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April 15, 2009

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ms

So do you think the Obama expenditures--not TARP, but on infrastructure, energy, health care, etc.--that he claims are temporary will have the same effect? Is it possible to make large outlays on changes and then have much smaller outlays on maintenance? If so, I might be able to support his expenditures. I think they are good things, I just think running up the national debt in a depression is madness.

Nathan Smith

"So do you think the Obama expenditures--not TARP, but on infrastructure, energy, health care, etc.--that he claims are temporary will have the same effect?"

No. I think investors will regard the new spending is permanent and it will crowd out private spending. Some recovery will occur because of monetary policy and the economy's natural self-repair as people adapt.

TARP expenditures actually may do some good, precisely because they're like war: people *hate* them, so they'll die politically from their own popularity.

"Is it possible to make large outlays on changes and then have much smaller outlays on maintenance?"

For infrastructure yes. But to ramp up infrastructure spending typically takes years. Most of the spending will come during a recovery-- or else during an ongoing depression when it is more unaffordable than it appeared *ex ante*. Also, since the best (highest-value-added) projects would have tended to be funded anyway, if you deliberately spend in order to spend, you'll tend to finance lower-quality stuff.

This argument doesn't apply to health care and energy at all.

"I might be able to support his expenditures. I think they are good things..."

Yes, but the problem is that the benefits are likely to be radically smaller than the costs. This is particularly true with energy, where we're pouring money into what are likely to be a lot of boondoggles in order to save energy at a time when energy is already cheap. More health care spending, too, will probably just

"I just think running up the national debt in a depression is madness."

I disagree. Running up the national debt in a depression can be quite sensible. Unfortunately that's not the best characterization of what Obama is doing. Obama is putting the US on a fiscal course that entails *permanent* deficit spending at rates faster than US economic growth, even if the economy recovers robustly, which the debt makes it less likely to do. It sounds extreme to say "bankruptcy," but I don't see how one makes the case that the US is not on a path to bankruptcy right now. The only reason this outcome seems unlikely is that one hopes the American people will acquire the wisdom to throw the Democrats out of power. But the extremely low intelligence voters displayed in 2008 makes any forecast based on the assumption that the American people have any sense seem shaky.

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