It seems like just a year or so ago that deficit spending was evil, irresponsible, and an attack on America’s future.  In fact, it was just a year ago, when Democrats and the media excoriated George Bush for cutting taxes to stimulate growth while increasing federal spending after 9/11 and during the war on terrorists.  Now, however, Democrats and the media cheer as Democrats demand a rate of deficit spending unlike anything seen since World War II:

The Congressional Budget Office released its latest budget forecast yesterday, and we now really do have red ink as far as the eye can see. Thanks to a 6.6% decline in revenues due to recession, a spending increase of some $500 billion or 19%, and assorted federal bailouts, the U.S. deficit for fiscal 2009 (ending September 30) will nearly triple to $1.19 trillion. That’s 8.3% of GDP, which CBO says “will most likely shatter the previous post-World War II record high of 6.0 percent posted in 1983.” It certainly blows away any deficit this decade, not to mention the Reagan years when smaller deficits were the media cause celebre.

But there’s more. None of that includes the new fiscal “stimulus” that President-elect Obama has promised to introduce upon taking office in two weeks. The details aren’t known, but Mr. Obama and Democrats have been talking about at least $800 billion, and probably $1 trillion, in new spending or various tax credits and reductions over two years. Toss that in and add more expected bailout cash, and if the economy stays slow the deficit could reach $1.8 trillion, or a gargantuan 12.5% of GDP. That 2006 Democratic vow to pass “pay as you go” budgets seems like a lifetime ago, which in political terms it was. …

Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington — and fast.

Part of this gets driven by panic.  A few years ago, Alan Greenspan famously criticized what he called “irrational exuberance” on Wall Street, causing a brief market downturn.  What we have now could be called “irrational despair,” the notion that this recession will be greater than anything ever seen since the Great Depression.  Barack Obama today offered the reversal of FDR in his speech, in which he seemed to say that the only thing we don’t have to fear is fear itself.

All of this hysteria goes to one purpose: to create a sense of panic that will make any government intervention seem rational and reasonable.  Instead of taking policy one step at a time, schemes and plans get made only to be eclipsed by even more grandiose schemes and plans without ever having tried anything else first.  The TARP plan was never even given the chance to work, thanks to a panicked Secretary of the Treasury who literally begged for its funding and then used the money to start nationalizing private enterprises.

What gets built in a panic will not get dismantled when the hysteria ends.  We are creating a baseline of expected government costs that the Wall Street Journal warns will endure as an expectation.  America saw this after FDR’s New Deal and LBJ’s Great Society.  Once Congress establishes a new level of confiscation and spending, it never reduces it — and only on occasion has kept it from growing.

Perhaps we have gone too long between recessions to understand how to handle them.  We had much worse economic prospects in the 1970s and had much less panic involved at the time.  We saw then what massive government intervention produced — inflation, stagnation, and regulatory paralysis.  Instead of drafting massive amounts of investment-capable capital out of the markets, we should be clearing the way for its use.  Let’s hope it doesn’t take another decade like the 1970s for people to remember that.

Update: King Banaian has more thoughts along these same lines, along with the numbers to back them up:

But I think much of this is hyperbole. Take for example “2 million out of work.” The context for this is a workforce over 140 million people. Through November, the 12 month percentage change in employment is a decline of 1.4%. (You can play with the data.) This doesn’t even match the 12-month percentage change in March 2002, hardly a period that called for the drama of this speech. Payroll employment declines of 2.5% or more have occured in both the 1974-75 and 1981-82 recessions. We may get to that level; I think that’s more likely than not some time in the next six months, at which point you will say “4 million out of work” rather than two. But let’s keep some perspective rather than dwell on “we could lose a generation of potential and promise.” That’s just bathos. Four million jobs lost sucks, but it’s not without recent precedent when the size of the economy is accounted for.

That same perspective is needed elsewhere. 2.8 million more people involuntarily in part-time work? Take a look at the data. 25% of them are workers age 16-24. We don’t have data before 1994 for the unemployment series that includes part-time workers who wish they were full time (known as U-6), and we know it’s higher than it has been since we’ve tracked the current series. But it was pretty high in 1994, also not a date when we thought the end of the world was nigh.

The lost GDP? From CBO’s budget outlook, it’s on a par, in percentage terms, with the 1974-75 recession. (See Figure 1 in the link on page 2.) Indeed, if you take that 8% gap and use Okun’s law, you’d estimate excess unemployment of 8/2.5 = 3.2% approximately. The CBO estimates the natural rate of unemployment to be 4.8%, so the expectation from that would be an average unemployment rate in 2009 of 8%. Again, not that far out of line from other recessions, and better than 1981-82.

8% has only a single digit.

Read it all, and quit weeping.