The budget outline that Barack Obama delivered last week is bolder than anything he’s done so far in managing the immediate banking crisis. Its combination of tax hikes and spending measures has been universally hailed or derided as the “end of an era” of shrinking government wrought by Reagan and his successors. That’s true, obviously, but it’s more than another periodic swing of the fabled American political pendulum. The Obama budget is also a continuation of the stimulus package he signed into law a couple of weeks ago, and a between-the-lines concession that any recovery worth the name is still a long way off.
The press has been straining for months to fit Obama’s moves since taking office into a 1930s, New Deal frame of reference; this is the first step that’s actually worthy of any such comparison. The budget’s extensive safety net provisions in the areas of health care and higher education amount to a recognition that the American public’s ability to pay for essentials and to provide for their children’s futures is going to remain seriously damaged for as far out as the eye can see. And the sheer scale of proposed spending–about $3.6 trillion–bears testament to the fact that government is going to need to take up as much of the slack in demand as it can for as long as it can.
The debt’s the thing. And the worst of it is not the public debt, breathtaking as its growth may be right now. One of the longer-range concerns that’s been ill-addressed in U.S. media to date is the prospect of winding up with a “lost decade” akin to Japan’s experience in the 1990s, when the government there pumped tons of liquidity into banks–and saw little effect from it, for reasons Financial Times columnist Martin Wolf wrote about recently:
“[T]he best analysis of what happened to Japan is by Richard Koo of the Nomura Research Institute. His big point, though simple, is ignored by conventional economics: balance sheets matter. Threatened with bankruptcy, the overborrowed will struggle to pay down their debts. A collapse in asset prices purchased through debt will have a far more devastating impact than the same collapse accompanied by little debt.
“Most of the decline in Japanese private spending and borrowing in the 1990s was, argues Mr Koo, due not to the state of the banks, but to that of their borrowers. This was a situation in which, in the words of John Maynard Keynes, low interest rates–and Japan’s were, for years, as low as could be–were ‘pushing on a string.’ Debtors kept paying down their loans.”
Paying down their loans in lieu of consuming, he means; the “pushing on a string” metaphor refers to the vain attempts at spurring consumption when there is so much debt in the system and everyone is preoccupied with getting out from under it. As Kevin Phillips wrote last year in Bad Money, from the vantage point of 2007 numbers, “Public debt–federal, state, and local (nearly $11 trillion all told)–was neither the immediate danger point nor the fastest-growing category. What went ballistic over the last quarter century is exactly what dissidents hold up for more attention: private debt (household, financial, and non-financial corporate) that wound up totaling some $36 trillion.”
Those figures include only $4.9 trillion in federal (i.e., public) debt, a number that has ballooned mightily owing to the last couple of years of Bush deficits and the Bush/Obama bailout and stimulus efforts to date. But the other categories have grown as well, and even at $12 trillion-ish, the public debt is less dangerous to the future of the economy than the private debt. Household debt alone stood at nearly $13 trillion in 2006 and financial sector debt at $14 trillion-plus. Both those statistics equal about 100 percent of annual GDP, give or take. As for rate of growth, household debt climbed 39 percent between 2001 and 2005; I haven’t seen figures on its growth during the last two years of Bush’s second term.
How do you make a consumer economy move again when the consumers have a) glimpsed the abyss of debt they’re mired in and b) decided they don’t like it? That’s the question that dogs any prospect of “recovery,” and the likeliest answer involves years of pain and stagnation. And federal deficits that are far larger than the Obama administration can afford to confess now.
Related links: WSJ, “Obama budget pushes sweepng changes”; WaPo, “Obama’s first budget seeks to trim deficit”; LAT, “Taxing for fairness or class warfare?” and “Obama’s budget trades steep deficits for broad goals.”