Tuesday, February 02, 2010

Obama and the Doctrine of Fiscal Irresponsibility

By Richard Vedder

I am wondering if the day will come when one of the bond rating agencies announcies it is putting the sovereign debt of the United States government on its "watch" list for possible downgrading. The Bush Administration was irresponsible, but irresponsible within previously observed bounds of recklessness. The Obama Administration is proposing a budget with a deficit of over $1.5 trillion, or 10 percent of GDP. It looks like the three year deficit for fiscal years 2009, 2010, and 2011 will exceed $4 trillion, much larger than deficits, even in relation to the economy, than ever observed except in all-out war. For all the talk of budget freezes, etc., Obama wants to spent over 5 percent more next year over this year's bloated total.

I would be surprised if interest rates do not start increasing on long term debt, and that to deal with that Obama will pressure Bernanke into doing the equivalent of printing money. These are bad times fiscally, just as they are in the real economy with its 10 percent unemployment (despite two so-called "stimulus packages" that have had no positive economic effect whatsoever in my judgment).

Amidst all of this, as American families tighten their belts to deal with economic adversity, the president wants to nearly double Pell Grant spending. As I read the numbers, he wants to both expand a good deal the number of Pell recipients as well as the average grant size. A near doubling in the size of the program is proposed. Moreover, he wants to make it an entitlement --everyone, no matter their economic condition, their ability to complete college, etc., has a "right" to large federal grants.

This is a recipe for disaster. We have had a number of good things to say about Pell Grants over the years, and in many ways prefer them to other forms of federal aid. Yet a large expansion in numbers will bring students into the program who are less needy economically and likely to be marginal academically. A growing number of college students, if they are able to graduate, have a terrible time getting a job related to anything they studied in college. A huge expansion in the number of recipients and grant size is an invitaiton for bigger tuition hikes, more attrition of students prior to receiving a degree, and more underemployment of new college graduates.

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