well. The hammer will come down hardest as a result on working people, African Americans, Hispanics, and the young who have suffered the most under Obamanomics, as they continue to struggle with unemployment, declining incomes, rising poverty, and now rising inflation, just like in the 1970s.

But the voters have a hammer as well. Rest assured that the very question -- do federal spending, deficits, and debt promote economic growth and prosperity? -- will be taken to the voters in the 2012 election. And then we will see if the voters agree with President Obama, Nancy Pelosi, Dick Durbin, Paul Krugman, Robert Reich and Ezra Klein, or whether they agree with the Tea Party that federal spending, deficits, and debt are already so out of control that they threaten the very bankruptcy of America.

Rest assured that the voters will be asked in 2012 to decide as well whether President Obama's scheduled 2013 tax increase tsunami should join his regulatory tsunami, or whether they think that will swamp the American economy.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.