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Remember the guy who talked about change? Where'd he go?

In 2006, Obama said this:

The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies...

Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year, the Federal Government will spend $220 billion on interest. That is more money to pay interest on our national debt than we'll spend on Medicaid and the State Children's Health Insurance Program. That is more money to pay interest on our debt this year than we will spend on education, homeland security, transportation, and veterans benefits combined. It is more money in one year than we are likely to spend to rebuild the devastated gulf coast in a way that honors the best of America.

And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.

Every dollar we pay in interest is a dollar that is not going to investment in America's priorities. Instead, interest payments are a significant tax on all Americans -- a debt tax that Washington doesn't want to talk about. If Washington were serious about honest tax relief in this country, we would see an effort to reduce our national debt by returning to responsible fiscal policies...

Increasing America's debt weakens us domestically and internationally. Leadership means that "the buck stops here." Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

Sadly, times have changed. Obama is currently claiming that, if Congress doesn't raise the debt limit, "it could unravel the entire financial system" and we would have "a worse recession than we already had, a worse financial crisis than we had already... So we can't even get close to not raising the debt ceiling."

Taking those quotes together, it appears Obama is declaring himself a leadership failure. It might be that Obama's being a little hard on himself though. After all, the responsibility for the Great Recession lies elsewhere.

Besides, the decision of whether or not the debt limit should be raised again isn't all that important anyway. The more important issue is the incentive the government has to continue to spend when it knows that the debt limit will be increased. In economics, this is referred to as moral hazard, whereby a party who is insulated from risk behaves differently than they would behave if they were fully exposed to the risk.

In this case, the government's behavior is to continue to spend, thus shifting the burden of bad choices "onto the backs of our children and grandchildren" (as Obama put it so poetically). Why? Because, regardless of the theatrics in Washington, D.C., there isn't any immediate or short-term risk that the government won't be able to pay its bills or take on more debt. The government is "doing the moral equivalent of yelling "Fire!" in a crowded theater," and purely for political posturing.

Moral hazard is also the reason why bankers are continuing to prosper while most of the rest of us are seeing layoffs, depleting savings, and becoming homeless. Spending money on social programs and risk-taking are certainly decisions that can be made to further goals. But subsidized risk - which is what taking on more government debt amounts to - is a moral hazard. For, as Obama said, "We will raise the debt limit. We always have. We will do it again."

In other words, there isn't any risk; therefore, the government can behave differently than it would otherwise.

Do you agree with Obama's 2006 statement that the debt problem is a leadership failure? What do you think should be done about the debt limit? What would be the harm in raising the debt limit to a quadrillion dollars? If Obama is a failed leader, who among the Democrats could replace him and win the next presidential election, especially given the intellectual bankruptcy in politics?

Economics 101: Moral Hazard


Original posting by Braincrave Second Life staff on Jul 18, 2011 at http://www.braincrave.com/viewblog.php?id=603

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