Bipartisanism = Economic Populism

I've been thinking a lot about fiscal responsability lately, how could I not? The federal governemnt is projected to run huge deficits (and when I say huge I mean 10% of gdp huge) for the next 10 years under Obama's proposed budget. And why not? What's the big deal? We want everything and we don't want to pay for it so why not just borrow a bunch of money and have what we want?

Unfortunately, despite what we try to convince ourselves, deficit spending in excess of 3% or so is unsustainable. In other words, the United States does not have an infinite line of credit. It is interesting to note that of all the government debt about half of it is owned by the Fed (the federal reserve buys government bonds to inject money into the system and lower interest rates), but a surprisingly large amount is held by foreigners and foreign governments, about 28%. (Source http://en.wikipedia.org/wiki/United_States_public_debt) Foreign holders of US debt are beginning to be a little wary of the stability of the dollar. In the G20 meeting held in London recently China's finance minister proposed replacing the dollar with an international currency as the main currency used in international trade--this is a clear sign that perhaps foreign governments are starting to lose faith in the US dollar. If that's the case, how are we going to finance our deficits? Perhaps the government should push the Fed to buy more bonds, decreasing the interest rate, and inflate away the debt. There is no geo-political risk associated with that (sarcasm). One thing is for sure, we can't cut spending or increase taxes. That is outrageous!!

Don't get me wrong I'm not only blaming the Democrats. I'm blaming both Democrats and Republicans. I am a member of the Republican party because I believed that the Republicans shared my view of lower flatter taxes, yes, but also fiscal responsibility. In fact, I always was under the assumption that fiscal responsibility trumped lower taxes in this party. Now, however, I'm not so sure that this is the case. George Bush, in his first year in office, turned soaring budget surpluses (we enjoyed thanks to the Clinton administration coupled with an economic boom), into an outrageous budget deficit by unprecedentedly cutting taxes, waging war and not vetoing one single spending bill (including a huge unfunded drug entitlement program) his entire tenure. Truly I feel bad for President Obama having walked into a budget nightmare.

If I can simplify the matter, Obama can do one of two things. 1) Commit political suicide and reform social security like it really needs to be reformed (cut benefits--especially on young retirees and increase taxes on everyone), or 2) pull a G.W. and cover your ears when economists begin to tell you that the budget is seriously out of control and uncover them just in time to hear Dick Cheney say "deficits don't matter". My worry is that he will chose the latter (as is apparent in his budget proposal).

My point is this: for years Republicans and Democrats have been fighting over size and scale of the government. Should we increase or decrease taxes? Increase or decrease spending? I'm just glad we have found a middle ground finally. We can now cut taxes and increase spending! Who cares?! Deficits don't matter! (thanks Cheney for that).

-Andrew