StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Deficit Makes a Triumphant Return

02 Jun 2009
Posted by Stan Collender

Here's my column from today's Roll Call.

It’s Time to Start Talking About the Budget Deficit

Note that the headline says “talking” rather than “doing” something about the federal budget deficit.

This is a critical difference. It’s still not time to take any actions that will reduce this year’s deficit. In the current economic environment, doing that when private-sector economic activity has not fully recovered would be a Herbert Hoover-like move that would be as incorrect a fiscal policy now as it was back then.

That’s not to say that there haven’t been some positive economic signs in recent weeks. Some things, like consumer sentiment and the Dow Jones Industrial Average, have been moving upward. Other statistics, like unemployment and mortgage defaults, continue to lag behind. And, while it looks good, it’s not at all clear whether the recent uptick in the Dow is real or a bear market rally.

As a result, the unambiguous evidence that the economic downturn has ended and that policymakers need to begin shifting fiscal policy from deficit increases to deficit reductions doesn’t yet exist. That doesn’t mean, however, that it isn’t time to make cutting the deficit a major topic of conversation. To the contrary, even if the question of when has not yet been settled, this is almost the precisely correct moment to begin debating the hows and whys.

Part of the reason is simple logistics. If the current positive economic trends continue, 2011 will be the first full fiscal year for which reducing future deficits below current forecasts and projections will be the correct fiscal policy. That may seem like a long time from now, but the Obama administration will send its 2011 budget to Congress in just about seven months and, if the past is any indication, the Office of Management and Budget is already working on it. That makes it important that, at least behind the scenes if not actually out in the open for all to see, reducing the deficit be part of the current discussion.

Part of the reason is also the absolutely unassailable fact that, even when it’s obviously necessary and required, and even when there’s a consensus that it has to be done, reducing the budget deficit isn’t ever easy. This is true regardless of which political party is in power and even if strong leadership is in place that wants to make it happen. There’s obviously a great deal of relatively recent federal history that proves this point. But if you think hard-to-adopt deficit reductions are a relic of past budget wars and that the world has changed, look at the fiasco (and that’s too kind a word) in California to know that, even when there will be real and immediate negative consequences, the politics of deficit reduction is no easier now than it was before.

There are four other reasons that the talk about reducing the deficit needs to start now.

First, Washington’s access to the huge sums it will need to continue borrowing to deal with the economic downturn will be helped immensely if the bond market believes its borrowing needs will be less in the not too distant future. Increasing the market’s confidence in the federal government’s willingness to deal with the deficit by making it clear that fiscal as well as monetary policy is ready and willing to deal with the inflation concerns that have been expressed in recent weeks should also have some positive impact on the interest rates the Treasury currently is paying.

Second, the Obama administration has to begin to make good on what up to now has been a promise to Blue Dogs and other fiscally conservative Democrats that deficit reduction will move from the back to the front burner when the economy allows it.

The Blue Dogs so far have been willing to go along with what President Barack Obama has asked of them, including supporting the fiscal 2010 budget resolution and the stimulus bill, based on several important but nonetheless largely symbolic gestures. The most prominent of these was the fiscal responsibility meeting held at the White House three days before the Obama budget was released. To maintain the Blue Dogs’ support, which will be critical during the upcoming debate on health care, those gestures now need to start to be replaced with something more concrete.

Third, if the unambiguous signs that the economy has recovered exist in 2010 as many now expect they will, the biggest economic issue going into the Congressional elections may well be federal borrowing, interest rates and inflation, and the deficit will be blamed for everything considered wrong with any or all of them. That makes it imperative that Congressional Republicans and Democrats start to move quickly to stake a claim to deficit reduction if the issues that may be dominating the business and financial headlines when voters next go to the polls are all blamed on too much red ink.

Finally, the Obama administration needs to start talking seriously about the deficit now because, assuming the strength of the economy is no longer an issue at that point, the deficit could easily be the most salient economic issue when the president runs for re-election in 2012. By that point, the president’s promise to begin to reduce the deficit will have had two real tests — the fiscal 2011 and 2012 budget debates — and Congress will be debating his 2013 budget while the campaign is happening.

At that point, the deficits the administration promoted to deal with the economy are likely to be seen primarily as problems he caused if he hasn’t already taken steps to deal with them. Moving now to claim the issue and make some real progress will be the best way for the White House to avoid the political problems that will likely otherwise exist.

In this recession, as in

In this recession, as in 2001, there is a lot of investment capital sitting on the sidelines with few good investment opportunities. It isn't being used anyway. The Federal government could collect some of this revenue to support some of its spending without harm to the economy.

The problem is political. Republicans will use any tax increase against Democrats in an election and Democrats are going to do nothing and let the unaffordable Bush tax cuts go away on their own. The problem is that Republicans and a large base of their support are anti-tax. This group is large enough to block meaningful attempts to bring revenues into line with the types of programs that have a consensus of support. In the extreme, it ends up like California where a minority of ideologues can block the will of the majority.

The supply side philosophy of Reagan lives on in the minds of many voters, even though it is not true. It promises something (increased revenue) for nothing (tax cuts for the wealthy). Until the media and the public at large wake up to the fact that this has been proved wrong, we will continue to struggle to have sane fiscal policy.


Making some real progress

"If the current positive economic trends continue, 2011 will be the first full fiscal year for which reducing future deficits below current forecasts and projections will be the correct fiscal policy." Dry humor?

Let's see, why has it not occurred to anyone on the Hill that borrowing from a decade of tomorrows to get through today may not be good fiscal policy. Perhaps it's because we're really only borrowing the savings of the Chinese and the third world and we all know they aren't going to get paid back ever in real terms, are they?

It's time to use SDRs as the reserve currency. It's time to send teams of IMF bureaucrats from one end of Washington to the other to teach the current crop of politicians and their consituents what stringency and honest fiscal policy really feels like.


" In the extreme, it ends up

" In the extreme, it ends up like California where a minority of ideologues can block the will of the majority."

Welcome to Minnesota -- where a small group of rich anti-tax guys, allied with a governor motivated only by national political ambition, run the state government.

We don't need no friggin' legislature!


The problem is political.

The problem is political. Republicans will use any tax increase against Democrats in an election and Democrats are going to do nothing and let the unaffordable Bush tax cuts go away on their own. The problem is that Republicans and a large base of their support are anti-tax. This group is large enough to block meaningful attempts to bring revenues into line with the types of programs that have a consensus of support. In the extreme, it ends up like California where a minority of ideologues can block the will of the majority.




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