Obama did actually cut the deficit a little

For what it’s worth, President Obama’s administration actually did succeed in reducing the annual federal budget deficit, although not by much.  Many of the charts and articles in newspapers are misleading on this point, because they count fiscal 2009 as the first budget year of the Obama administration.  Fiscal 2009 began on October 1, 2008, so it was the last budget year of the Bush administration.

The chart is based on a projection made last summer.  Click on U.S. deficit shrinks nearly nine percent in fiscal 2010 for the actual figures.

If, for you, the deficit is the big issue that overrides all others, the Obama record so far is not as bad as the Bush record.  And Obama’s problems are more the result of the situation he inherited than any particular thing he has done.  But the situation has to be dealt with. This is another one of these cases where not being as bad as President Bush is not good enough.

Click on Why Have Deficits Exploded? for a chart and comment by Paul Krugman, winner of the Nobel Memorial Prize for Economics, showing that the increase in the deficit is due to the recession and and its impact on federal revenue, much more than to any increase in spending.

Click on Even More on the Origins of the Deficit for another chart and comment by Krugman showing the same thing in a different way.

Click on How we misunderstand our deficit problem—and the solution for an argument by the Washington Post’s Ezra Klein that economic growth rather than spending or revenue is the key to dealing with the deficit.

Krugman and Klein are right to argue that economic recovery should be the priority right now.  The largest U.S. government debt in history, in relation to the size of the economy, were incurred during World War Two.  That debt was never paid off.  But the postwar U.S. economy grew at so fast a rate that the relative size of the debt shrunk.

The question is what, if anything, the government can do to restart economic growth.  I don’t see any reason to think that the economy will recover by itself if government just sits on the sidelines, as Senator Minority Leader Mitch McConnell and House Minority Leader John Boehner advocate.  But a stimulus program that fails to jump-start the economy will make things worse.

The usual ways for government to stimulate the economy is to ease credit by lowering interest rates and to get more money in circulation, either through temporary tax reductions or temporary increases in spending.  But such measures may not work this time because the U.S. economy crashed because of a level of borrowing and spending – on the individual, corporate and governmental levels – that couldn’t be sustained.  Now that the bubble has burst, sensible people are cutting back on spending and paying down their debts.  This is wise and necessary, but in this situation, where is economic growth to come from?

My answer is that the government’s priorities should be on measures needed to produce future wealth.  This means, first, spending the money necessary to repair and ungrade the nation’s deteriorating roads, bridges, dams, levees, port and airport facilities, rail networks and water and sewer systems.  This is money that is going to have to be spend anyway, so why not now?

Anybody who has been active in a church or a community organization knows how tempting it is to balance the budget by deferring or stretching out building maintenance, and what a false economy this turns out to be in the end.  This is the position we are in as a country.

The other thing the government can do is to help promote green industries and other high-technology industries, as in the past it promoted the growth of the railroad, airline, nuclear power and semiconductor industries.  The best way to do this is to create a market for these technologies by upgrading its own operations.

In the long run government spending and tax revenue do have to be brought into a better balance.  Right now the U.S. government is in the fortunate position of having interest rates as close to zero as they could ever be.  This could change very quickly and unexpectedly for the worse.  With an economy stuck on dead center, though, it is hard to see a way out.

[Added 10/27/10]

To put it another way:

1.  The United States can’t afford to keep piling up debt – governmental and otherwise – at the present rate.

2.  The United States government can’t do anything about the debt so long as the country is in a severe jobs recession.

3.  The most important thing to do is to end the recession.

4.   The best way to fight the recession is to spend money on maintenance and improvements to infrastructure, investments in new technology and other things that will pay for themselves (or avoid larger future costs) in the long run.

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