U.S. Red Ink Climbs Even Higher, to $1.8 Trillion

The government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates. Budget office figures released Monday would add $89 billion to the 2009 red ink -- increasing it to more than four times last year's all-time high as the government hands out billions more than expected for people who have lost jobs and takes in less tax revenue from people and companies making less money. The unprecedented deficit figures flow from the deep recession, the Wall Street bailout and the cost of President Barack Obama's economic stimulus bill -- as well as a seemingly embedded structural imbalance between what the government spends and what it takes in. As the economy performs worse than expected, the deficit for the 2010 budget year beginning in October will worsen by $87 billion to $1.3 trillion, the White House says. The deterioration reflects lower tax revenues and higher costs for bank failures, unemployment benefits and food stamps. ... "The deficits ... are driven in large part by the economic crisis inherited by this administration," budget director Peter Orszag wrote in a blog entry on Monday. – AP

Dominant Social Theme: Let the red ink flow.

Free-Market Analysis: No, no ... the staggering deficits developed by the Obama administration are NOT driven by the economic crisis inherited by this American president. In fact, prudent free-market economics dictates that the deficit should be pruned as aggressively as possible. But that's not the case of course when it comes to this budget-making, one that includes some US$700 billion for economic stimulation and another US$700 billion to stabilize various financial firms and other kinds of companies that are apparently too big too fail.

Here is testimony by budget director Peter Orzsag in March to Congress, announcing budget numbers:

Deficit $2 trillion higher for this year and next because of crisis we inherited.

The economic crisis we've inherited raises the deficit by roughly $2 trillion (for this year and next year combined). The crisis raises the deficit by:

• Adding more than $600 billion of deficit spending ($300 billion a year) because a weak economy reduces revenue and increases spending on automatic stabilizers (like unemployment insurance)
• Requiring $650 billion or more to stabilize financial markets (including placeholder):
  -$171 billion for stock purchases in Fannie Mae and Freddie Mac
  -$247 billion in federal costs for TARP
  -$250 billion placeholder in case additional actions are necessary
• Creating the need for the $787 billion Recovery Act to jumpstart the economy

Deficit would be another $2 trillion higher over the next 10 years without our policies – and we wouldn't have cleaner energy, better education, or more efficient health care.

The final statement on the deficit being US$2 trillion over the next 10 years "without our policies" strikes one as fairly naive if not defiantly defensive. Just asserting that clean energy, better education and more efficient healthcare will cut the budget in the next decade by that amount is puzzling to those who believe in the efficiency of markets (versus governments).

What Orzsag is saying is that government can "save" money (presumably taxpayers') by coming up with innovative "new" programs. This runs counter to everything that many government observers believe about programs at the federal level. In fact, how many average citizens really think that the Obama administration will generate and implement programs that will save money because they are "better and more efficient"? Do Obama's administrators really believe in the efficiency of the federal government? Can they point to programs that have made the country "better and more efficient" at the federal level?

We suppose it all has to do with how you define the words. If you believe that the FDA ought to be regulating the air while the EPA should be regulating all the water (an upcoming bill, believe it or not) then perhaps a case can be made that government must be in control of all critical areas of the economy.

But please deal, then, with this critical question: Why has sweeping government control never worked anywhere it has been tried? Both Russia and China have backed away from government command-and-control because such formulations promised only bankruptcy and rebellion. Yet the Western axis, notably Britain and America in the past decade, rush pell-mell toward additional government control despite all the historical precedents that teach otherwise.

In any event, the budget Obama has released, borrowing 50 cents on every dollar is NOT the result of problems left over from the Bush administration. Probably at least half of it is dedicated either to economic stimulation (which is destructive to the real economy in the long run) or focused on propping up otherwise bankrupt companies. Get rid of these two areas and current and future budgets would seem to be nearly in balance.

Which brings us to another point: Is the administration actively seeking the destruction of the America economy? We have heard this point raised on several "conservative," national talk shows recently, the idea being that more badly the economy functions, the more widely the welfare state (and thus the government) casts its net. While there is probably some truth to this, there is little if any evidence that President Obama fully understands free-markets or is pursuing his anti-market policies despite knowing better. He seems quite sincere in his prejudices – which can be explained by his background; he is a product of a government-activist education and has almost always toiled either in academic or political settings. He knows a good deal about policy to be sure, but little about free-market economics.

At some level within the admin there is certainly the idea that the kind of pump-priming going on nowadays will only, in the best scenario, put off the day of reckoning -- perhaps until Obama is ready to leave office. But if a full measure of rebalancing is not taken now, then the quasi-depression of the later 2000s will doubtless return with even more force in the not too distant future. These timelines are thus subject to uncertainty and it is therefore safe to say that while the US administration (and administrations in Europe as well) may want the crisis to stick around, they certainly don't want it to deepen to the point where there's blood on the streets. Even the Chinese retreated from overt violence after Tiananmen Square. It's simply not healthy in this day and age for government leaders to be perceived as keeping citizens in line through force.

Conclusion: The Obama administration does not need to launch a budget of this size with this much red ink. It could apparently lop off deficits simply by removing stimulus and too-big-to-fail appropriations. By not doing so, it is doing its part to increase inflation, leading eventually to price inflation and the resultant impacts on the economy – high interest, a slower economy and, of course, rising precious metals' prices.

Over the next months and years, one might wish to scrutinize the administration carefully to see if there is any moderation of its anti-market stance or rhetoric. The dye may already be cast, but one can usually make things even worse. If the administration continues to go down the road of "even worse" than what is possible becomes probable for the economy – a delayed recovery, a further slump or even a deepening depression.