Diary

Democratic Policies Make a Bad Economy Worse

Take a good look at this graph:
cboprojections.jpg

Those lines show the Congressional Budget office’s latest projections: A historic deficit made worse by Obama’s budget. From the CBO’s report:

Proposed changes in tax policy would reduce revenues by an estimated $2.1 trillion over the next 10 years. Proposed changes in spending programs would add $1.7 trillion (excluding debt service) to outlays over the next 10 years. Interest costs associated with greater borrowing would add another $1.0 trillion to deficits over the 2010–2019 period.

The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).

“I realize there are those who say these plans are too ambitious to enact,” Obama said in his weekend address. “To that I say that the challenges we face are too large to ignore. I didn’t come here to pass on our problems to the next president or the next generation — I came here to solve them.” Isn’t creating $9.3 trillion in deficits ” passing on our problems”?

So what we have is a situation made exponentially worse by the enacting of Democratic policies of raising taxes and increasing spending. Obama ran on change, and change we have gotten. Change for the worse.

There is enough blame to spread around in terms of our current deficit. I am concerned with our future. I am an unashamed deficit hawk. This is why. Per the CBO:

Because fiscal stimulus boosts aggregate demand through increases in government spending or reductions in taxes, such policies raise budget deficits in the short term. That effect is desirable for fiscal stimulus because it reflects the increased demand being delivered to the economy. Contemporaneous changes elsewhere in the budget-tax increases or cuts in spending-designed to offset those short-term effects on deficits would serve to reduce or eliminate the stimulative effect.

Those higher deficits, however, tend to slow economic growth in the long term if they are allowed to persist, because they tend to reduce capital accumulation and the upward trend in the economy’s capacity to produce. Given the large projected shortfall of federal revenues relative to outlays in the medium term and long term, any policy designed to provide short-term fiscal stimulus will have to reckon with long-term consequences. Increases in spending and decreases in taxes that are intended to be temporary may be difficult to reverse later. Moreover, even if taxes and noninterest spending return to their baseline levels, the additional debt service from the period of larger deficits will-unless offset by greater fiscal discipline later-crowd out some amount of future growth.
In addition to their negative long-term effects, policies that substantially worsen the fiscal outlook can have negative short-term effects as well. The nation currently benefits greatly from the fact that investors worldwide tend to flee to U.S. Treasury securities in times of trouble. That tendency provides an important advantage in times of crisis, helping to increase liquidity and decrease interest rates. If investors lost confidence in the government’s debt as a safe haven because of deterioration in the long-term fiscal outlook, the U.S. economy would lose that advantage, perhaps permanently.