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Obama’s voodoo economics
Deficit Nonchalance
By Paul Craig Roberts
February 13, 2009 "Information Clearinghouse"

Who remembers economists’ hysteria over the “Reagan deficits”? Wall Street was in panic. Reagan’s fiscal irresponsibility was bringing the end of the world.The fiscal year 2009 federal budget deficit that Obama is inheriting, and adding to, will be ten times larger in absolute terms than Reagan’s biggest and a much larger share of GDP in percentage terms. Yet, economists are sending up no alarms. Paul Krugman, for example, couldn’t damn Reagan’s puny deficits enough. But today he thinks the deficit can’t be large enough! The central issue of the stimulus and bailout plans is how to finance the massive budget deficit. This issue remains unaddressed by economists and policy makers. As far as I can tell, the government, its advisers and cheerleaders think financing the deficit will be a cakewalk, like the Iraq War.I am tempted to claim that economists’ nonchalance about the massive deficit is an indication that Krugman and the whole lot of them are converts to supply-side economics--”deficits don’t matter.” I triumphed, and economists have become my acolytes. The Nobel Prize will arrive tomorrow.Only we supply-side economists never said that deficits don’t matter. We said that deficits have different causes and consequences. Some are problematic. Some are not, or are less so.Obama’s deficit is problematic. It is a massive deficit, far beyond anything ever before financed on planet earth. It is arriving at a time when pressures on the dollar as reserve currency have mounted from decades of rising trade deficits. The deficit is hitting the financial markets when the rest of the world is in turmoil from ingestion of toxic Wall Street financial instruments. The US must service massive debt when the US economy is hollowed out from the offshoring of manufacturing and professional service jobs. The Obama deficit is a far more serious deficit than the “Reagan deficits.”As President Reagan’s first Assistant Secretary of the Treasury for Economic Policy, my job was to find and implement a cure for “stagflation.”“Stagflation” was the word used to describe the worsening “Phillips curve” trade-offs between inflation and employment. The postwar policy of Keynesian demand management relied on easy money to expand employment and GNP and used recession and unemployment to cool down inflation when inflation got out of hand. Over the years, the trade-offs worsened. It took more inflation to get the economy going, and more unemployment to cool down the inflation. This problem worsened during Jimmy Carter’s presidency. Reagan used the “misery index,” the sum of the unemployment and inflation rates, to boot Carter from office.Keynesian economists concluded from the Great Depression that the way to maintain full employment was for the government to manage aggregate demand. If the sum of consumer and investor demand was not sufficient to maintain full employment, government would step in. By running a deficit in its budget, economists thought that government could add enough additional demand to bring employment up to full.'
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