Fri, 27 Feb 2009 03:07:49 +0000 – By Peter FerraraDirector of Entitlement and Budget Policy, Institute for Policy Innovation/ General Counsel of the American Civil Rights Union
Last week, President Obama led the adoption of almost $1 trillion in new federal spending in a supposed stimulus package, the largest increase in government spending in world history. But borrowing $1 trillion from the private economy to spend $1 trillion is not going to stimulate anything on net.
On Tuesday night, Obama told us he is now going to cut the deficit in half. Now we've seen his budget and it's clear that the primary way he is going to do that is by extending universal health coverage to everyone. Yep, Obama and his economics gurus think they are going to gain huge budget savings by adopting the largest new entitlement in world history.
Obama is rapidly taking us back to all of the policies of Jimmy Carter and the 1970s. And that is going to produce the same results Jimmy Carter got.
There should be an economic recovery later this year, because in another two months this will be the longest recession since World War II. But with the huge $2 trillion deficit Obama's spending spree has already built up, almost 5 times Reagan's largest deficit, a significant recovery is going to lead to rapidly rising interest rates. That will work towards reversing recovery.
With the Fed madly pumping up money as well, any recovery is also going to reignite inflation. The Fed is planning to cut back on money and credit at the first sign of recovery to preempt inflation, but doing that will further increase interest rates. So the betting here is the Fed will back down from that, and inflation will surge.
The cap and trade legislation Obama proposed on Tuesday night to combat global warming (a fairy tale that doesn't exist) will impose another trillion dollars in costs on the economy, working further to reverse recovery. Energy costs will soar, including the return of high gas prices, exacerbated further by the new restrictions on oil drilling and production the Obama administration has already adopted. Those restrictions will also lead to the return of Jimmy Carter's gas shortages.
Between high energy costs, higher marginal tax rates, higher interest rates and resurgent inflation, the recovery will falter, and high unemployment will persist. In the 1970s, it was called stagflation.
Peter Ferrara is Director of Entitlement and Budget Policy for the Institute for Policy Innovation, and General Counsel of the American Civil Rights Union, among other posts. He served President Reagan in the White House Office of Policy Development, and the first President Bush as Associate Deputy Attorney General of the United States.