I had been speculating on these pages what Obama’s Presidential trajectory would be, whether his administration would be more like Jimmy Carter’s or more like Bill Clinton’s. Then I thought it might be more like Bob Rae’s Ontario Premiership, but I had been undecided until recently. However now with the latest sky-high deficit projections for the US Federal government, I am much more certain. Obama will become America’s Bob Rae.
For the benefit of those readers who aren’t Ontario residents, Bob Rae was the NDP Premier of Ontario from 1990 to 1995. When he came to power, Ontario was entering a severe recession. He tried to pull Ontario out of it with deficit spending. By 1994 the deficit had reached a record $17 billion. Because the Keynesian pump priming was not working, Bob Rae then became a born-again fiscal conservative. This alienated his public sector union base. When he was thrown out of office in 1995 by Conservative Mike Harris, he was hated by the right for being a socialist and the left for being a capitalist stooge.
The first part of Obama’s Presidency is certainly looking to parallel Bob Rae’s. The question therefore becomes, can Obama avoid Bob Rae’s fate?
Personally, I can’t see how the United Sates can avoid a debt crisis, if not in the next 4 years then certainly within the next 8 years. This is because, right now, US federal spending is completely out of control and Obama’s plan is to increase it even more.
The projected deficit for 2009 is $1.2 trillion and, if I am not mistaken, this does not include the $825 billion (over 2 years) ‘stimulus’ package that the Democrat Congress recently passed. Some estimates indicate that the deficit might top $2 trillion before the year is out. In addition, the Democrats are planning to massively increase entitlements. Last week, Congress passed a bill expanding government medical insurance to middle class children who are already covered by their parent’s health plans. The stimulus package includes permanent increases in unemployment insurance and welfare payments. And then there is socialize medicine, which Obama says is coming. Entitlements are not like last year’s ‘stimulus’ rebates. These things are long term financial commitments, not here-today-gone-tomorrow line items in the budget.
Because the economy will likely improve in the next several years as the credit markets repair themselves (thanks to low gas prices and an extremely loose monetary policy - the Great Depression was the only protracted economic contraction in history precisely because the Federal Reserve tightened the money supply when they should have loosened it), the budget shortfall will be ameliorated somewhat. This happened in 2007 as an improving economy caused the US federal deficit to drop to $161 billion from $248 billion the year before (an improvement that was brought about by George Bush’s income tax cuts).
But the important thing to remember about government spending is that it isn’t the absolute amount of spending that makes people happy, it is only the increase in spending that causes joy. When people are used to receiving government money, they immediately take it for granted. They expect it. Have you ever seen a welfare recipient thank the government for their cheque? People are only happy when they get a government cheque that they don’t expect. This means that in order to maintain the happiness quotient and remain a Santa Claus President, President Obama will have to increase government spending continuously. In other words, the deficit must grow exponentially.
How even the US Federal government can sustain that level of spending for any period of time is beyond me. At some point it has to stop. And that means a debt crisis.
For Canadians this is familiar territory. We had a debt crisis in 1995. It occurred when bond rating agencies became skittish, causing Canada’s borrowing costs to go through the roof. In America’s case, it may happen simply because there will no longer be enough excess money in the world to pay the bills.
The good news is that the debt crisis is where socialism stops. Oprah Winfrey and compassionate conservatism (and compassionate everything else of that matter) will be out. Hard-headed realism will be in.
The other good news is that while it will be painful for the government, it isn’t necessarily bad for the economy as a whole. Canada (and Ontario) in the late 90’s did rather well for themselves, even as governments painfully downsized.
The third bit of good news is that those in charge can weather the storm if they are proactive in their budget cutting. While Bob Rae certainly didn’t make it out of Ontario’s debt crisis with his reputation intact, Canada’s Liberal party did, thanks to Finance Minister Paul Martin’s aggressive belt tightening.
How will Obama do? Will he be a hero like Paul Martin, or will he be consigned to the ash heap of history like Bob Rae? I dunno, but we are about to find out.