Get ready for “the deficit chorus,” as James K. Galbraith put it to us today.
I was happy to see that David E. Sanger quoted Galbraith in his news analysis of Obama’s budget in today’s New York Times.
But I was puzzled by the way he was quoted, in an article that makes this claim: “For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors.” There is some wiggle room here—virtually no room for new domestic initiatives, unless there are no miraculous political compromises; and I suppose it would take a miraculous political compromise for Congress to change its priorities away from ever-increasing military spending and refusal to raise marginal tax rates on the wealthy, and toward health care, education, jobs programs, etc. But the effect is to suggest that domestic spending is just not possible.
Well—judge for yourself; here’s the beginning of the article:
Deficits May Alter U.S. Politics and Global Power
By DAVID E. SANGER | February 1, 2010
WASHINGTON—In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.
The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.
But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020—years after Mr. Obama has left the political scene, even if he serves two terms—they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.
For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.
And this would be a bad thing?
Here’s the bit quoting Jamie Galbraith:
[Obama's chief economic advisor Lawrence] Summers, in an interview on Monday afternoon, said, “The budget recognizes the imperatives of job creation and growth in the short run, and takes significant measures to increase confidence in the medium term.”
He was referring to the freeze on domestic, non-national-security-related spending, the troubled effort to cut health care costs, and the decision to let expire Bush-era tax cuts for corporations and families earning more than $250,000.
But Mr. Summers said that “through the budget and fiscal commission, the president has sought to provide maximum room for making further adjustments as necessary before any kind of crisis arrives.”
Turning that thought into political action, however, has proved harder and harder for the Washington establishment. Republicans stayed largely silent about the debt during the Bush years. Democrats have described it as a necessary evil during the economic crisis that defined Mr. Obama’s first year. Interest in a long-term solution seems limited. Or, as Isabel V. Sawhill of the Brookings Institution put it Monday on MSNBC, “The problem here is not honesty, but political will.”
One source of that absence of will is that the political warnings are contradicted by the market signals. The Treasury has borrowed money to finance the government’s deficits at remarkably low rates, the strongest indicator that the markets believe they will be paid back on time and in full.
The absence of political will is also facilitated by the fact that, as Prof. James K. Galbraith of the University of Texas puts it, “Forecasts 10 years out have no credibility.”
He is right. In the early years of the Clinton administration, government projections indicated huge deficits—over the “sustainable” level of 3 percent—by 2000. But by then, Mr. Clinton was running a modest surplus of about $200 billion, a point Mr. Obama made Monday as he tried anew to remind the country that the moment was squandered when “the previous administration and previous Congresses created an expensive new drug program, passed massive tax cuts for the wealthy, and funded two wars without paying for any of it.”
But with this budget, Mr. Obama now owns this deficit. And as Mr. Galbraith pointed out, it is possible that the gloomy projections for 2020 are equally flawed.
Simply projecting that health care costs will rise unabated is dangerous business.
“Much may depend on whether we put in place the financial reforms that can rebuild a functional financial system,” Mr. Galbraith said, to finance growth in the private sector—the kind of growth that ultimately saved Mr. Clinton from his own deficit projections.
His greatest hope, Mr. Galbraith said, was Stein’s law, named for Herbert Stein, chairman of the Council of Economic Advisers under Presidents Richard M. Nixon and Gerald R. Ford.
Stein’s law has been recited in many different versions. But all have a common theme: If a trend cannot continue, it will stop.
When I asked Jamie Galbraith whether he was misquoted, here’s what he told us:
The press is indulging in a vast wave of hysteria.
Of course the deficit chorus has an agenda, which is to block jobs programs, prevent public investment, and to trim and privatize Social Security and Medicare.
I’m not normally an oracle of the markets. But the markets are sending a very clear signal: they don’t believe a word of the hysteria. If they did, the 20 year Treasury bond rate would not be under 4.4 percent. In fact, the US government can borrow what it needs, at historically low interest rates, and so there is no financial barrier to funding the jobs, social programs and public investments that the country actually needs.
It’s case of who you gonna believe, them or your lying wallet?
Not quite what showed up in Sanger’s analysis, alas. (Otherwise wouldn’t the headline have been: “There is no financial barrier to funding the jobs, social programs and public investments that the country actually needs”?) I’m still glad he contacts Galbraith for his articles, though…