Monday, February 23, 2009

Obama's Fiscal Contradictions

After having pushed through an increase in the deficit in the coming years of a total of $800 billion, Obama now says that he is worried about the size of the deficit and will act to restrain it. But if he was really worried about the deficit, then why did he push through that increase?

Perhaps some would say that this is not a contradiction because he is guided by the Keynesian logic that during this slump it is proper to increase the deficit to limit the downturn, but once we see a recovery we should tighten again.

But that argument doesn't hold because first of all, as I discussed here before, much of the so-called stimulus is actually implemented in 2011 or later, the point in time when according to Obama we should start reducing the deficit. And secondly, Keynesians generally don't like fiscal restraint even years after economic growth resumed. Paul Krugman for example has criticized Roosevelt for fiscal tightening in 1937 even though economic growth resumed in 1933. Similarly, Keynesians has criticized Japan for a fiscal tightening in July 1997, even though economic growth was fairly rapid in 1996 and the first half of 1997.

In short, Obama's plan for fiscal restraint makes no sense at all given how they contradict the supposed logic of the "stimulus plan" and will to a large extent be implemented at the same time, contradicting (so to speak) each other in effect on the budget balance as well.

So, what is really the deal with this? The real point is, as I pointed out before, that this will permanently increase the size of government as most of the proposed fiscal tightening measures consists of tax increases, while most of the "stimulus" , especially after 2010, consists of spending increases. But instead of being open about this, Obama claims that the purpose of the spending increase part is "stimulus" while the purpose of the tax increase part is "deficit reduction". This was of course also the modus operandi of the great implicit role model for Obama, Herbert Hoover, who first dramatically increased spending in particularly 1930 and 1931 because of the stimulus effect this would allegedly have, only to raise taxes in 1932 using the deficit as an argument.


Blogger goo8734 said...

Hi Stefan:

Interesting article from Jeffrey Sachs. He's starting to sound a little 'Austrian' -- the idea that we might be creating the conditions for another bubble if we overreact to this crisis!

Sachs Article


7:19 PM  

Post a Comment

<< Home