The Continuing Federal Budget Nightmare

William Anderson
Foundation for Economic Education
May 14, 2009

The numbers that come in from the government are staggering, with a projected federal budget deficit of nearly two trillion dollars. As one recent news account put it:

With the economy performing worse than hoped, revised White House figures point to deepening budget deficits, with the government borrowing almost 50 cents for every dollar it spends this year.

The deficit for the current budget year will rise by $89 billion to above $1.8 trillion — about four times the record set just last year. The unprecedented red ink flows from the deep recession, the Wall Street bailout, the cost of President Barack Obama’s economic stimulus bill, as well as a structural imbalance between what the government spends and what it takes in.

This no longer is a “problem.” It has become a calamity, and there are no political forces in Washington willing or able to stop what seems to be a runaway train. Furthermore, the political arrogance that is the nation’s capital prevents people from understanding the obvious: we are witnessing an episode of ruinous government spending that is going to have severe ramifications for years to come.

After the latest numbers came out, White House Budget Director Peter Orszag declared that the deficits are being driven by the recession, which this government inherited, so the numbers are not the fault of the current set of policymakers at 1600 Pennsylvania Avenue. I am no defender of George W. Bush and his spendthrift government, but even a Bush critic like me can see that the incoming Obama government decided the speeding train was not going fast enough, so they opened the throttle wide open and tied it down.

Some perspective is needed here. In nominal terms, the deficits are far and away greater than anything we have seen. According to the Statistical Abstracts of the United States, if one adds up all of the budget deficits of the Bush administration, they about equal the deficits for this fiscal year alone. Now keep in mind that many of us believed that the Bush deficits were ruinous, with its profligate spending and monetary “creation” through the Federal Reserve System – and the boom and bust pattern of the economy proved our point.

However, it is as though the Bush policymakers were skinflints compared to what we are seeing now. Furthermore, there are economists who claim that the present government is not spending enough. Recent Nobel Prize-winner Paul Krugman claims that the unprecedented surge in federal spending is only a “half-measure” that won’t revive the economy. The solution? Even more spending!

My first reaction is simple: Spend with what? Borrowers need lenders, and that means that someone out there has to believe that a U.S. bond is a good investment.

Much of the U.S. deficit has been funded by Asian governments such as China and Japan which accepted dollars for goods and then rolled those dollars into U.S. government debt. However, that gravy train is slowing down rapidly, as the seller is running out of suckers.

There is one buyer, however, that seems ready and willing to buy what Uncle Sam throws its way: the Fed. As the recent statements by the Fed have demonstrated, the central bank is increasing its purchases of both government and private securities at an increasing rate, revving up its printing press in the process.

This cannot lead to recovery; when the government throws out this much paper, there is no way we will not see a “crowding out,” which strips the very funds needed for business investment. Rather, it will lead to inflation and lots of it. Never mind that the Obama administration has announced that this economy will enjoy a 3.5 percent increase in output by the year’s end; the only things that are going up are the inflation and unemployment rates.

One does not have to wish this administration to fail in its economic policies. This government is doing that without any help from the opposition.

William Anderson is an associate professor of economics at Frostburg State University. He received a doctorate in economics from Auburn University, and is an adjunct scholar with the Mises Institute and the Mackinac Center. He has written for The Freeman since 1981, and also has had articles in Reason Magazine, Forbes On-line, The Free Market, and a number of refereed journals. He is on the editorial board of The American Journal of Economics and Sociology, the Journal of International Business Disciplines, and the Journal of Economic, Social, and Political Studies.

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