Fallout: The Financial Crisis

Bad stimulus could make deficit worse

Marketplace Staff Jan 7, 2009
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Fallout: The Financial Crisis

Bad stimulus could make deficit worse

Marketplace Staff Jan 7, 2009
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TEXT OF STORY

Kai Ryssdal: Once you wrap your brain around the numbers — trillion-dollar deficits and a stimulus nearly that big — it’s easier to appreciate the rock and the hard place that Barack Obama finds himself between: Ever-increasing deficits or a stuck economy. Commentator David Frum sympathizes. But he worries the president-elect has already gone too far in one direction.


David Frum: “Americans will eat anything if it is toasted and held together with a couple of toothpicks and has lettuce sticking out of the sides, preferably a little wilted.” So said Raymond Chandler’s fictional private eye, Philip Marlowe. He could have added: and anything they still won’t swallow, we can put in Obama’s stimulus package.

The Wall Street Journal reported Tuesday that President-elect Obama plans to offer states up to $7 billion if they will pay unemployment benefits to laid-off part-time workers who would not normally qualify. Obama will also press states to include workers who wouldn’t otherwise qualify into their Medicaid programs. Obama is reportedly proposing that these two new social programs expire after two years. But here’s another saying, and it isn’t fiction: In government, there is nothing more permanent than a temporary program. So, how is all this to be paid for?

We are heading for a trillion-dollar deficit. As Obama himself acknowledges, probably years of deficits in the trillion-dollar neighborhood. Relative to GDP, these would be the biggest deficits since World War II, twice as big as the biggest of the deficits of the 1980s. It gets worse. All of this is happening before the baby boomers have begun to retire. What happens when the 78 million boomers begin to claim pensions and Medicare?

Economists disagree whether a fiscal stimulus is really needed. Many argue that the best way to fight a recession is with monetary policy. But even if fiscal stimulus is the right way to go, we need to keep our heads. Don’t allow fiscal stimulus to become a disguise for permanent expansions in the size and cost of government — especially at a time when the bill for past permanent expansions is soon so massively to come due.

The irony is: If Obama disregards caution and indulges his ideology now, ballooning the deficit beyond all reason, he may find himself spending his second term desperately and belatedly cutting the very same government he came to office eager to expand.

RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute. His most recent book is called “Comeback: Conservatism That Can Win Again.”

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