Deficit Spending

My parents raised me to be frugal. Except for cars and homes, we were expected to save for something we wanted and then pay cash for it. As I formulated my own sense of managing finance, I extended that into a lifetime of living beneath my means. It should be no surprise then, that as a matter of policy, I am a deficit hawk. Revenue is revenue, expenses are expenses and Federal deficit spending is, in essence, living off the credit cards.

The deficit spending by both the Bush Administration and the Obama Administration are disturbing to me, but it’s important to not be dogmatic and put these fiscal policies in context. The deficit spending by the Bush Administration was in part a result of tax cuts – which should have been offset with spending cuts – and the costs of the necessary war in Afghanistan and the unnecessary war in Iraq[1].

The Obama Administration has to continue funding the two wars he inherited. In addition, he inherited the fallout from the near-collapse of the financial sector as the mortgage crisis manifested itself. As Obama tried to determine the budgetary approach, he could be a fiscal hawk – the approach natural to me and most Republicans – or he could try and spend our way out of the biggest fiscal crisis we have seen since the Great Depression. As is so often the case, history can give us some insight.

After the stock market crash in 1929, the Secretary of the Treasury, Andrew W. Mellon, indicated that the Hoover Administration would let the market sort it out[2]. They would let weak banks fail (keep in mind, this was before the FDIC) by refusing to lend them cash and refusing to put more cash into circulation[3]. These actions created a liquidity crisis. Further exacerbating the problem, Herbert Hoover signed the Revenue Act of 1932, which raised tax rates across the board in order to balance the budget.

The lessons learned from the fiscal policy of the Hoover Administration is that the market can sort it out, but it will do so with a huge human toll. It taught us that during a steep economic decline, balanced budgets are not only unnecessary, they are detrimental to recovery.

The point is, not all deficits are created equal. Short-term deficit spending in response to a specific economic crisis is necessary. Bush indebted us to enact popular, but irresponsible, tax cuts and to avoid funding an unnecessary war.   Obama is indebting us to avoid financial calamity. The job for the electorate is to ensure that this unsustainable fiscal policy is short-term and targeted toward economic recovery.

While I am not a fan of deficit spending, I am certain that the policies of the Obama Administration are the right ones. We hadn’t had an adult in the White House since George H.W. Bush. It’s comforting to see that we have one again.

References:

[1] http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aRuHfcMIxMfw

[2] Notes from Crash: The Next Depression? on the History Channel

[3] http://en.wikipedia.org/wiki/Andrew_W._Mellon

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