FDR Spent Too Little; Obama Has to Spend More

That's the judgement of "economists" according to the Times.

More government spending beyond the planned $825 billion economic recovery plan, economists say, is probably in the cards as well. Roosevelt is seen as the father of big-spending government, yet the judgment of history seems to be that in the 1930s he was too timid.

“The lesson from the 1930s and early 1940s is that the government has to do much more than it has done so far, both to end the financial crisis and to get us out of the recession,” said Mr. Sylla of N.Y.U. “I do think the Obama team knows this and seems prepared to act on the knowledge.”

But if we're in a crisis triggered by excessive debt - homeowner debt, negative savings, budget deficits, trade deficits around 7% of GDP - how can adding more debt help? I simply lack the imagination necessary to get my brain around that conundrum. Peter Schiff still seems to be the only one making any sense, to me at least.

Barack Obama has spoken often of sacrifice...But apart from a stirring call for volunteerism in his inaugural address, the only specific sacrifices the president has outlined thus far include lower taxes, millions of federally funded jobs, expanded corporate bailouts, and direct stimulus checks to consumers...

What he might have said was that the nations funding the majority of America's public debt -- most notably the Chinese, Japanese and the Saudis -- need to be prepared to sacrifice. They have to fund America's annual trillion-dollar deficits for the foreseeable future. These creditor nations, who already own trillions of dollars of U.S. government debt, are the only entities capable of underwriting the spending that Mr. Obama envisions and that U.S. citizens demand.

In sum, our creditors must give up all hope of accessing the principal, and may be compensated only by the paltry 2%-3% yield our bonds currently deliver.

As absurd as this may appear on the surface, it seems inconceivable to President Obama, or any respected economist for that matter, that our creditors may decline to sign on. Their confidence is derived from the fact that the arrangement has gone on for some time, and that our creditors would be unwilling to face the economic turbulence that would result from an interruption of the status quo.

But just because the game has lasted thus far does not mean that they will continue playing it indefinitely. Thanks to projected huge deficits, the U.S. government is severely raising the stakes. At the same time, the global economic contraction will make larger Treasury purchases by foreign central banks both economically and politically more difficult.

The root problem is...America's GDP is composed of more than 70% consumer spending. For many years, much of that spending has been a function of voracious consumer borrowing through home equity extractions (averaging more than $850 billion annually in 2005 and 2006, according to the Federal Reserve) and rapid expansion of credit card and other consumer debt. Now that credit is scarce, it is inevitable that GDP will fall.

Neither the left nor the right of the American political spectrum has shown any willingness to tolerate such a contraction. Recently, for example, Nobel Prize-winning economist Paul Krugman estimated that a 6.8% contraction in GDP will result in $2.1 trillion in "lost output," which the government should redeem through fiscal stimulation. In his view, the $775 billion announced in Mr. Obama's plan is two-thirds too small.

Although Mr. Krugman may not get all that he wishes, it is clear that Mr. Obama's opening bid will likely move north considerably before any legislation is passed. It is also clear from the political chatter that the policies most favored will be those that encourage rapid consumer spending, not lasting or sustainable economic change. So when the effects of this stimulus dissipate, the same unbalanced economy will remain -- only now with a far higher debt load. [More]