Deficit Politics

White House Sends Signals on Deficit

By GERALD F. SEIB
Wall Street Journal
6/12/09

Think of the federal budget deficit as a nasty virus lurking inside President Barack Obama's plans, threatening both his efforts at economic recovery and his broader agenda. This virus will need long-term treatment -- years of it.

But the deficit also is becoming a significant short-term psychological problem that the administration has to deal with now. Put simply, if the administration can't convince the financial markets, the Congress and the public that it really, truly will cut into the deficit over time, even if it can't do so for a while, the long-term economic and political problems get a lot worse.

This week the warning signs began popping up. In financial markets, long-term interest rates rose to their highest level of the year, at least in part out of concerns over big government borrowing in the years ahead, raising a new threat to recovery in the housing industry.

And on the political side, Republicans showed they think the deficit is an issue they can use to good effect to attack the president. Sen. George Voinovich of Ohio, a longtime scold on fiscal responsibility, took to the Senate floor Wednesday to declare that Mr. Obama "must not be serious about addressing the growing national debt, or worse yet doesn't understand the fiscal crisis we are in, or even worse than that he just doesn't care."

All this is hardly lost on the president and his aides, of course, so they also have been busy this week trying to counteract any notions they are complacent about a projected $7 trillion in deficits over the next decade, even as they disperse billions of dollars to stimulate the economy and rescue the financial system.

First, Mr. Obama Tuesday called on Congress to pass legislation enshrining "pay-go" budget practices that require lawmakers to find a dollar of savings or taxes for every new dollar spent. (Skeptics, some within the president's own party, immediately noted that the proposal came with a multitrillion-dollar loophole because it would exclude from pay-go rules Medicare payments to doctors, changes in the estate and gift taxes, the Alternative Minimum Tax and extension of the Bush-era tax cuts.)

At the same time, the White House is preparing a plan to squeeze billions of additional dollars out of Medicare costs, which are the cause of so many long-term deficit woes. That comes a few weeks after Mr. Obama ordered cabinet members to find $100 million in administrative savings in their budgets, and pledged to find bigger savings elsewhere, a step that proved too token to have much psychological impact.

As all that suggests, the administration is embarking on some serious signal-sending to convince the world that it's on the case and committed to at least keeping the deficit as a share of gross domestic product to historically acceptable levels.

"I think we have been careful from the beginning to highlight that in the midst of a dangerous problem you need fiscal stimulus, but that in the long run the debt-to-GDP ratio has to be on a sustainable path," says Lawrence Summers, head of the White House's National Economic Council.

Administration officials also insist that the recent bond-market move to push up interest rates is less rooted in fears about government spending than some claim. The increases are as much the result of a belief that economic recovery is happening faster than expected, they argue, noting that the stock market and interest rates are rising in tandem.

"The journalistic narrative on the increases in interest rates" has "given more weight to concerns about the deficit" than is justified, argues one senior administration official.

In any case, officials say they recognize more will be needed over time. Eventually, the president will have to propose ways to hold down Social Security costs. And Obama aides continue talk of an eventual tax-reform plan that will generate more revenue.

But the big elephant in this room is health care. In the eyes of most Obama aides, the most important deficit-fighting measure of the next few months is the effort to pass a health-care overhaul that expands coverage without costing more federal dollars, and that makes systemic changes that hold down overall health costs.

The federal government, as the nation's single biggest buyer of health care, has more at stake in cost containment than anybody else. "We are addressing health care...because if you don't address that, you're on an unsustainable path on deficits," says Peter Orszag, the head of the president's Office of Management and Budget.

Mr. Obama was even more succinct in a Wisconsin appearance Thursday. Talking about inflation in health costs, he said simply: "If we don't get a handle on it, we're not going to be OK."

___________________________________________________________

GOP blew up budget themselves

CYNTHIA TUCKER
Atlanta Journal Constitution
6/14/09

It would be easier to take Republicans seriously on government spending now if they’d ever complained about spending during the tenure of President George W. Bush — especially during the six years when they controlled government and could have cut spending dramatically. They could have fought the Pentagon on expensive and unnecessary weapons, eliminated farm subsidies to wealthy growers and pared back Medicare.

Instead, they did just the opposite. They slashed taxes and substantially increased government spending, burning through the estimated $800 billion annual surplus the federal government had accumulated under Bill Clinton. The Republican-dominated Congress even passed a huge entitlement, the fiscally foolish prescription drug plan for the elderly.

Now, though, with Democrats in control, Republicans are fiscal conservatives again — or so they say. All the fuss about mounting deficits prompted President Barack Obama to tell Congress last week that he’d reintroduce the “pay as you go’” law, which expired in 2002. It would require new spending programs be paid for with budget cuts or revenue increases. And it’s not a bad idea.

But, believe it or not, Obama’s recent spending has contributed only a couple of shovels-full toward digging this deep fiscal hole. The recession, which slashed tax receipts, did much more.

And policies implemented by the previous administration were like a giant backhoe from the movie “Transformers” — digging, digging, digging.

President Bush chose to overthrow Saddam Hussein and hide the costs off-budget, becoming the first president to go to war without a tax increase to pay for it. By the time all U.S. troops have left Iraq, that war is likely to have cost two trillion dollars. And Bush’s tax cuts would have left us in a fiscal slough even without the recession. With an aging population and more spending on entitlements, there’s a growing gap between revenue coming in and revenue going out.

For all the Republicans’ criticism of the stimulus package, Obama and the Democratic-controlled Congress were right to pour money into the fight against the Great Recession. Most economists agree that the federal government shouldn’t worry about deficits when the economy is edging toward the apocalypse. The $787 billion stimulus package is a key reason Federal Reserve Chairman Ben Bernanke now sees “green shoots” suggesting an economic upswing by next year.

Obama isn’t off the hook, of course. If he runs for re-election in 2012 and the country is still swimming in red ink, he’ll have a huge problem. So there’s every political reason to believe he’ll have come up with a plan to reduce deficits before then.

But with Republicans trying to reclaim the mantle of fiscal conservatism, they ought to have something important to contribute to the debate. They don’t. The plan introduced by House Republicans, which they claim would save $75 billion a year, has specific spending cuts amounting to only about $5 billion. During the March budget debate, Sen. John McCain (R-Ariz.) slammed “earmarks,” but Republicans grabbed a substantial portion of them for their districts.

They spent no time fighting against huge money-wasters such as agricultural subsidies. Instead, Republicans such as Georgia Sen. Saxby Chambliss helped protect subsidies for agribusinesses. Worse, the GOP’s signature economic prescription is cutting taxes. That’s voodoo economics, just as it was when George H.W. Bush said so in 1980.

If that’s the best the GOP can do on fiscal conservatism, they won’t regain credibility any time soon.

_____________________________________________________

Video of First Article