Freezing the recovery

I guess it isn't that much of a surprise that Obama wasn't going to push for a second stimulus package. Many of us economics-professor-types thought the first one was too small right from the beginning - big enough to prevent us from going down the drain we were circling, but not big enough to get us back on a self-sustaining growth path.

But to cave so utterly to the deficit scolds is not something I would have predicted. If Obama freezes spending (but not on the military, oh no, heaven forbid we spend less than 10 times what the next 10 countries spend on their militaries) he ties our hands in a way that is completely unnecessary in the long run and counterproductive in the short run. This is the Republican economic program we are seeing unfold: Recession? What recession? Let's reduce the deficit instead!

It is a seriously bad idea to start attacking the deficit in January 2010. We should NOT be trying to cure the deficit one year after the stimulus has been put in place, and before half of it is even spent. The main economic problem we have is that consumers arent buying. 17% of them are unemployed or work only part time. And the rest are still looking at houses and stock portfolios that are worth way less than a couple of years ago. Businesses aren't investing, because there is weak demand and loads of excess capacity. That leaves only the government to take up the slack and fill the missing demand. Yes, that means deficit spending in the short run (e.g., last year's stimulus bill), but it also means jobs and higher incomes as a result of that spending.

It is hard to avoid the conclusion that Obama and his advisors don't believe in their own policies. If they did they wouldn't be cutting them off before they are even fully implemented. They are channelling Herbert Hoover, who tried to reduce the deficit for three years after the stock market crash in 1929 (we all know how well that worked out for him). For God's sake, Mr. Obama, if you won't learn what every economist learns in 'Intro to Macroeconomics' (which I last lectured on just this morning) then at least try and learn what FDR taught us:

1. When you spend money in a recession and people get jobs as a result, they vote for your party for the next five decades; and

2. The voters dont give a damn about the deficit. A job is more important than whatever share of the deficit they end up helping to pay in the future.

But I can tell you one group who will be ecstatic about this spending freeze - bond traders! A lower deficit might mean somewhat lower interest rates at some point in the future. (Though certainly not now since they can't go any lower than where they are - zero). So lets hear it yet again for the most important constituency in the USA: Wall Street.