Saturday, February 14, 2009

The Obama Tightrope

. Saturday, February 14, 2009

It will be difficult not to fall off:

For Mr. Obama, the national debt has become a pressing dilemma. If he transitions too quickly from priming the economy with money to pulling back for the sake of fiscal rectitude, the president risks choking off whatever economic recovery he might spark in the next year. Ms. Romer points to the seesaw nature of the New Deal, when President Franklin D. Roosevelt would spend big one year and then back away the next, never allowing the economy really to get traction.

But if the administration waits too long to address the deficit, long-term interest rates may have to rise to attract buyers for all those Treasury bonds. That too could send the economy back into recession.

I'm defining "fall off" as a fate similar to Japan's since the mid-90s: lots of "stimulus" but no recovery. Lots of new infrastructure, but much of it wasteful. High debt-to-GDP ratios but little or no growth. An aging population putting increasing pressure on the budget through entitlement obligations. A banking system in flux, with a number of "too big to fail" zombie banks whose outright collapse would be massively damaging (see: Lehman Bros.) but whose continued existence prevents necessary adjustment in the financial sector.

The U.S. is not Japan, and we have some advantages over the Japanese (i.e. greater demand for our debt at lower yields, less dependence on exports to fuel the economy), but there are some parallels here and it is worth keeping them in mind.


The Obama Tightrope
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