Obama understands how to cut a deficit, I think

by Ed Bowsher on 07 September 2010  |  17 comments
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Big spending cuts won't reduce the deficit.

I’ve said several times that I think George Osborne’s strategy of aggressive spending cuts is a mistake. But I haven’t written much about what is going in the US. That’s a mistake, hence today’s post.

Let’s start with a quick recap of the history. Early last year, Obama launched a $787 billion stimulus package that was designed to head off a depression after the financial crisis. The money was mainly spent on infrastructure projects and support for state governments that weren’t able to borrow in tough times.

Polling evidence suggests that a majority of Americans think that the stimulus hasn’t worked. I think there are two reasons people for this:

-          Unemployment has stayed high. It rose to 9.6% in August and many pundits think it could go over 10% next year

-          The Republicans and their friends in the media have worked very hard to spread the false message that the stimulus has done nothing except increase the deficit.

It’s my strong belief that the US economy would be in a worse mess without Obama’s package and that the deficit would be higher too. If you don’t believe me, check out this blog post by Paul Krugman in the New York Times and, in particular, the graph at the bottom.

It’s just a shame that the package is now running out of puff and that unemployment is set to rise. It looks like Obama understands that he should have gone for a bigger stimulus and is trying to correct his mistake to some extent. He’s proposing to set up an ‘infrastructure bank’ and spend $50 billion on improving road, rail and other infrastructure.

Why does that matter to us?

I only wish Obama felt able to do much more but I guess he’s constrained by political realities and what he can get through Congress. It’s important for all of us that he makes progress on this because a healthy US economy is very much in the interests of the UK. If the US is struggling, it’ll be harder for our exporters to make money there.

Even more importantly, I wish George Osborne would pay attention to what Obama is doing and switch strategy.

It’s frustrating that Obama hasn’t gone for a bigger stimulus. We don’t know whether his limited proposals are driven by a realistic acceptance of political reality or whether he genuinely believes that a larger stimulus would do more harm than good. My hunch is that it’s the former. Either way, he isn't pushing for an Osborne-style austerity package. He probably understands that would be a very dumb move.

More: This speech is well worth reading