obama vodoo economics

Obama's Fiscal Goals Hinge on Rosy Scenarios

Monday, February 23, 2009 8:02 PM
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WASHINGTON – President Barack Obama's ambitious goal of cutting the federal deficit in half relies on a perfect — some might say improbable — convergence of factors: a recovered economy, a tax boost for the rich and success in easing foreign entanglements.


In calling for a deficit of about $530 billion in four years, Obama has established a marker by which to measure his first-term performance as president. The dollar figure could be his albatross or his badge of success.


"This will not be easy," Obama said Monday as he kicked off a fiscal summit at the White House. "It will require us to make difficult decisions and face challenges we've long neglected."


For Obama, the challenge is clear: He will have to increase spending on health care and energy if he wants to accomplish the policy overhaul he promised during his campaign, yet he also needs to cut spending elsewhere and increase revenue to meet his deficit goal.


All this, even as he employs accounting practices he says will more honestly depict the size of the federal budget.


For him to succeed, the economy will have to meet current forecasts that it will begin to turn around gradually during the second half of the year. Even so, Obama might still have to seek billions more to help rescue the beleaguered financial sector.


Administration officials say Obama will also achieve budget reductions through lower spending on the war in Iraq. However, it is unclear how much of those savings he will then devote to Afghanistan, where he already has agreed to boost troop strength.


Further budget assistance would come from increases in taxes for wealthier Americans. Administration officials have said Obama will meet his campaign pledge to end President George W. Bush's tax cuts for people who make more than $250,000. Those tax cuts are to expire at the end of 2010.


Obama plans other tax cuts for most Americans, but any tax hike is likely to meet stiff resistance from congressional Republicans. And if the economy has not improved, there will be pressure on him not to raise taxes on any segment of the population, no matter how rich.


Such a discussion about taxes would be especially charged in the middle of the 2010 midterm elections.


What's more, banks are paying dividends on the assets that the government purchased in its rescue effort. The government could see a return on its investment in later years if banks can buy those assets back. The government experienced a similar increase in spending in the 1990s when the Resolution Trust Corp. bailed out the savings and loan industry. Eventually the government got its money back and more, contributing to the low deficits of the era.


"A lot of things have to go right between now and then," Mark Zandi, chief economist for Moody's Economy.com, said in an interview before he addressed the White House summit. "The policy response to the crisis has to work for the budget to stick to the script."


Administration aides say they inherited a budget deficit of $1.3 trillion and project the deficit to grow to $1.5 trillion by Sept. 30, the end of the current fiscal year. But much of that is emergency spending designed to contain the economic crisis and assist banking institutions. Once that spending stops, the deficit will shrink on its own.


In fact, if the $787 billion economic stimulus package recently signed into law and the government's other billions spent on mortgages and banks amounted to the only additional spending undertaken between now and 2013, the deficit would be likely to dip in four years to a sum lower than Obama's goal.


"So the question is really can they do that (reduce the deficit) as well as implement the agenda that he was elected on," said William Gale, director of economic studies at the Brookings Institution.


Obama's target would place the deficit at about 3 percent of gross domestic product. The GDP is a measure of a country's economic activity and many economists say deficits during a stable economy should amount to no more than 2 to 2.5 percent. At $1.5 trillion, the deficit would hit a whopping 10.6 percent of GDP this year.


Obama's 3 percent goal would still only lower deficits to ranges similar to those under Bush. Zandi said the key is whether the deficits are on a falling path


The president is also counting on achieving his deficit target by reducing wasteful programs — a perennially elusive aim of many an administration. For instance, he said he wants to halt federal support for huge agriculture companies that don't need the help. He also would end tax breaks for companies shipping jobs abroad. Yet, such companies have staunch defenders in Congress who have fought off similar efforts in the past.


Obama also said Monday he would return to the pay-as-you-go rule the government used in the 1990s to help control federal deficits. Back then, the law required that any tax cut or increase in federal benefits like Medicare had to be paid for with a tax increase or spending reduction elsewhere in the budget.


Obama's embrace of that rule will take effect after enactment of the recent stimulus package.


The stimulus law includes language preventing the alternative minimum tax from raising levies on millions of middle-class families this year. If the pay-as-you-go rules were applied to that tax provision, it would have forced Obama and Congress to find $70 billion in savings to pay for it — an exercise none of them would have enjoyed.




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