Wednesday, February 17, 2010

Walking the Fiscal Tightrope and Peacocks

Martin Wolf calls to task the deficit fear-mongers out there trying to stampede people into ending economic stimulus.
"Prof Ferguson is trying to frighten US policymakers out of sustaining or, better still, increasing fiscal stimulus, even though the true issue is longer-term sustainability. He also accuses opponents of believing in a “Keynesian free lunch”. Not so. The argument is, rather, that the benefits of the higher output today exceed the costs of debt service tomorrow.
Prof Ferguson believes instead in a conservative free lunch. This is the view that fiscal tightening today would have little effect on activity. Normally, when monetary policy has room for manoeuvre and the private sector’s borrowing is unconstrained, that is right. But, as Olivier Blanchard, chief economist of the International Monetary Fund, and colleagues note in a recent report: “To the extent that monetary policy, including credit and quantitative easing, had largely reached its limits, policymakers had little choice but to rely on fiscal policy.”"
We need to keep the stimulus tools at hand while keeping an eye on the future. We need to give the private sector the time it needs to heal. A key part of that healing process is to put appropriate financial regulation in place. We need to make sure that the banking shenanigans that got us into this mess are only history.

Here's some additional facts countering the idea that Obama caused the deficit.
(from the Center for American Progress)

The budget deficit in FY 2009 was a whopping 9.9 percent of GDP, the highest it has been since World War II. And that enormous deficit was caused as much by a dramatic decline in tax revenues as it was by an increase in spending. In fact, the size of the revenue decline was four times larger than all of the new spending initiatives started since President Obama took office. Tax revenues in 2009 were at their lowest levels since 1950. When revenues decline by 17 percent, as they did last year, deficits skyrocket.

President Bush inherited a record budget surplus when he took office. Yet he managed to turn that surplus into a massive deficit after repeatedly cutting taxes while prosecuting two wars and enacting billions of dollars worth of new spending programs without paying for any of them. By the time President Obama took office in January 2009, the Congressional Budget Office was projecting a budget deficit of $1.2 trillion for the year. The dramatic decline from record surplus to record deficit under President Bush resulted in a nearly $3 trillion increase in publicly held debt, the largest debt expansion in American history.

In fact, the incredible budgetary decline that took place under President Bush is responsible for far more of our current deficit troubles than any new initiative taken under President Obama. More than 50 percent of 2009’s huge deficit can be directly attributed to policies enacted by the previous administration, and that is not counting the 20 percent that was due to the economic disaster that began and gathered its momentum on President Bush’s watch. President Obama’s efforts to rescue the economy, on the other hand, are responsible for only 16 percent. Much more importantly, the long-term fiscal damage done by the Bush administration absolutely dwarfs any lasting effects of the temporary economic recovery measures taken under President Obama. The Bush-era tax cuts alone will add more than $5 trillion to the budget deficit over the next 10 years.

A deficit peacock is someone is more interested in scoring political points than actually decreasing the deficit. Do they only focus only on spending cuts, with nary a word about revenues? Do they offer easy answers and simple solutions? Are they in favor of actions that would actually exacerbate the problem? Do they blame all our woes on President Obama and neglect to even mention the previous eight years? If any of the answers are “yes,” then you’ve identified a deficit peacock.

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