Obama Understands What Deficit Spending Is, Right?


I wanted to go through Obama's 2011 budget speech and expose the groups who will rail against its most sensible parts.* But then I read this sentence and felt too confused to go on:

We also continue to lay a new foundation for lasting growth, which is essential as well. Just as it would be a terrible mistake to borrow against our children's future to pay our way today, it would be equally wrong to neglect their future by failing to invest in areas that will determine our economic success in this new century.

That sentence doesn't make any sense, does it?

Obama's telling us "it would be a terrible mistake to borrow against our children's future to pay our way today." But that sentence is wrong -- twice. First that conditional "would" is a little bizarre, because this is our current policy. We're running up at least three consecutive trillion-dollar-deficits in 2009, 2010 and 2011 according to White House and CBO projections. We are paying for today with our children's future. That is what a deficit is.

Second deficit-spending isn't a terrible mistake, because it's not terrible, and it's not a mistake. It's not terrible because it's responsible economics to run up a deficit during a recession. When private demand falls below the economy's productive capacity, government replaces the shortfall in demand by increasing its own (see: Richard Posner's post). To finance that extra government spending, we borrow money against a future in which we hope to be more prosperous. If we'll more money, then we'll have more money to give the government to pay back our debt. This practice is not a mistake because, once again, it is our current policy.

Maybe I'm making too big of a deal about this sentence. I know Obama's speech writers are immensely talented, and I know Obama knows what deficit spending is. I think he's trying to say, "Unfortunately the recession has forced us to borrow against our future. But rather than a tragedy, let's see this as an opportunity to invest in the future." But deficit spending is an investment. It doesn't need a distinction. It's like taking out a loan because you think you can pay down the interest and still eventually profit from the upfront cash. People do this all the time. It's got good economics behind it. Why impugn your own policies by calling them "a terrible mistake?"

*For example, replacing the subsidy to banks who lend to college students with direct government lending is a commonsense way to both save money and streamline the college lending system. And yet the plan has many enemies. We can start with Sallie Mae, one of the leading private student lenders, which would lose government subsidies as the government took over direct lending to students. Many Republicans have accused the government of trying to establish an monopoly on student loans, especially Sen. Mike Enzi and Sen. Lamar Alexander, who blasted the move as an attempt to turn the Department of Education into "a $500 billion national bank" in this piece by Eliza Krigman. On the Democratic side, key Sen. Ben Nelson's home state of Nebraska is home to Nelnet, another leading private lender that he's interested in protecting from the subsidy elimination.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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