Let's start with a couple of well known public facts as assumptions in our analysis:
- The Democratic congress, at Obama's behest, is currently proposing an economic stimulus package of $825 billion in tax cuts and spending. This may swell to $1 trillion before it is sent to Obama's desk.
- Obama asserts in his speeches that he will create or preserve 3.5 million jobs with his economic stimulus package.
- Federal deficit spending projected for 2010, the first year of Obamatopia, is $1.3 trillion.
If you assume job creation every single day of a 4 year Obama presidency (i.e., 1460 days), jobs will have to be created at an average rate of almost 2,400 jobs/day or 72,000 job/month. To put this number into perspective, according to the US House of Representatives Committee on the Budget report issued on July 31, 2008 (a blatantly Democrat spin job, I admit), average job creation needed simply to keep pace with the growth of working age population is 150,000 jobs/month. During the years of the Bush administration, job growth averaged 58,000 jobs/month. During the years of the Clinton administration, job growth average 210,000 per month. Seems like we should get a lot more jobs for the money spent.
Can we afford the Keynesian approach to stimulating the economy. While the Bush administration has been reviled as a profligate spendthrift, as a percentage of GDP, the annual federal deficit has been less than 3% annually on average, and less than the 5% average of the Clinton administration. Obama is now proposing annual budget deficits for the next several years approaching 10% of GDP. As you can see from the chart at the left, deficits of this magnitude have not been seen since WWII.
A critical assumption of the Keynesian theory is that the economy has the inherent means to satisfy consumer demand. Another way of stating this assumption is that the economy has sufficient manufacturing capacity to satisfy consumer demand and needs only to add jobs to increase output. Unfortunately, several factors mitigate against the success of Keynesian economics in the United states today. First, the process of globalization over the past several decades has shifted the basis of our economic growth to consumption rather than production. Businesses have moved factories overseas (China, Japan, Latin America) eliminating the capacity to add jobs in this economy. Second, this consumption has been fueled by consumer debt sending US dollars overseas. Third, savings rates in the US are near zero. Fourth, the largest holder of US debt and US currency reserves (our largest trading partner, China), has strong incentives not to invest its excess dollars here and to instead spend domestically to stimulate demand at home because the slowing of our consumer spending has caused a decline in its economic growth that could lead to regime instability.
Another factor that cannot be quantified is the willingness of foreign investors to continue to finance US debt by purchasing US Treasury bills and bonds. Presumably there is some risk aversion limit where US debt becomes so large and the expectation that that debt will be paid back becomes so small that absent huge interest rate increases, there will be no buyers. This will become especially critical as the baby boomer generation begins to draw social security and medicare.