There are two basic truths about the enormous deficits that the federal government will run in the coming years. The first is that President Obama's agenda, ambitious as it may be, is responsible for only a sliver of the deficits, despite what many of his Republican critics are saying. The second is that Mr. Obama does not have a realistic plan for eliminating the deficit, despite what his advisers have suggested....[A]s President Bill Clinton was leaving office, [t]he Congressional Budget Office estimated that the government would run an average annual surplus of more than $800 billion a year from 2009 to 2012. Today, the government is expected to run a $1.2 trillion annual deficit in those years....
You can think of that roughly $2 trillion swing as coming from four broad categories: The first category — the business cycle — accounts for 37 percent of the $2 trillion swing. It's a reflection of the fact that both the 2001 recession and the current one reduced tax revenue, required more spending on safety-net programs and changed economists' assumptions about how much in taxes the government would collect in future years.
About 33 percent of the swing stems from new legislation signed by Mr. Bush. That legislation, like his tax cuts and the Medicare prescription drug benefit, not only continue to cost the government but have also increased interest payments on the national debt.
Mr. Obama's main contribution to the deficit is his extension of several Bush policies, like the Iraq war and tax cuts for households making less than $250,000. Such policies — together with the Wall Street bailout, which was signed by Mr. Bush and supported by Mr. Obama — account for 20 percent of the swing.
About 7 percent comes from the stimulus bill that Mr. Obama signed in February. And only 3 percent comes from Mr. Obama's agenda on health care, education, energy and other areas.
--"America's Sea of Red Ink Was Years in the Making," David Leonhardt, New York Times (6.9.09)
As I observed in my last post, Republican operatives have done a good job of shifting responsibility for the Bush era policies and deficits onto Obama. They are holding to the time-honored approach of making the same misleading or untrue statements over and over again until they stick, until they are somehow accepted by many as true--regardless of more truthful rebuttals. But as the NYT article makes clear, the facts are that Obama has added but little to the overall budget deficit. That responsibility rests with the G. W. Bush administration, and all the lies that can shamelessly be told will not change that.
What is more questionable, or premature at least, is the NYT opinion that, "Obama does not have a realistic plan for eliminating the deficit." It is very early in this process, and Obama is clearly still examining, discussing, and formulating alternatives--he's still learning--as he addresses the best policy options, promoting them, and negotiating the political mine fields. And the solutions to some of the challenges may not be politically workable in one step; they may take two or more. Which is not to say that the NYT is wrong about what is now on the table, but it is wrong to imply that this iteration is likely the last. More from the NYT on their concerns about the adequacy of Obama's response to date--and the disingenuous lack of answers from the Republicans, as well:
Mr. Orszag says the president is committed to a deficit equal to no more than 3 percent of gross domestic product within five to 10 years. The Congressional Budget Office projects a deficit of at least 4 percent for most of the next decade. Even that may turn out to be optimistic, since the government usually ends up spending more than it says it will. So Mr. Obama isn't on course to meet his target. [But see The Economist article and comments, below, that are more generous in setting the context and more optimistic about the possibilities.]
But Congressional Republicans aren't, either. Judd Gregg recently held up a chart on the Senate floor showing that Mr. Obama would increase the deficit — but failed to mention that much of the increase stemmed from extending Bush policies. In fact, unlike Mr. Obama, Republicans favor extending all the Bush tax cuts, which will send the deficit higher.
Republican leaders in the House, meanwhile, announced a plan last week to cut spending by $75 billion a year. But they made specific suggestions adding up to meager $5 billion. The remaining $70 billion was left vague. "The G.O.P. is not serious about cutting down spending," the conservative Cato Institute concluded.
What, then, will happen?
The solution, though, is no mystery. It will involve some combination of tax increases and spending cuts. And it won't be limited to pay-as-you-go rules, tax increases on somebody else, or a crackdown on waste, fraud and abuse. Your taxes will probably go up, and some government programs you favor will become less generous.
Doubtless these conclusions are true. But the solutions, the particular programs will likely have to be introduced in stages. Yesterday, President Obama called on the AMA at their annual meeting to recognize that our health care challenges "are a ticking time bomb." He offered the outline of his approach to reducing health care costs, but also made some specific, necessary first proposals. The open question is, how quickly will further, specific and politically practicable proposals be introduced by Obama's team? And more, perhaps, when will it become evident to the public, and key industry and political players, the importance of supporting now the more difficult and painful changes necessary to reforming existing health care and other failing policies? Timing and political effectiveness are critical.
This same topic of public debt was addressed more universally and at greater length in the cover piece of the most recent edition of The Economist ("Government Debt: The Big Sweat") and in the Leaders section:
THE worst global economic storm since the 1930s may be beginning to clear, but another cloud already looms on the financial horizon: massive public debt. Across the rich world governments are borrowing vast amounts as the recession reduces tax revenue and spending mounts—on bail-outs, unemployment benefits and stimulus plans....
Will they default, inflate or manage their way out?
This alarming trajectory puts policymakers in an increasingly tricky bind. In the short term government borrowing is an essential antidote to the slump. Without bank bail-outs the financial crash would have been even more of a catastrophe. Without stimulus the global recession would be deeper and longer—and it is a prolonged downturn that does the greatest damage to public finances. But in the long run today's fiscal laxity is unsustainable. Governments' thirst for funds will eventually crowd out private investment and reduce economic growth. More alarming, the scale of the coming indebtedness might ultimately induce governments to default or to cut the real cost of their debt through high inflation....
---"The biggest bill in history: The right and wrong way to deal with the rich world's fiscal mess," Leaders section, The Economist (6.11.09)
The Economist recognizes what everyone should understand: most industrialized countries are in this public debt situation because they now have to be. It was the only way to quiet the financial and economic "perfect storm," for which they themselves set the occasion. If much of America's budget deficit is driven by other factors as well, responding to the broken financial system, failing banks and a flagging economy surely played a significant role. But the response has to be prudent, measured, and well timed suggests The Economist; analysis, planning, rethinking and re-planning will likely be a necessary ongoing process. More from The Economist:
What should policymakers do? A sudden fit of fiscal austerity would be a mistake. Even when economies stop shrinking, they will stay weak. Japan's experience in 1997, when a rise in consumption taxes pushed the economy back into recession, is a reminder that a rush to fiscal tightening is counterproductive, especially after a banking bust. Instead of slashing their deficits now, the rich world's governments need to promise, credibly, that they will do so once their economies are stronger.
Good points. And that is necessarily the approach of the Obama team to the evolving economic and political realities, even if the financial press and many factions appear unsatisfied with anything less than a complete, perfect, and politically saleable plan immediately. (Yes, I know they are meeting deadlines, filling the ceaseless demands of the news cycle, selling print space or air time. But still.) And the realities of congressional party politics and various business interests also rightly give us pause; for there has been little to be optimistic about in the workings of Congress or the response of business since TARP and the stimulus bill. The Economist raises the same concerns:
But how? Politicians' promises are not worth much by themselves....
Broadly, governments should pledge to clean up their public finances by cutting future spending rather than raising taxes. Most European countries have scant room for higher taxes....Even in the United States, where tax revenues add up to less than 30% of GDP, simply raising tax rates is not the best answer. There too, spending control should take priority, though there is certainly room for efficiency-enhancing tax reforms, such as eliminating the preferential tax treatment of housing and the deductibility of employer-provided health insurance.
The next step is to boost the credibility of these principles with rules and institutions to reinforce future politicians' resolve....
Yet nothing sends a stronger signal than taking difficult decisions today. One priority is to raise the retirement age, which would boost tax revenues (as people work longer) and cut future pension costs. Many rich countries are already doing this, but they need to go further and faster. Another huge target is health care. America has the most wasteful system on the planet. Its fiscal future would be transformed if Congress passed reforms that emphasized control of costs as much as the expansion of coverage that Barack Obama rightly wants.
This advice, overall, rings true and wise. And Obama's plans and actions appear consistent with this advise. Although, as the NYT article concluded, in addition to cost control and program reforms, the U.S. will likely also have to raise taxes. We--Obama and the Congress--will have to do whatever must be done. The Economist article admonishes us, "Instead of slashing their deficits now, the rich world's governments need to promise, credibly, that they will do so once their economies are stronger." It appears to most of us that Obama and his team are addressing issues and initiating proposals at break-neck speed, but they are also going only as fast as necessity and circumstances dictate. They are exercising pragmatism and patience, as well as resolve.
On the financial front, Bernanke and Geithner are constantly assessing and planning the next best steps in restoring the strength and regulatory oversight of our financial system. The war in Iraq is winding down, even if the war in Afghanistan is expanding. (Sometimes getting out of messes responsibly is painful and expensive at best--but exiting sooner rather later, would be my hope and pray.) And Obama is now directly leading the initiative to reform and restructure the health care system to significantly reduce per capita health care costs while providing access to all. Social security and Medicare will have to follow soon after. These articles have offered some sound beginnings of their own, ideas that have been often discussed before, and I would be surprised if most all of them aren't also embraced by Obama.
My confidence in Obama is clear, no doubt. If anyone has the package of personal and political skills to lead us through this budget crisis successfully, it is him. But he cannot do it alone. He will require continuing, often selfless and sacrificial, public support. And there will soon come a time when he will need bi-partisan Congressional support, as well. Still, players in the health care industry will try to play the spoilers. So, we will succeed only if we Americans act selflessly, responsibly, and accountably as one body in the national interest. But not even Obama may be able to deliver that.
http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html?_r=1&ref=todayspaper
http://www.economist.com/printedition/displayStory.cfm?Story_ID=13829461
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