Commentary: It's right to rethink recovery plans
This article first appeared in the St. Louis Beacon, June 19, 2009 - The president remains a popular figure. Based on the most recent New York Times/CBS News poll, his overall approval rating is 63 percent. Support for his handling of the deficit and the auto bailout is dwindling, however.
More than one-half of the poll's respondents do not believe the government should spend money to stimulate the economy. Nearly two-thirds of those asked also believe that the administration lacks plan to reduce the burgeoning federal deficits.
The poll's results reveal that the public retains its long-held distrust of centralized governmental power. With the economy stepping back from the brink, most want a return to less government intrusion. Free market capitalism took a severe beating over the past year, but it remains the primary engine of future economic growth and prosperity.
Why have the poll numbers slipped? One reason is that President Obama's massive stimulus package and assorted bailouts have pushed the deficit into record territory. The Congressional Budget Office in July 2008 projected that this fiscal year's budget deficit would amount to $482 billion. That number would be rosy compared with the $1.2 trillion (and counting) estimates now predicted. These kind of numbers, like $4 a gallon gas, has gotten people's attention.
Deficits rise and fall with business contractions and expansions. What is vastly different about the Obama deficit is its long-term nature. The bailout of the auto and financial industry and the proposed revamping of the health care system, and these are just part of his efforts, are likely to generate a permanent increase in government spending.
When the economy was tumbling, such programs were received like a knight in shining armor. With signs of economic recovery building daily, our natural skepticism of such meddling is reasserting itself. That and the fact that the debt created by these deficits must be paid.
Economists at the IMF, as reported in The Economist, project the gross debt of the U.S. government to exceed 100 percent of GDP by 2014. In 2007, the figure was about 63 percent. This increase has many concerned over just how it will be paid.
Government debt can be repaid by borrowing, taxing or relying on the Fed. Government borrowing binges lead lenders to raise questions about getting repaid. There is little doubt that the U.S. government will repay its debt. Still, the fact that some major lenders, such as China, have raised the issue speaks volumes. Remember when the U.S. could dictate financial conditions to foreign investors?
The taxation avenue is impossible until the economy rights itself. While populist clamoring for taxing the rich will always have a popular following, raising taxes on any group, whether it is the rich or business, at this time will impede economic expansion.
That leaves the Fed. The erstwhile independent Fed has accommodated the government's increased involvement in the economy. While the Fed did act appropriately last fall and early this spring as the "lender of last resort," many question the verve with which it attacked its role.
What worries many of us is that the Fed will not be able to wean itself from its current policies and return to what it is supposed to do: keep inflation low.
Bond markets already have the inflation jitters. With banks holding huge reserves and the money stock growing at double-digit rates, the Fed must act to stem inflationary pressures once the economy rebounds. Doing so will not be popular with the Obama crowd.
No one can argue that the president faces massive problems. The question is whether the public will reject the push for more government over more economic freedom. To paraphrase Ronald Reagan, is government the solution?
Rik Hafer is a distinguished research professor and chair of the Department of Economics and Finance at Southern Illinois University Edwardsville and a scholar at the Show-Me Institute.