Crowding Out Not Gonna Happen Soon

With unemployment hovering near 10% for nearly two years now, it should be obvious that the economy is no where near capacity.  Yet, many on Wall Street and in the talking-head TV shows continue to maintain that government borrowing is “crowding out” private investment (or going to soon).  Um, I don’t think so.  Crowding out would be seen in rising interest rates.  But a look at the data shows we’re still hard against the “zero bound”.  In other words, interest rates are still about as low as they can go.

US Government Short run interest rates near zero for 2008-2010

Why the Deficit Increased

The deficit increased over the last 2 years, but it wasn’t because of any “surge” or “explosion” in government spending.  It was because the real economy, which generates the tax revenues, collapsed because of a financial crisis, as the following graph shows.  It wasn’t an increase in govt spending. Spending continued to increase at the same rate as it did during the “boom” years of 2005 and 2006.  Instead, when the financial crisis on Wall Street in 2008 spilled over into the real economy it collapsed tax revenues.  Fiscal stimulus to drive recovery really hasn’t been tried yet on a scale commensurate with the problem.

Govt Receipts vs. Govt Expenditures, 2005-10In this graph, the gap between the blue and red line represents the deficit.  Yes, it got bigger in 2008, but it’s because tax receipts dropped.

So how did that $780 billion stimulus bill of the administration that passed in Feb 2009 disappear?  Easy.  First it wasn’t $780 of spending.  It was a little over $400 billion in spending over 2.5 years.  The rest was tax cuts.  Second, it was only Federal government spending.  At the same time, state and local governments and school boards cut spending.  Net: no change.

Leadership FAIL: Again

This time I’ll outsource the job to Paul Krugman at the New York Times.  I don’t always agree with Paul, but he’s spot on with this. The Obama administration never misses an opportunity to miss an opportunity, especially if it involves banks.

Epitaph For An Administration

In today’s report on the foreclosure mess, a revealing sentence:

As the foreclosure abuses have come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

Surely this can serve as a generic statement:

As NAME ISSUE HERE has come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

Stimulus, bank rescue, China, foreclosure; it applies all along. At each point there were arguments for not acting; but the cumulative effect has been drift, and a looming catastrophe in the midterms.

Or to put it another way, the administration has never missed an opportunity to miss an opportunity. And soon there won’t be any more opportunities to miss.