Tuesday, February 2, 2010

Is it possible to be both a budget hawk and a Keynesian?

Right now, President Obama's budget explodes the deficit, using the rationale of Keynesian stimulus  (NY Times.)
In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.
The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.
But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.

I am skeptical because the spending is loaded with patronage to public employee unions, and pays only lip service to "future" debt reduction.

If President Obama is to be believed, why not cut future spending now?  This would preserve short run stimulus, and show his critics that they are wrong to be suspicious.   Here is my proposal: build in an automatic increase in the eligibility age for Social Security and for Medicare (2 months/year beginning this year) until the deficit is brought into balance.

To be fair, President Obama has proposed a commission to make suggestions to reduce future deficits, but effective leadership seems to require something stronger.

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