Keynes on Keynes
Keynes once said, “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”. In an ironic twist of fate, this statement now applies to the Administration and its economist boosters, who adopt Keynes as a figure of faith in supporting massive spending deficits.
The amount of deficits that are accruing over the coming years is unprecedented. The CBO estimates these at $9.3 trillion from 2010-2019, with a debt-to-GDP ratio of 82% at the end of that period.
To be sure, some of this reflects an overhang after the financial crisis, or spending on the stimulus. But by 2019, after all of these effects are long gone, the goverment will still run a permanent $1.2 trillion deficit per year. Largely, these deficits are the result of reckless spending combined with further tax cuts, and do not take into account further spending in healthcare or defense.
And yet the Democrats and their boosters don’t appear particularly troubled by these events, as they draw blindly upon Keynes just as the Republicans used Laffer. According to Krugman, the world is still facing a massive savings glut, and can therefore finance deficits of any magnitude without worrying about inflation. According to the Orzag consensus, the real problem with the budget lies in out-of-control healthcare spending, which can in turn be contained through massive spending in this sector.
This is crazy. The world will not finance American debts in perpetuity–even the British are finding trouble lining enough investors for their debts, while the Chinese are raising hell on this issue. One day, investors will look at the high returns offered by tax-exempt munis, corporate bonds, etc. and decide that a 2-3 percent yield is insufficient reward for holding Treasury assets from a government more reckless than Argentina. This will happen at the same time that the Fed will need to sell lots of Treasuries as well to unwind their financial operations. Already, there is talk of lowering America’s AAA financial rating.
The situation on the health front doesn’t look great either. To think that simply spending billions will curb runway cost increases reflects a technocrat utopian view that has repeatedly failed in tackling healthcare. Health care definitely needs reform, but to achieve massive cost savings will require substantial cuts in treatment. That’s not going to happen either.
Obama well be the Democrat Reagan. Unfortunately, he is also set to replicate Reagan’s history on fiscal deficits.
