There are two posts I’d like to bring to your attention because, together, they broach a subject I’ve been trying to figure out how to post on for some time. The first is a post by Scott Sumner noting the failure of Keynesianism first as policy but even more importantly in political terms. The frequent retort to arguments along these lines (and one always made by Paul Krugman) is that state and local governments have been working at cross-purposes to the federal government. That dog won’t hunt:
Krugman likes to point to the “50 Little Hoovers,” but what he is really doing is pointing to 50 little flaws in the Keynesian model. If the cutbacks in state and local spending reflect declining revenues due to the recession, then the Keynesian model needs to treat them as endogenous, just as business investment falls endogenously due to weak sales and excess capacity. In order to be exogenous, it would have had to be under the control of the (Federal) policymakers who make the decisions about the size of the fiscal package. But Keynesians seemed to greet the news of huge S&L spending cutbacks with surprise and dismay. And then they used it as an excuse for the federal stimulus not working. That’s about as logical as blaming the failure of Federal stimulus on corporations cutting back on investment (something FDR did in the 1930s, showing that logic has never played much of a role in arguments over government stimulus.)
Additionally, as I’ve said around here pretty frequently while it may be theoretically possible that a perfectly timed and well-structured stimulus might have the predicted effects, we’re politically incapable of producing a perfectly timed and well-structured stimulus. If it turns out that inflation is rampant and uncontrollable in China following their (much praised) stimulus package, it may well be the case that nobody is capable of producing a large enough stimulus package that’s timed right and structured well enough.
The other post is from Keith Hennessey and it includes the eye-catching graphic at the top of this post (click on the graphic for a larger version). The graphic is a visual representation of the long-term effects of the Obama Administration’s recently proposed budget drawn directly from the Administration’s own numbers.
Here’s the point that I’ve been gnawing on. According to the NBER, the official scorekeeper for recessions, we’ve been in a recovery for nearly a year and a half. As we have recently had reaffirmed for us, recoveries don’t go on forever, there is always the eventual downturn. The recovery has been going on for nearly 15 months. When will we start paying off the spending spree that the federal government has been on for the last year and a half? If it’s not soon, we’ll be in another economic downturn.
I’ve already given my prescriptions. I think we should turn the fiscal clock back to about 1996. To get even that far we’re going to need to engage in a major reworking of the tax code (long overdue) that, alas, includes some additional revenue and we’re going to need to cut some spending. I’m jake with a deficit that runs between 1 and 2% of GDP. The present plans which involve running deficits of twice or more than that in perpetuity make my blood run cold. And we haven’t even factored in the impossibly rosy projections for GDP growth that the Obama Administration is using (4% or more where I think that 2 to 3% is much more likely).