Why Obama's Deficit Spending Is Making Things Worse

Less federal spending means more private-sector spending, where more jobs originate.

By + More

James Rickards is a hedge fund manager in New York City and the author of Currency Wars: The Making of the Next Global Crisis from Portfolio/Penguin. Follow him on Twitter: @JamesGRickards.

J. Wellington Wimpy was one of the most durable cartoon characters ever. Called Wimpy for short, he appeared in the print, animated, and film versions of Popeye for over seven decades. Wimpy was a glutton for hamburgers and was usually portrayed either eating one or preparing his next burger feast. Wimpy was also a con man and devoted enormous efforts to getting others to pay for his hamburger habit. His most famous gambit was the promise, "I will gladly pay you Tuesday for a hamburger today."

Although Wimpy is less well-known now, his approach is alive and well in the form of neo-Keynesian economists such as Paul Krugman, Christina Romer, Peter Orzsag, and others who insist that more spending is needed now to "stimulate" the economy. Fiscal discipline can come later when the United States can better afford it. Spending should be implemented with borrowed money if needed. In the spirit of Wimpy, they declare, "I will gladly pay you later for some stimulus today."

This neo-Keynesian formula has two parts. The first is deficit spending today ostensibly to create jobs and stimulate growth through the magic of the Keynesian multiplier—the idea that a dollar of deficit spending creates more than a dollar of gross domestic product. The second part is fiscal discipline in the so-called "out years" to reassure the bond vigilantes that U.S. spending is on a sustainable path. Both parts of this formula are flawed and the combination ruinous. However, the prominence of the proponents and political appeal of the timing—hamburgers today, payment tomorrow—give the idea a wide and receptive audience.

[See a collection of political cartoons on the economy.]

The first part of the formula is easy to shoot down. Empirical evidence has been accumulating for years that the Keynesian multiplier is mythical, an abstraction only an academic could embrace bearing no resemblance to real world economic dynamics. One need look no further than President Barack Obama's 2009 stimulus program of $787 billion in extra deficit spending. This was projected to create 7 million net new jobs and increase GDP by 3.7 percent by the end of 2010. In fact, no net jobs were created and the economy did not grow at all. Many academic studies have shown the Keynesian multiplier to be less than one, which means that new deficit spending actually reduces private sector output.

The second part of the formula—fiscal discipline down the road—is also flawed. Here the issue is broken trust. The latest promises from economists and opinion leaders about fiscal discipline in the future come on top of  50 years of lies, frauds, broken promises, and disrespect for citizens exhibited by elected officials in the United States. The highlight reel would include Vietnam, Watergate, Whitewater-Lewinsky, and Iraqi weapons of mass destruction. Broken promises specifically related to fiscal discipline are plentiful.

[See a collection of political cartoons on the budget and deficit.]

In 1986, President Ronald Reagan's Tax Reform Act sought to cut tax rates and pay for the cuts by eliminating loopholes and deductions. This is sound economics and a step in the direction of a flat tax with low rates and no deductions. The problem was that between 1990 and 1993, Presidents George H. W. Bush and Bill Clinton gradually raised tax rates but did not restore the deductions. The result was an eight-year game of bait-and-switch in which taxpayers ended up with higher rates and fewer deductions.

More recent examples of fiscal deception include President Obama's pledge in 2009 to "cut the deficit we inherited in half by the end of my first term in office." In fact, Obama has increased deficits by over $6 trillion and has come nowhere close to his promised target.

When you hear mainstream economists offer detailed reasons why the Bush-Clinton tax increases were needed and why the Obama deficits are the right medicine for the economy, bear in mind these are the same economists who did not see the 2007 housing collapse coming, did not see the 2008 financial panic coming, and are willfully ignoring gathering threats to the stability of the dollar today.

[Check out our editorial cartoons on President Obama.]

Government has become a complex entity with an insatiable demand for new spending. Government is like a shark that must feed continually or die. When times are good government increases spending. When times are bad government increases debt so it can keep spending. At no point in the business cycle does total government spending ever go down. At no point in the credit cycle does total government debt ever go down. Citizens understand this. They have been lied to long and often enough to get how the game is played.

Citizens who insist that government stop talking about cuts and start the actual process of cutting spending now have got it right. Fewer resources for government means more resources for the private sector where ideas, invention, technology, innovation, and jobs actually originate.

Wimpy's financial dodges were amusing in the Popeye cartoons and entirely fictional. The real-life Wimpys in academia and Washington are not amusing at all. In fact, they are dangerous to the stability and national security of the United States. They have been partly discredited in the eyes of many citizens. Let's hope it doesn't take another financial collapse to finish the job.

  • Chad Stone: Why Obama's Economic Stimulus Worked
  • Check out Economic Intelligence on Twitter at @EconomicIntel.
  • Check out U.S. News Weekly: an insiders guide to politics and policy.