Oh, Obama

If debt accumulation meant growth, Greece and Italy would be the world’s leading economies: the European Union is absolutely right to oppose America’s spending frenzy.

Question: How do you recognize the first approaching Atlantic storm following Bush the Evil?

Answer: When both liberal columnist Paul Krugman and right-of-center David Brooks attack the economic policies of the Tunix-Europeans in the New York Times*.

“Bad leadership,” blusters Krugman. The Euro-bankers, he says, “seem weirdly complacent” after missing the depth of the crisis. He adds, “To hear anything in America comparable to the know-nothing diatribes of Germany’s finance minister you have to listen to, well, Republicans.” Brooks compares the Europeans to Marie Antoinette, who obviously didn’t foresee the guillotine, and accuses them of preferring “a free-ride on the stimulus packages that the Americans and Chinese are already paying for.” Some, he says, “reject the idea of using fiscal policy to end recessions.”

It may be that the Europeans (once again) are timid, disjointed and without leadership. But Krugman and Brooks both missed a few fine distinctions here. For example, Merkel’s forces came up with a stimulus package of 3.4 percent of GDP, almost three times that of Sarkozy, who managed only 1.3 percent. But the Europeans are basically right in their skepticism: Keynes doesn’t work.

Anyone interested in the theoretical basis should read the latest studies on the subject as laid out by John Cogan/John Taylor (Stanford) and Tobias Cwik/Volker Wieland (Frankfurt). In layman’s language, these four argue that 80 years after the crash of 1929, when there were no social systems in place, every stimulus dollar would not have the $1.50 worth of effect that Obama’s economic advisor, Larry Summers, claims, but would have the effect of only 40 cents. If they’re right, Obama’s $800 billion stimulus package would only result in 600,000 new jobs – that would be a cost of $1.33 million dollars apiece!

Of course, people can vehemently disagree over these models, but whoever believes in Keynesian economics would have a hard time presenting convincing proof. It’s undeniable, however, that Obama has unleashed a mighty wave of debt. The Congressional Budget Office (CBO) warns that the budget deficit will reach $1.8 trillion, roughly half of Germany’s entire economic output. Measured as a percentage of GDP, the deficit would balloon to 13 percent, four times the allowable limit in the Euro zone.

If debt accumulation meant growth, Greece and Italy would be the world’s leading economies, as they drag the highest debt (nearly 100 percent of GDP) around the West behind them. And where will the ten trillion dollars come from that Washington will have to borrow in the coming years? From the Chinese, who already hold far too many American bonds? From the Middle Eastern Sheiks, who are now only getting $50 a barrel for their oil? No, the Fed will have to print money (or, more politely put, buy back billions of dollars worth of treasuries) and thereby stoke up the worst inflation since the days of the Korean and Vietnamese wars.

Obama’s stimulus package is pure Keynesian fireworks. The effects are already well known: everyone will ooh and ah, but the heavens will sparkle only very briefly. If we get the financial markets back in shape (something that will cost trillions, anyway), then the economy will heal itself.

*Translator’s Note: a reference to those Europeans following alternative philosophies; the Tunix Congress in Berlin during the late 1970s gave rise to, among other things, the newspaper die Tageszeitung and the Green Party