The View from the Right

Greg Mankiw is a right wing economist who was chairman of Bush's CEA (Council of Economic Advisors). Here's his viewpoint on Obama's attempt to cut $100 million from the budget:

Fiscal Responsibility

by Greg Mankiw

The Washington Post reports:

President Obama plans to convene his Cabinet for the first time today, and he will order its members to identify a combined $100 million in budget cuts over the next 90 days, according to a senior administration official....Earlier this month, both chambers of Congress passed Obama's $3.5 trillion budget outline for 2010, which includes unprecedented new investments in health care, education and energy. But the huge budget, which contemplates a $1.2 trillion deficit, has drawn the ire of small-government conservatives, who say that such high deficits jeopardize the nation's economic future.
Just to be clear: $100 million represents .003 percent of $3.5 trillion.

To put those numbers in perspective, imagine that the head of a household with annual spending of $100,000 called everyone in the family together to deal with a $34,000 budget shortfall. How much would he or she announce that spending had be cut? By $3 over the course of the year--approximately the cost of one latte at Starbucks. The other $33,997? We can put that on the family credit card and worry about it next year.

The tragedy of the Great Depression was that FDR was harrassed and pushed and bullied into "balancing the budget" in the year 1937 which then caused the country to go into another deep slide with industrial production falling nearly 30% from mid-1937 to mid-1938. This was as bad as the 50% fall over 3 years that occurred from mid-1929 to mid-1932. This was completely unnecessary. It was caused by right wing opponents pressuring FDR to "balance" the budget. So it is sad to see Obama trying to curry favour with the right by talking of "budget cuts".

In a severe recession/depression the government need to stimulate, not save. The consumer and business are "saving" too much right now because they are terrified. If government "saves" it just creates more shrinkage in the economy. It is a tragedy that a very smart economist like Mankiw is putting this kind of pressure on Obama by insinuating that he needs to "cut more" from the budget. Mankiw knows the Keynesian economics is needed in this situation. He knows the government has to act as "spender of last resort". It is a shameless cynical move on his part to play up a need to "cut waste" from the budget. He knows better as an economist. But as an ideologue he can't resist joining the right wing crowd to put pressure on Obama to do something that he shouldn't do. He knows that exactly this pressure extended the Great Depression when it pushed FDR into "balancing" the budget in 1937. Shame on Mankiw!