deficit
My column from this morning's Roll Call is about Wall Street's clearly changing opinion about the federal deficit and national debt. I wonder why CNBC hasn't discussed this yet.
Bond Vigilantes Are Now Deficit Cheerleaders
Aug. 3, 2010
The story is that the bond market forced President Bill Clinton to change his budget plans. Bob Rubin, director of the newly created National Economic Council, supposedly convinced Clinton that those who buy and sell Treasury securities on Wall Street would force interest rates much higher and hurt the economy if he didn’t do something about the deficit and federal borrowing.
Because of the bad news about the FY11 deficit, OMB withheld the Mid-Session Review 8 days beyond its statutory deadline until 3 p.m. this afternoon. Technical reestimates of individual income tax and Social Security taxes were the primary reason for the deterioration along with somewhat weaker wage growth. Usually that means taxpayers fell into lower tax brackets and claimed more deductions and credits than estimated. The FY10 deficit was reestimated $79 billion lower than in February because of lower outlays for unemployment compensation, FDIC deposit insurance, and a broad range of discretionary spending. The real GDP forecast was raised to 3.2% for CY10 from 2.7% in February and was lowered to 3.6% for CY11 from 3.8%. This is confirmation of my long held expectation that we're going to see deficits of at least $1 trillion for years to come.
For over a year House Blue Dog Democrats took a back seat to President Obama's top priorities, a $787 billion stimulus bill and a health reform bill that CBO scored as paid for, but about which many have their doubts. This week the Blue Dogs bit off almost $80 billion from the extenders bill, H.R.4213, most of which passed the House this afternoon on two separate votes. The good news is that those fighting larger deficits in the House are gaining power. The bad news is that the Senate will undoubtedly add back some of that spending when it takes up the bill during the week of June 7. Taking away $8 billion of COBRA health benefits for the unemployed, $24 billion of Medicaid aid for the states, and $40 billion from the Medicare physician reimbursement hits the vulnerable, which I'm not comfortable with, but I've learned the hard way that there are no easy deficit cuts.
That was the title of today's luncheon talk to the National Economists Club by Urban Institute Fellow and former Deputy Assistant Treasury Secretary Gene Steuerle. A video and slides will be posted here. These are the main points he made.
Peggy Noonan's column about the budget in last Friday's Wall Street Journal (I could probably stop here and know that I've said all that needs to be said) shows why someone who doesn't know anything about the budget or economy shouldn't write about them.
One sentence in particular caught my eye:
"People are freshly aware and concerned about the real-world implications of a $1.6 trillion dollar deficit..."
Peggy...Has anyone ever told you that you have to consider the economic context in which a deficit occurs? A deficit even half that size when the economy was growing, like the ones that happened during Bush 43, were indeed a disaster. But last year's deficit of $1.4 trillion, which occurred when monetary policy was having no effect and when businesses and consumers weren't spending, not only was the correct fiscal policy, it was a triumph. The same will be true this year if the deficit is $1.6 trillion.
I too attended yesterday's Peterson-Pew Commission on Budget Reform Policy Forum, and I highly recommend that you watch it for several reasons:
I dropped by a forum of the Peterson-Pew Commission on Budget Reform yesterday, the earnest group of budget mavens that's been pushing for a bipartisan deficit commission and is itself a dress rehearsal for such a commision.
Unfortunately, as polite as the discussion was, the gridlock was obvious. It didn't bode well for President Obama's plans to name a bipartisan commission on Thursday.
Douglas Holtz-Eakin, the former CBO director who was John McCain's top economic adviser during the presidential campaign, sounded dispassionate until you listened to the nuances. Without flatly rejecting the idea of tax increases to help close the deficit, Holtz-Eakin pointedly insisted that spending was the main problem and that "we cannot tax our way" out of this.
I heartily agree with Bruce Bartlett's scathing description of Minnesota Gov. Tim Pawlenty's proposal for a balanced-budget amendment to the Constitution: it's phony, simplistic, ill-informed and cynical.
But my wife stopped me cold this morning with this question: "Ed, what if you were a Republican politician right now, running against a Democrat? What else would you come up with?"
My short answer: I got nothing.
Obviously, there are plausible conservative ideas about how to reduce the budget deficit, deal with entitlements, reform health care or regulate financial services.
