Is Obama Roosevelt, or Reagan? Neither.

Matt Yglesias says that Niall Ferguson is getting his knickers in a twist about nothing--or rather, that he's trying to fool us into twisting up our knickers through the nefarious power of framing:

Nial Ferguson's indignant observation that "a deficit this size has not been seen in the US since the second world war" is an interesting exercise in rhetoric. Conveniently, it's completely accurate! But what's missing here is that the deficit projected for next year is way smaller than WWII deficits:


To say something like "Obama is going to run a deficit slightly bigger than what we saw in the Reagan years" is a lot less terrifying than "a deficit this size has not been seen in the US since the second world war." But we're looking at a debt level that's much more comparable to what was wracked up in the 1980s and early 90s than to what we saw in the late-1940s.

His readers have already pointed out that the chart he puts up confuses debt-to-GDP ratios with deficits.  More to the point, however, neither metric makes his case.

  • According to the CBO, which is usually preferred for projections because it does not share the White House Office of Management and Budget's fervent desire to please the boss, the debt-to-GDP ratio will end up north of 80% early in the next decade.  It peaked around 110% at the end of World War II.  It peaked at about 47% under Reagan.  In both percentage and absolute terms, the Obama debt-to-GDP ratio will be closer to World War II than to Reagan.  More worryingly, unlike the World War II debt-to-GDP ratio, ours is expected to keep growing in the years beyond the graph's end, because the projected deficits are higher than projected inflation.
  • The Obama deficits are projected to peak at 13%.  This is not "somewhat larger" than Reagan's; it is more than twice as large as Reagan's 6% peak.  In absolute terms, it's just about halfway between Reagan and World War II.

Matt goes on to note that this seems like a good time to run the biggest deficits since World War II.  I agree.  But the World War II deficits were distinctly different from the current run.

First of all, everyone expected that they would be paid off after the war ended by keeping tax revenue high and spending low.  This is, in fact, what happened.  No one expects this to happen now--not even the administration, which has promised to "cut the deficit in half" from the current unsustainable levels.

Second of all, the era of "total war" brought access to a large pool of essentially forced savings.  People plowed their money into war bonds and war stamps because it was their patriotic duty, and because there wasn't really much else to buy--goods either weren't available, or were rationed.

The Obama administration doesn't have this luxury.  Our domestic savings rate is much smaller than our budget deficit, and no one's going to rush to buy a "Liberty Bond" to bail out GM.  Yields on longer-term debt have been rising over the last month, and credit ratings agencies have stepped up the pace of their warnings about America's AAA credit rating.  If interest rates get too high, the current deficits are going to crowd out more and more actual spending.

Democrats have largely been treating debt and spending as if they were largely a political problem.  What will the taxpayers tolerate?  Quite a lot, it turns out, in time of crisis.  And so Democrats seem to have settled on a strategy of passing as much spending as they can now, while the American public is still reeling from debt sticker shock, and figuring out how to actually pay for it later.

Roosevelt could do this because people felt that America faced an actual existential threat.  But that urgency rarely, maybe never, exists outside of total war.    Obama needs to please the bond market, as well as the taxpayers.  And the bond market is more educated and attentive than the average voter.  You can't just tell them that you're going to achieve fabulous cost savings through health care IT.  You have to prove it.  The administration hasn't been super-convincing about specifics.  So there's a real worry that the bond-holders won't buy it.