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THE 10-SIGMA EVENT OF FISCAL POLICY
We need to honestly examine the role fiscal policy played in modern financial history.
There is an image of President Barack Obama as being one of the most spendthrift leaders in modern history. Although it is true that the United States federal debt ballooned under his watch, most of that increase resulted from automatic stabilizer programs such as unemployment insurance and welfare payments.
Obama took over as President on January 20th, 2009 just as the Great Financial Crisis was beginning to bite. Before that point, during the previous four decades, the United States had three years when the federal government discretionary spending had fallen on a year over year basis. The 1960s saw two of those discretionary budget cuts – 1964 and 1968 - and the third was 1995. Prior to 2009, year after year, the United States government had for the most part consistently increased the discretionary spending of the federal budget.
Then Obama took office. His first year after the crisis, the discretionary budget was held approximately flat with just the tiniest downturn. But then for the next four years, the discretionary budget had unprecedented year-over-year declines.
Even though the United States had previously never experienced two years in a row of discretionary spending cuts, under President Obama they had five consecutive years of declines!
If the math nerds that run risk books were to describe this collapse, they would probably describe it as a 10-sigma event. Three declines over forty years to five in a row?
President Obama’s reputation as being loose with the purse strings is especially ironic given that his first term was the tightest fiscal policy America has experienced in modern times.
It is no wonder that Fed Chair Ben Bernanke was so persistent in his pleas for fiscal aid. Not only was the Federal Government not helping, they were engaging in pro-cyclical fiscal cuts.
I know this post will strike many of you as insane. I can hear it already - "Obama didn't cut enough - that's why we are in this mess!" I understand your point - no need to send me your hard money lectures. I disagree that a time of private sector retrenchment is when to find religion about balancing budgets. So, if you advocate that economic recessions should see the government add to the economic pain with pro-cyclical spending cuts, well then, we're just on different pages.
Today as we struggle with an increasing ineffectiveness of Central Banks to stimulate developed economies, we need to examine the role that governments play with their fiscal policies. It can begin with taking an honest look at the recent past and asking whether fiscal policy made the problem better or worse.
Thanks for reading,