Obama’s budget shows he’s no Keynesian

Commentary: He links fast growth with fiscal contraction in Washington

By MarketWatch

WASHINGTON (MarketWatch) — In his 2013 budget proposal released on Monday, President Barack Obama has now fully embraced austerity as the recipe for economic success.

Obama is no longer a Keynesian.

Although the economy remains weak and unemployment is still elevated, Obama proposes the sharpest contraction in fiscal policy in more than 40 years. And, in the midst of those tax increases and spending reductions, he’s predicting a booming economy growing well above the economy’s long-run potential for the next six years — averaging an incredible 3.6%. Read our news coverage of the White House budget plan.

In short, Obama is agreeing with his Republican critics who say that what the economy really needs right now is a rapid move toward balanced budgets. By contrast, Keynesian economists would say that reducing budget deficits now, when we still have so much slack in the economy, would slow growth. They recommend running high deficits until the economy is stronger, and then moving to balance.

Next year, the Obama budget proposal sees federal tax receipts increasing by 2 percentage points of gross domestic product, and federal outlays falling by 1.1 percentage points of GDP. The total drag from fiscal policy would total 3.1% of GDP.

The last time the government tightened fiscal policy that much was in 1969, when a 10% income tax surcharge was implemented to pay for the Vietnam War. The immediate results were terrific in one sense: the federal budget was balanced in 1969, the only time it was balanced between 1960 and 1998.

Unfortunately, the balanced budget was a major cause of the recession that began in December 1969. All too often over the past 90 years, attempts to reduce deficits or increases surplus have contributed to ensuing recessions.

A recession is what the Congressional Budget Office thinks might happen next year if the government goes ahead with deficit-reduction measures already baked into federal law, including the sunsetting of the Bush-era tax cuts and the automatic budget cuts agreed to last year when Obama and Congress settled the debt-ceiling standoff.

For 2013, the CBO projects growth of just 1% (as opposed to 3% in the White House budget), largely because of austerity measures. According to the CBO, growth could be as high as 4.1% next year if the government delayed its plans to reduce the deficits.

It’s hard to fathom how the economy will be able to grow at such a rapid pace over the next three years if fiscal policy is exerting such a powerful drag.

—Rex Nutting