CBO: House Financial Regulatory Plan May Increase Deficit by $4.5 Billion Over Next 10 Years

In case you missed it, the Congressional Budget Office yesterday released cost estimates of the financial regulation plan that the House of Representatives will vote on this week.

According to the report, it would increase the budget deficit by $4.5 billion over the the next ten years since revenues are expected to increase by $4.9 billion while direct spending is anticipated to increase by $9.4 billion.

How to think of the deficit

Tyler Cowen gives his view:

Krugman writes: “Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.”

I would interpret this evidence differently.  A high deficit often is an unfavorable symptom of bad politics, even if you think the high deficit is economically OK on its own terms.  It’s a sign that you have dysfunctional institutions and decision-making procedures, as indeed they do in Belgium and Italy.  I believe that the not-always-swift American voter in fact understands high deficits — correctly — in this light.  They don’t hold theories about “crowding out,” rather they sense something in the house must be rotten.  And so they rail against deficits, as do some of their elected representatives.  It’s a more justified reaction than the pure economics alone can illuminate.

When water regularly overflows from your toilet, you want the toilet fixed, whether or not the water is doing harm.

CBO: Budget deficit hit record $1.4 Trillion in 2009

From BusinessWeek:

The federal budget deficit tripled to a record $1.4 trillion for the 2009 fiscal year that ended last week, congressional analysts said Wednesday.

The Congressional Budget Office estimate, while expected, is bad news for the White House and its allies in Congress as they press ahead with health care overhaul legislation that could cost $900 billion over the next decade.

The unprecedented flood of red ink flows from several factors, including a big drop in tax revenues due to the recession, $245 billion in emergency spending on the Wall Street bailout and the takeover of mortgage giants Fannie Mae and Freddie Mac. Then there is almost $200 billion in costs from President Barack Obama’s economic stimulus bill, as well as increases in programs such as unemployment benefits and food stamps.

The previous record deficit was $459 billion and was set just last year.

Government can fix health care, like everything else

HT: Carpe Diem

Bigger Governments Produce Worse Recessions

In his August 9ts column , Nobel Prize-winning economist Paul Krugman stated:

So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government. . . . [W]e appear to have averted the worst: utter catastrophe no longer seems likely. And Big Government, run by people who understand its virtues, is the reason why.

Alan Reynolds of the Wall Street Journal has a response:

This is certainly a novel theory of the business cycle. To be taken seriously, however, any such explanation of recessions and recoveries must be tested against the facts. It is not enough to assert the U.S. economy would have experienced a “second Great Depression” were it not for the Obama stimulus plan.

Even those who think government borrowing is a free lunch can’t possibly believe the government has already done enough “stimulus spending” to explain the difference between depression and recovery.

CNN Money recently calculated that the stimulus plan has spent just $120 billion—less than 1% of GDP—mostly on temporary tax cuts ($53 billion) and additional Medicaid, food stamps and unemployment benefits. Less than $1 billion has been spent on highway and energy projects. Commitments for the future are much larger, but households and firms can’t spend commitments.

Proponents of Big Government can’t say we avoided the next Great Depression due to hypothetical stimulus money that is mostly unspent. So they argue it’s more important that the federal government merely continued spending and didn’t “slash” spending as in the early 1930s. But the federal government didn’t slash spending in the early ’30s. Federal spending rose by 6.2% in 1930, 7.7% in 1931 and 30.2% in 1932. Since prices were falling, real increases in federal spending were huge during the Hoover years.

A 1999 study in The Journal of Economic Perspectives by Christina Romer (now head of the Council of Economic Advisers) found that “real macroeconomic indicators have not become dramatically more stable between the pre-World War I and post-World War II eras, and recessions have become only slightly less severe.” Ms. Romer also noted that “recessions have not become noticeably shorter” in the era of Big Government. In fact, she found the average length of recessions from 1887 to 1929 was 10.3 months. If the current recession ended in August, then the average postwar recession lasted one month longer—11.3 months. The longest recession from 1887 to 1929 lasted 16 months. But there have been three recessions since 1973 that lasted at least that long.

The relative brevity of recessions before the New Deal is particularly surprising since the U.S. economy was then dominated by farming and manufacturing—industries far more prone to nasty cyclical surprises than today’s service-based economy.

To believe Big Government explains why this extremely long recession was not even longer, we need to find some connection between the size of government and the depth and duration of recessions. There is no such connection in U.S. history, or in recent cyclical experience of other countries.

On the contrary, recessions have become longer as the U.S. government (and the Fed) became larger, more expensive, and more involved in the economy. Foreign countries in which government spending accounts for about half of the economy have also suffered the deepest recessions lately, while economic recovery is well established in countries where government spending is a smaller share of GDP than in the U.S.

In short, bigger government appears to produce only bigger and longer recessions.

In my humble opinion, a belief in Keynesian economics seems to be based more on faith in the power of government than historical or empirical evidence.

A Socialist Stupor

Investor’s Business Daily (a publication I highly recommend) has published a frightening article on the deficits we are facing.

As it is, even with the administration’s highly bullish GDP growth estimates of more than 4% for 2011, 2012 and 2013, the deficit never drops below $600 billion in the next decade.

So, how bad could it get? Take just one program as an example.

According to congressional testimony scheduled for Tuesday from Neil Barofsky, special inspector general for the Troubled Asset Relief Program (TARP), we have a monster on our hands.

TARP, begun as a “modest” $700 billion program to buy up bad mortgages, has morphed into a Hydra-headed 12 programs wrapped up in one, with $3 trillion in government commitments.

But here’s the bombshell: According to Barofsky’s prepared comments, which IBD obtained Monday, total efforts to “stabilize and support the financial system” since 2007 could eventually “reach up to $23.7 trillion.” Such numbers are, in a word, stunning.

Add to this the $1 trillion-plus planned for health care reform over the next 10 years and the $1 trillion to $3 trillion cost for cap-and-trade, and you can see the deficits will be enormous, pervasive and permanent — requiring unparalleled tax hikes.

Eventually, the total take by government at all levels will be well over 50% of GDP — enough to sink the U.S. economy into a state of semi-permanent stagnation, a socialist stupor.

Hopefully, after reading this excerpt, our readers will agree that the word “frightening” is appropriate. Now, we have had conservative presidents, such as Ronald Reagan and George W. Bush, in the past run up large deficits. Granted, none like this, but large deficits nonetheless. However, our current Fed Chairman (Ben Bernanke) has shown quite a willingness to work closely with the U.S. Treasury. That is a very dangerous combination. Deficits will not cause serious damage to an economy unless the government taxes its way out of debt or monetizes the debt (Treasury prints money or Fed lowers interest rates). Generally speaking, citizens will only tolerate so much taxation; and the Federal Reserve is supposed to be independent to the point where it would not take orders from Congress or the Oval Office. But if the Fed is willing to lower interest rates or buy up Treasury bonds, we could be looking at massive inflation.