Monday, August 23, 2010

The Bush/Obama $4.4 trillion spending boom


From today's WSJ:

CBO's mid-year review largely reinforces the bad news we already knew—to wit, that spending has exploded since Democrats took over Congress in 2007, first with the acquiescence of George W. Bush and then into hyperdrive after Mr. Obama entered the White House.
To appreciate the magnitude of this spending blowout, compare CBO's budget "baseline" estimate in January 2008 with the baseline it released Thursday. The baseline predicts future spending based on the law at the time. As the nearby chart shows, in a mere 31 months Congress has added more than $4.4 trillion to the 10-year spending baseline. The 2008 and 2009 numbers are actual spending, the others are estimates. As recently as 2005, totalfederal spending was only $2.47 trillion.

This is the biggest problem facing our economy today: the huge and escalating increase in the size of government intervention in the economy. This is unsustainable, and I predict will not be sustained. The voters are sick and tired of this; the public sector at all levels of the economy is getting out of control, and it must be reined it. Stop the spending!!


Public Library said...

Twin Gorillas in the room. The Fed needs reigning in and limited powers or they can simply blow-up the US all by their lonesomes.

Benjamin Cole said...

I completely share the view that federal outlays have become unsustainable. We must target federal outlays to less than 18 percent of GDP.

Fiscal discipline disappeared with President Eisenhower.

On the other hand, the money is there.

NEW YORK (Dow Jones)--The government bond market put in a somnolent performance Monday in a session guided by no major economic data, although there was good demand for a sale of long-dated inflation-indexed securities.

The market drifted to the finish line with very small gains for short-dated securities, while the 30-year bond lost a minimal amount of ground. Markets had little to set the tone for the day, given that there were no major economic data scheduled for release.

The Treasury sold $7 billion in 30-year inflation-indexed bonds to decent demand. The reopened securities, commonly referred to as TIPS, came at a yield of 1.768%. The security was first sold on Feb. 26. Its bid-to-cover ratio, a measure of investor interest, was 2.78, a record high. The indirect bid, a proxy for large buyer interest, was 39%, down from 42.4% in the winter sale."

There is capital everywhere, gobs of it. US Treasuries can sell all day long. There is no crowding out.

Not sure what this means exactly. Seems like the globe generates excess savings.

Public Library said...


You describe the very problem that will lead to the next crisis. Probably a ccy crisis.

Too much money, at too low a cost, in way too many hands. However, lest not forget this is paper money and therein lies the problem.

Benjamin Cole said...


Well, capital is cheap. I am not sure that is a bad thing.

We may have crossed into a new era in our global economies. For generations, capital was relatively scarce.

Thanks to rising productivity, free enterprise and lower tax rates on high incomes, we now have gobs of capital.

It may be that savers have to get used to low returns. Supply and demand--lots of supply.

You want to get rich? Develop a viable business (or a wicked curveball). Investing won't get you there. Low returns. (You see this in developing countries--retruns are higher than developed. Less capital).

I do think we need to change our tax codes to reward equity, and not debt.

I have to say, I am in Milton Friedman's camp, when it comes to money. He was against a gold standard; said it resulted in men tunneling around like moles. (MF could issue a cutting remark, no?)

MF said inflation is always about printing too much money. I think ti follows that deflation is always about not enough.

Really, I can't say money is too loose now--in fact, with incipient deflation, and no jobs growth I am hoping the Fed will remember that economic prosperity trumps zero inflation as a policy goal.

I think our problems stem from a huge misallocation of capital to housing and poor underwriting on most real estate loans, including commercial. Obama is not helping--with the benefit of hindsight, I think he should have sounded many pro-business themes and policies, given the severity of the recession. In fact, the whole D-Party is off-base with the "business is the bad guys" stick.

Public Library--in the end, I am not a doomster. A pro-business D-Party, or an anti-militarist R-Party (Well, just bring back Eisenhower), and we could be back in the swim.

mmanagedaccounts said...

Methinks the economy does not have a monetary problem, but a fiscal one. We have too much spending and taxes are too high. We hear banks aren't lending, but we also hear there's nobody coming through the door to borrow. We need an increase in demand and that increase can come from lower taxes, not temporarily but a permanent reduction in spending and taxing.
I favored TARP, but a good friend of mine said TARP was possibly the biggest Republican mistake since Hoover's 1932 tax hike. Am I wrong?
Thank you for all you do in helping us become more knowledgable.
I also benefit from other comments, so a thank you to those who do.

Public Library said...
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Public Library said...


Our views have more in common than they do differences. The only difference is the view on money printing.

Disinflation in the current environment is the result of too much money printing. In my view, to re-flate via the printing presses does not stabilize the system. I believe It actually creates more uncertainty.

Yes spending is out of control but that is obvious to just about everyone on the planet. What seems to draw the most bi-polar debate is the Fed and the printing press.

How long did we really think the experiment would last post the Nixon decision? We've been inflating our pain away for 30 years.

Maybe we need to print if only to reach the end more quickly so we can hit the reset button.

I am not a doomsday-er wither but the imbalances are GIGANTIC and growing. It all starts with the Fed...

Benjamin Cole said...


Then, you do favor a gold standard, but no Fed?

I share many views with you--and by no means am I married to any view, but especially on monetary policy.

Still, eliminating the Fed seems rather radical.....

Charles said...

Government services are luxury goods. In economics jargon the income elasticity of government services >1. When trillions of dollars of wealth have evaporated, government services need to be cut back even more than private consumption. The opposite is happening. This is the equivalent of a massive tax increase. The Democrats have done nothing in the last 4 years to facilitate the necessary structural adjustments in the economy.

Benjamin Cole said...

Public institutions always fight "the last war."
So, we have federal agencies fighting poverty and racism, a USDA to help farmers, and the Department of Defense spends money like crazy in a Cold War formation.
It is still 1962, as far as federal agencies are concerned (well, 1932 at USDA).
So, the Fed is fighting its last great war--inflation.
Private companies selling out-of-date services go bankrupt.
There is no bankruptcy in DC.

Mr. Kowalski said...

"We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude. A departure from principle in one instance becomes a precedent until the bulk of society is reduced to be mere automatons of misery... And the fore-horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression" Thomas Jefferson, 1780

McKibbinUSA said...

When we vote in the Democrats, we get trillions spent on government. But, when we vote in the Republicans, we get trillions spent on overseas wars. How does one choose? I do not trust big government (Democrats) or big business (Republicans). I guess that's why I am advocate for the Libertarian platform. More at:

You are right, the Bush/Obama $4.4 trillion spending boom is very discouraging, and especially for we small business owners. Thank you for the opportunity to comment...

Mark Gerber said...

"The voters are sick and tired of this; the public sector at all levels of the economy is getting out of control, and it must be reined it. Stop the spending!!"

No doubt the spending must stop. However, I fear that about half the voters are not sick and tired of it at all; rather, they want more. At best we will go back to gridlock in November. Given the facts of what we have done, and the path we are most likley to continue down, I don't see how we have any hope of getting our country back. Only a devestating economic collapse will force reality upong the American people and stop the spending insanity.

We're are only one shock away from collapse already.

randy said...


You've noted many times that you strongly support more QE. John Hussman has a counter-argument that was insightful I thought. To me anyway, it has been paradoxical to have such inflationary pressures with declining rates. This article helped me understand better, and argues the risk is the dollar.

"With the U.S. economy predictably weakening, this second round of quantitative easing appears likely to continue. Unfortunately, the unintended side effect of this policy shift is likely to be an abrupt collapse in the foreign exchange value of the U.S. dollar."

"The argument here is not that quantitative easing will create inflation which will hurt the dollar. The argument is more subtle. It is that we are running a fiscal policy that is long run (though not short-run) inflationary, and that the monetary policy of quantitative easing prevents longer term interest rates from acting as an adjustment variable, since the Fed is essentially announcing that it will lean on the Treasury bond market. By suppressing Treasury yields, the Fed forces the exchange rate to bear the full weight of the adjustment."

randy said...

shoot forgot the link:

Public Library said...

I argued a year ago here getting into the housing market now was a fools game.

Americans still think prices will rise 10% per annum for the next decade.

When prices drop another 15% and we continue to shed jobs, the next leg of weak FNMA and FHLMC borrows will hit the eject button too.

Americans might finally realize housing isn't a sound retirement vehicle. Rather, it was always concentrated risk in a non-cash producing asset.

But since the Fed was only to eager to provide faux money and congress handing out loans to every Tom/Dick/Harry, the equilibrium was blown hundreds of miles off course. So much so it almost became a birth right to own an appreciating home.

The party is long over and heading south from here.

Benjamin Cole said...


A weak dollar? Where do we sign up?

Check out Scott Grannis' excellent post a few days back, charting the exchange rates of the dollar over the last four decades.

The 1990s was a nadir for the US dollar.

The 1990s were the best decade we ever had---terrific economic growth, low inflation, a Dow that quadrupled, rising employment and low unemployment.

And we ran federal surpluses!!!!

Give unto me a weak dollar.

Verily, I challenge all: If a weak dollar is bad, then explain the great 1990s to me.

I want more bad.

randy said...

A weak dollar would be FAR LESS bad if we would dramatically reduce our foreign oil purchases. For the life of me, with all the problems related to that ( please don't tell me our problems in the middle east have nothing to do with oil ), I cannot understand why that is not our #1 policy issue.

Why the 90s were great? Some would argue that it was a mirage created when globalization driven productivity (read cheap labor) combined with cheap money (artificially provided by the fed) driven consumption and speculation to create unsustainable growth. Until the balloon popped.

Public Library said...

Benj I agree with Randy,

You are throwing everything in your alphabet soup and calling a weak dollar the general cause of prosperity.

Government intervention from Congress to the Fed is crippling this nation from within.

Benjamin Cole said...


Also, please see The Money Illusion blog, and the post there on Milton Friedman.

MF said low interets rates are a sign of tight money.

Benjamin Cole said...

Public Library-

I am not saying a weak dollar caused all the good news in the 1990s.

I am saying, if a weak dollar is so bad, explain the 1990s.

It was a honking great decade.

Scott Grannis said...

Re the weak dollar: When the dollar is very weak, that generally means that markets are very pessimistic about the long-term outlook for the U.S. economy. When the economy turns out to be better than the miserable expectations (because fiscal and monetary policy improve), then the market has to change its outlook, and demand for dollars improves.

randy said...
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randy said...

I read the Friedman post on money illusion. As backdrop, I agree a little inflation would be welcome at the moment. Slow enough not to scare anyone, but enough to mildly reflate assets so that businesses and investors feel comfortable investing again without mortal fear that everything will be half off next year. However, saying that current low rates is a "foolproof" indicator that money is tight ridiculously (to me) ignores the effect of the massive flight to safety. More to the point though, please explain how more QE would help.
The Fed balance sheet would grow, there would be more money supply, yes. But how is that going to induce consumers, business owners, entrepreneurs etc to do something that they won't do now? I guess the argument is that you have to convince those actors that there will be inflation, and sooner than later. If that's the case, then it is a confidence game... is there not a risk that confidence will actually fall if more QE easing is seen as more desperation?

John said...


I think you get it pretty good. QE must convince the market that money will be supplied without limit until confidence is restored. Then we have the problem of unwinding it before inflation gets out of hand. There are many unintended consequences to money printing. I think another QE is possible after the election if confidence is not improved. I don't think Bernanke & Co. are excited about doing it though.

My personal belief is that ZIRP will do the job given enough time. Politicians though...ugh!