The president had some bold words for the American public earlier this week. He said things that some people didn't want to hear. He talked about responsibility and sacrifices.
"We simply cannot continue to spend as if deficits don't have consequences, as if waste doesn't matter, as if the hard-earned tax dollars of the American people can be treated like Monopoly money, as if we can ignore this challenge for another generation.
". . . It's time to save what we can, spend what we must and live within our means once again."
- President Obama, 2010
After saying these bold words he then presented Congress with a plan for the largest deficit in American history. I guess politicians are immune from irony.
First of all, let's break down the budget itself.
Notice how the military budget is the largest item on the agenda, yet Obama's plan to freeze spending exempts military spending. How can you possibly expect to get spending under control when you exclude the largest item in the budget? It's a joke.
And it's not like we don't spend enough money on guns and bombs. It's the one area that we overwhelm the rest of the world. Our spending priorities are all screwed up.
Some neo-Keynesians may warn about the dangers of cutting spending while the economy is weak. On the surface that may be a real concern, but it ignores the most important and relevant issue: is the spending doing any good?
For instance, we could spend billions of dollars paying people to dig ditches and then fill them back in. Would this be a good way to spend the taxpayer money? Of course not.
Ironically if we had spent that money on ditch-digging/filling-in we might have had more to show for the monstrous deficits of last year.
For starters, we spent at least a trillion dollars bailing out the Wall Street banks. Why was it important to bail them out? Well, the only useful purpose of banks is to loan money. Did they use the bailouts to loan the money? No.
What the Wall Street banks executives did do is give themselves record bonuses. Personally I think putting unemployed people to work digging ditches would have been a better use for the money.
That isn't the only way we spent taxpayer money last year. We also spent trillions of dollars on the housing market. Was that money well spent? Let's see what SIGTARP has to say.
To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.
In other words, we've spent countless dollars taking Wall Street's bad investments in the housing bubble and uploading it onto the public balance sheet. Do you think this is a good use of taxpayer money? Wouldn't it have made more sense to spend the money on rebuilding our railway and electrical infrastructure?
Then there is the questionable wisdom of using taxpayer-funded mortgages so people could flip houses.
My point is that people shouldn't get hung up on the amount of money, but instead they should concentrate on how poorly it is being spent.
With that said, I am now going to contradict myself and point at the sheer size of the coming budget deficit.
You aren't living within you means if the debt is going up far faster than the GDP.
The $1.6 trillion deficit forecast for the current year represents 10.6 percent of the U.S. gross domestic product, making it the biggest by that measure since World War II, according to administration figures. The deficit in 2009 was $1.4 trillion.
Now I'm going to contradict myself again. I said above that military spending was the one area where we overwhelmed the rest of the world.
The truth is that there is another area we are even more dominant: borrowing.
This brings up the question of who is going to lend us all this money? Morgan Stanley recently asked that question, but failed to come up with an answer. What they did was find a huge gap with nothing to fill it.
Why is that? One reason is because foreigners, and especially China, has balked at funding our ever greater borrowing demands.
"The United States cannot force foreign governments to increase their holdings of Treasuries," Zhu said, according to an audio recording of his remarks. "Double the holdings? It is definitely impossible."
The other reason is because the Federal Reserve, which has funded these massive deficits so far, is about to end its buying programs.
In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.
How this will all end up is beyond my ability to predict, but I can say for certain that unless we fix our priorities right now, we are going to all suffer.