Two big economic items for the day. The first is that the President has decided to create a debt panel that will supposedly lead us out of the fiscal mess that we are in. The second is that David Leonhardt has allied himself with the Administration’s spin machine to sing the praises of last year’s stimulus package. Both deserve a response.
The deficit commission will not achieve anything until and unless the question of entitlements is finally addressed. Social Security, Medicare, and Medicaid are all operating at untenable levels, and if entitlement reform is not seriously pursued and implemented by Washington, a fiscal disaster of astonishing magnitude awaits us. Thus far, I have heard nothing that would lead me to believe that the Obama Administration is serious about entitlement reform. I suppose that there is time for me to be surprised, but I doubt that any surprise will come before the 2010 midterm elections.
The effort to keep our fiscal house in order was not helped, of course, by the Obama Administration’s stimulus package, which, as Matthew Continetti points out, was hardly the best use of taxpayer funds to stimulate the economy. In a response to Leonhardt’s lionization of the Obama Administration’s economic program, Reihan Salam reminds us that governmental monetary transfers were saved, and not consumed, and that it was the resilience of the private sector that helped us avoid a repeat of the Great Depression. Government spending simply did not occur fast enough in order to stimulate the economy.
Salam points to a study by economists Carmen Reinhardt and Kenneth Rogoff, which tells us that “[c]ountries with a gross public debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.” This suggests bad tidings for the United States, where the gross public debt is rising fast; at this time, it hovers around 60% of GDP. Gross government debt was at about 89% of GDP in 2009, according to Reinhardt and Rogoff.
There were better ways to stimulate the economy. Salam refers us to this op-ed by Michael Boskin, which advocated a cut in the payroll tax, a policy implementation that would add 3-4 million new jobs, at a fraction of the cost of the stimulus, and would have been implemented more quickly that was the stimulus package. If the Obama Administration is serious about fiscal responsibility, and economic growth, it will ditch the stimulus package and push through cuts in the payroll tax. Unfortunately, as Boskin points out, the Administration is planning tax increases that would be designed to pay for health care reform, but would impact small businesses and the overall economy especially hard. This will make President Obama’s political base very happy, but it will make things far worse for a struggling economy that could easily fall back into another recession.