We Can't Spend Our Way Out of a Debt Bubble

With loopholes big enough to drive a cement truck through, Obama will propose three-year spending freeze.
 

Looking to signal at least one step toward reining in huge federal budget deficits, President Barack Obama will propose a three-year freeze in non-security discretionary spending, senior administration officials said Monday.

His budget proposal, to be unveiled in part with Wednesday's State of the Union speech and in detail next week, will urge Congress to keep overall spending at $447 billion a year for agencies other than those charged with national security and mandatory-spending programs such as Social Security and Medicare.

The freeze would take effect with the 2011 fiscal year starting Oct. 1, and wouldn't affect the $787 billion economic stimulus plan already being implemented, the officials said.

It also wouldn't affect a $154 billion jobs plan pending before Congress and backed by Obama, the officials said. One aide said that plan would be exempt because it would take effect this year, before the freeze.

Administration officials, who spoke on the condition of anonymity to not upstage the president, said that the three-year freeze would save $250 billion over a decade -- if it's approved by an election-year Congress.

After three years, the total spent would be the lowest as a percentage of the total economy in 50 years. Spending on those agencies has increased by an average of 5 percent a year since 1993, the officials said.

Still, officials acknowledged that the savings wouldn't come close to eliminating the deficit and balancing the budget. "We're not here to tell you we've solved the deficit," one official said.

Exemptions
 

• The $154 billion jobs plan pending before Congress
  
  
• Medicare
  
  
• Social Security
  
  
• The $787 billion economic stimulus plan already being implemented
  
  
• Department of Defense
  
  
• Homeland Security
  
  
• Veterans Administration
  
  
• International operations.

What's Covered
 

• One-eighth of the total annual budget

I don't know how the administration isn't embarrassed to present this. Moreover, "the freeze would be measured overall and would not be applied across the board." The freeze is only for three years.

Repeating the Mistakes of 1937?

Calculated Risk says:
 

This is an important issue, but I'd rather wait to address the deficit until after we see clear signs of a recovery.

Note: I have a long history of being a deficit hawk, but I don't want to see a repeat of the mistakes of 1937, see: A Comment on the Deficit and National Debt.

Sorry Calculated Risk -- you're mistaken: "Mistakes of 1937" didn't sink the US back into depression. The plain fact of the matter is: It's virtually impossible to spend one's way out of a popped credit bubble.

Don't mistake Federal spending for a recovery. Indeed this "recovery" is a mirage. There can never be a "clear recovery" financed by debt when the problem is excess debt in the first place. Logically the idea makes no sense.

In 2003, Greenspan had a choice:

1. Take a hard recession now.
2. Take a depression later.

Greenspan chose the latter.

All stimulus did back then was create housing and debt bubbles. Then it crashed anyway. Now supposedly the cure is more spending?

This is what we face now: As soon as stimulus is taken away, the downslide begins. How many times can you pave a road or grant cash for clunkers? Eventually what little pent-up-demand there was is exhausted, and the stimulus ceases to have an effect.

This idea of Keynesian "priming the pump" has never worked and it never will. Japan and its national debt to the extent of 200% of GDP should be proof enough.

The only thing that can possibly work is the write off of bad debts -- something both the administration and the Fed are reluctant to do. We can either do this now, or drag it out for two decades like Japan, only to end up deeper in debt.

What ended the Great Depression -- and let's hope it doesn't come to that again -- was WWII and the destruction of capacity everywhere but the US.

Spending $5 trillion dollars wouldn't do a thing now, other than wreck the dollar and create another bubble. Repeat after me: It's impossible to spend one's way out of a debt bubble.

Given that it's impossible, it's pointless to try. Thus the real lesson of 1937 is "don't blow debt bubbles in the first place."