Friday, March 27, 2009

Cliff Diving: The US Economy

image from BMO economics research

The above is the CBO (Congressional Budget Office) estimate for Obama's budget in the context of the recent past. There is no denying that it is a bloodbath of red ink. The tragedy is that the Bush administration didn't nip the problem in the bud back in 2007 when the cost would probably have been one-fifth the size (remember, Ben Bernanke assured everybodey that it was "contained" to the sub-prime market in early 2007 and that was only a few hundred billion dollars, not trillions).

If you look not at dollars, but at GDP percentage, it doesn't look as bad. It is a lot of money, but the other option -- falling into a Great Depression -- is so very, very bad that only ideologues like the Republicans are willing to argue that the costs should be foregone in favour of a complete crash in the economy. Reagan was a happy warrior who ran up a 5.6% deficit and Republicans cheered him on. He did that during a vanilla recession, not a recession threatening to become a depression.

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