Robert Samuelson: "burgeoning debt could trigger a future financial crisis"

Matt Welch | May 18, 2009

Washington Post econ columnist Robert J. Samuelson is flabbergasted both by the extent of President Obama's fiscal recklessness, and the ease with which he's getting away with it:

Just how much government debt does a president have to endorse before he's labeled "irresponsible"? Well, apparently much more than the massive amounts envisioned by President Obama. [...]

By 2019, the ratio of publicly held federal debt to gross domestic product (GDP, or the economy) would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent). The Congressional Budget Office, using less optimistic economic forecasts, raises these estimates. The 2010-19 deficits would total $9.3 trillion; the debt-to-GDP ratio in 2019 would be 82 percent.

But wait: Even these totals may be understated. By various estimates, Obama's health plan might cost $1.2 trillion over a decade; Obama has budgeted only $635 billion. Next, the huge deficits occur despite a pronounced squeeze of defense spending. From 2008 to 2019, total federal spending would rise 75 percent, but defense spending would increase only 17 percent. Unless foreign threats recede, military spending and deficits might both grow. [...]

Except from crabby Republicans, these astonishing numbers have received little attention -- a tribute to Obama's Zen-like capacity to discourage serious criticism. [...]

At best, the rising cost of the debt would intensify pressures to increase taxes, cut spending -- or create bigger, unsustainable deficits. By the CBO's estimates, interest on the debt as a share of federal spending will double between 2008 and 2019, to 16 percent. Huge budget deficits could also weaken economic growth by "crowding out" private investment.

At worst, the burgeoning debt could trigger a future financial crisis. [...]

The wonder is that these issues have been so ignored. Imagine hypothetically that a President McCain had submitted a budget plan identical to Obama's. There would almost certainly have been a loud outcry: "McCain's Mortgaging Our Future." Obama should be held to no less exacting a standard.

Whole thing here. Related Reason content: Econ columnist Veronique de Rugy on Obama's irresponsible first budget, and on just when deficits do matter. And if you haven't already, check out Samuelson's "Lessons from the Great Inflation" from our January issue.

Comments

|5.18.09 @ 9:08AM|#

Imagine hypothetically that a President McCain had submitted a budget plan identical to Obama's.

Main point aside, this argument is just as boring as "Bush was worse!". With all the actual reasons to be up in arms over Obama's budget, hypothetical ones are just distracting.

|5.18.09 @ 9:13AM|#

Obama's Zen-like capacity to discourage serious criticism.

"I drink your hope. I drink it up."

|5.18.09 @ 9:24AM|#

People don't question the Voracity of Hope because they're scared of getting consumed themselves.

|5.18.09 @ 9:25AM|#

Wasn't Bob Samuelson an Olympic US volleyball player? And why in god's name do I know that?

Chad|5.18.09 @ 9:38AM|#

Raise taxes by 5% of GDP. Problem solved.

Next?

|5.18.09 @ 9:42AM|#

I'm no economist and I tend to think that the deficits are going to be a big problem. But Samuelson doesn't explain why the 80% debt/GDP ratio in 1950 didn't turn out to be an irreversible problem. Why did we make it through that okay, but now we're in big trouble?

Flex Nasty B.I.G.|5.18.09 @ 9:43AM|#

The problem is that Republicans are the only ones questioning Obama's spending, and they don't have any credibility with the public right now. Whenever I've raised even token criticism of Obama's spending with my centrist and liberal friends, I've gotten completely blasted and accused of being a Bush supporter and Fox News junkie.

|5.18.09 @ 9:46AM|#

Probably because the economy grew by leaps and bounds and taxes and spending didn't keep up. The problem today is that we can't rely on such growth to offset the silliness of our government.

|5.18.09 @ 10:00AM|#

"The wonder is that these issues have been so ignored. Imagine hypothetically that a President McCain had submitted a budget plan identical to Obama's. There would almost certainly have been a loud outcry: "McCain's Mortgaging Our Future." Obama should be held to no less exacting a standard."


Of course there would have been an outccry. This wouldn't be happening if McCain had won the election because the press would be doing its job. The choice in the election was never about who was better in the abstract. The question was did you want Obama operating with an entirely Democratic Congress and absolutely no criticism or scrutiny from the media or McCain dogged by an opposition Congress and a hostile press.

|5.18.09 @ 10:02AM|#

But Samuelson doesn't explain why the 80% debt/GDP ratio in 1950 didn't turn out to be an irreversible problem. Why did we make it through that okay, but now we're in big trouble?

That debt had been run up in a war that was over. The Obama debt is being run up on domestic spending programs with no end in sight.

|5.18.09 @ 10:08AM|#

Of course, people voted for it. McCain may have voted more with Bush on technical issues and non-budget issues, but when it came to the issues that actually impact the budget significantly-- Medicare prescription drug benefit, farm subsidies, ethanol subsidies, energy bills, etc., Obama voted for the spending where McCain didn't. Even on defense spending, though Obama voted against the war he voted for every spending supplemental.

If we restrict to domestic spending, the idea that Obama's election was a repudiation of the Bush deficits is absurd. It would seem more accurate to say that the American people voted against the guy who, for all his other ills, had said consistently that the spending party needed to stop. That would be a crude simplification, but it makes more sense than the idea that Obama's election was somehow a rejection of deficits and debt.

Citizen Nothing|5.18.09 @ 10:13AM|#

Hey! Chad the granny-hater is back!
How many old folks have you kicked to the curb this week, Chad?

|5.18.09 @ 10:18AM|#

People don't question the Voracity of Hope because they're scared of getting consumed themselves.

Pro Libertate -
I'm am so borrowing that Voracity of Hope snippet. Unlike certain executive branch officials from Delaware, I will try to remember to give proper attribution.

|5.18.09 @ 10:24AM|#

J sub D,

Feel free. It's so perfect for this administration, isn't it? I've been using it as a tag over at Urkobold.

Someone with Photoshop skills should morph Obama into Mr. Creosote/Terry Jones, with that caption.

|5.18.09 @ 10:37AM|#

Someone with Photoshop skills should morph Obama into Mr. Creosote/Terry Jones, with that caption.

I'm thinking Jabba the Hut.

|5.18.09 @ 10:42AM|#

"It would seem more accurate to say that the American people voted against the guy who, for all his other ills, had said consistently that the spending party needed to stop."

But how many people knew that? Most voters were so misinformed in this election they went to the polls thinking Obama was the deficit hawk candidate.

EJ|5.18.09 @ 10:58AM|#

"Samuelson doesn't explain why the 80% debt/GDP ratio in 1950 didn't turn out to be an irreversible problem. Why did we make it through that okay, but now we're in big trouble?"

The debt was declining steadily from WWII. The big reason why we could hold that debt was because the persona savings rate durring the war was about 25% and it stayed at about 10-12% through the 1970s. We are now at only 4%, up from close to 0 a year ago. There is little domestic savings to fund the government debt; we rely almost entriely on foreignors, who are buying less treasuries now (our trade deficit has shrunk by half in the last year, and therefore capital inlfows have halfed), and the Fed just printing (which is unsustainable). Consumption and private investment would have to decline a full 10% more or so to get us to a savings rate able to fund our current deficits, assuming foreign appetite for treasury debt doesnt grow again. To put this in perspective, economic output so far through this recession has fallen about 3%.

|5.18.09 @ 11:12AM|#

What if we confiscate the assets of the Roman Catholic Church and use them to reduce the national debt? Then, when the Papists try to sue the government for restitution, we can say, "That's water under the bridge; we can't waste a lot of time and energy looking backwards, at things which have already happened. Let's focus on the future."

See how easy it is?

I hear the Mormons have a bunch of money, too.

|5.18.09 @ 11:42AM|#

"What if we confiscate the assets of the Roman Catholic Church and use them to reduce the national debt? Then, when the Papists try to sue the government for restitution, we can say, "That's water under the bridge; we can't waste a lot of time and energy looking backwards, at things which have already happened. Let's focus on the future."

That is pretty much what we did to the Indians. At some point if the entire country went insane and grabbed all of the land and property from every Catholic in America, it would be a little late to make amends just like it is a little too late to give South Dakota back to the Sioux.

Glad to see you are finally starting to absorb a few things through that thick skull of yours Brooks.

JB|5.18.09 @ 11:47AM|#

Obama faces little criticism because the MSM just can't get enough of his cock down their throats.

Obama could hold a press conference, not take one question, and then walk out into the crowd of journalists, beat the crap out of one and take a dump in his throat. Not only would the other journalists still cheer, but so would the guy getting a dump down this throat.

|5.18.09 @ 11:50AM|#

"Not only would the other journalists still cheer, but so would the guy getting a dump down this throat."


He would never brush his teeth again.

Rice Bingham|5.18.09 @ 12:15PM|#

Burgeoning debt could trigger a future financial crisis? Really?

the debt-to-GDP ratio in 2019 would be 82 percent

Private sector debt-to-GDP is currently over 400%.

Rice Bingham|5.18.09 @ 12:16PM|#

Stupid tags.

Rice Bingham|5.18.09 @ 12:24PM|#

Raise taxes by 5% of GDP. Problem solved.

Next?

Dude, what kind of glue are you sniffin'? I might have to try some.

|5.18.09 @ 12:28PM|#

I think the answer is pretty obvious.

We are not going to dramatically reduce spending, when has that ever happened.

We will increase taxes, but not nearly enough to cover spending. Not even Obama could raise marginal tax rates 30-40% without a hue and cry?

The answer is inflation, lots of it in a constant stream for the foreseeable future.

Rice Bingham|5.18.09 @ 12:33PM|#

The answer is inflation, lots of it in a constant stream for the foreseeable future.

If only it were that simple.

|5.18.09 @ 12:51PM|#

15% inflation for the next 5 years will reduce the existing US liabilities by about 50%, taking deficit to a more sustainable level.

Of course every US pensioner whose money is in fixed assets will also have their assets degraded, and those who hold cash will get hit particularly hard.

But you are right that is the bull-case scenario.

|5.18.09 @ 1:06PM|#

15% inflation for the next 5 years will reduce the existing US liabilities by about 50%, taking deficit to a more sustainable level.

The Chinese are currently negotiating for inflation guarantees on the bonds they hold or will buy in the future, so I wouldn't be a bit surprised to see the utility of inflation as a tool for controlling our debt drastically reduced.

|5.18.09 @ 1:09PM|#

"The Chinese are currently negotiating for inflation guarantees on the bonds they hold or will buy in the future, so I wouldn't be a bit surprised to see the utility of inflation as a tool for controlling our debt drastically reduced."

I was not aware of that, that is pretty interesting. How would that be different from the Chinese purchasing TIPS as soon as their existing Treasuries roll over?

Are they talking about developing a hybrid security in between Treasuries and TIPS?

|5.18.09 @ 1:11PM|#

Or is it more like the Chinese are demanding some free inflation futures to protect their downside.

So it isn't a hybrid security, but rather the simultaneous purchase of 2 securities.

oat willie|5.18.09 @ 3:36PM|#

"I drink your hope. I drink it up."

Win

|5.18.09 @ 3:48PM|#

Are they talking about developing a hybrid security in between Treasuries and TIPS?

Not being in the room, of course, I'm not sure what they are asking for. Rolling over into TIPS or a hybrid won't do much to protect them because their Treasury holdings stretch out over decades.

I suspect that what they are asking for is to have their Treasuries linked to a basket of currencies, or valued based on inflation-adjusted dollars, or even against a basket of commodities.

I do know they are pissed that so much of their sovereign wealth is exposed to a dramatically increasing risk of being devalued by inflation.