The following is in response to Paul Kasriel’s commentary, Washington Had a Spending Problem, which was published on July 26:
Dear Editor,
I like Paul Kasriel’s material and read it often. In this case, however, he erred by using the first derivative to describe the magnitude of the current spending and deficits. The rate of change is an appropriate measure in the right context, but to suggest that the Obama administration’s spending is constrained because it isn’t growing at a very fast pace is not the right economic argument. The fact is, the deficit is huge. It may be growing at a lower rate, but the Obama deficit is starting form a higher base.
Kasriel’s logic is like a physician saying to a 400-lb man that he has lost weight because his rate of gain is now only 5% per year compared to a 10% rate of gain two years ago. The fact is the patient has continued to gain weight and is entering ever more dangerous territory, further threatening his health. Yes, his rate of gain is lower, but his morbidity conditions are worsening, posing escalating mortality issues.
Kasriel further compounds his misleading conclusions through his treatment of interest outlays. We are in an extraordinary low interest rate environment and everyone appreciates that this environment can’t last forever (although Bernanke did say last Tuesday that rates will remain low l at least until mid-2013). Yet, even a minor uptick – 25 bps or 50 bps – would change the debt service requirements dramatically. That would be like turning up the room thermostat on our overweight patient by one or two degrees. Our patient would become very uncomfortable very quickly, while a patient of normal weight would likely feel little or no change.
The real solution is not to paint rosy pictures using the current rate of gain, but to put our patient on a real weight-loss program. Then, when the room temperature rises, as it will inevitably, our patient will be in better health and better able to withstand the rising temperatures.
For Kasriel to suggest that our patient is in good condition despite his morbidity and mortality indicators is to deny the obvious. Our over-weight patient may be the leanest man in the room, and not gaining weight as fast as the others, but he is still in very poor health.
Michael O. Kokesh
Managing Director
Ramparts Asset Management Co., LLC
San Francisco, CA
