Obama Doubles Down

Barack Obama did not actually predict trillion-dollar deficits indefinitely; more precisely, he said, “unless we take decisive action, even after our economy pulls out of its slide, trillion-dollar deficits will be a reality for years to come” (emphasis added). At the same time, the highly competent Congressional Budget Office projected a $1.2 trillion deficit for fiscal 2009 (year ending 9/30/09).

I was initially surprised by Obama’s forthrightness on the deficit question, but on reflection there are three good reasons for him to do it:

  1. He wants to lower expectations by making the case that we have a serious deficit problem before taking office.
  2. He wants to signal that he is aware of the deficit issue, to try to defuse the attacks he is going to get from fiscal conservatives regarding his stimulus plan.
  3. He wants to use the current crisis – and the political opportunity it gives him, as a new and generally popular president with significant majorities in both houses – to tackle the long-term retirement savings problem.

If you parse the sentence, in saying “even after our economy pulls out of our slide,” Obama is saying that the long-term deficit problem would exist with or without the current crisis – and he is right. A $1.2 trillion deficit, caused by a steep fall in tax revenues, partially by the costs of various bailouts, and a little bit by two ongoing wars, is small compared to the Social Security and Medicare funding gaps ahead. In signaling that he will announce some kind of approach to entitlement spending by next month, Obama is implying that he wants to take on not just the short-term recession, but also the long-term deficit problem.

This is good for two reasons. First, someone has to face the problem. President Bush “tried” (not very hard) to do something about Social Security in 2005, although the general direction of his proposal, in shifting from a defined-benefit to a defined-contribution model, would have shifted risk from the government onto individuals.

Second, there are economic reasons why long-term sustainability should be addressed at the same time as short-term stimulus. Virtually everyone (even Martin Feldstein) favors a large, debt-financed government stimulus package. However, the more the government borrows, the more risk there is that lenders will worry about our ability to pay off the debt. While few people expect the U.S. to default, the more widespread fear is that we will print money (in a more sophisticated form, of course) to inflate away the debt. Because of those fears, large amounts of borrowing will drive up interest rates, especially as the economy recovers, both for the government (increasing our interest payments) and for the economy as a whole (undermining growth). The solution, if there is one, is to put forward a credible plan for dealing with the long-term retirement problem.

The risk, of course, is that Social Security and Medicare can be politically lethal, which is one reason President Bush backed off so fast. But I still think this is the right bet for Obama to make. Insofar as any solution is going to involve some pain (lower benefits, increased benefit age, higher taxes, increased control over health care), it is going to be easier to pass in a time of perceived collective crisis. And being willing to tackle the problem could also help gain support from fiscal conservatives for the stimulus that we need now.

3 responses to “Obama Doubles Down

  1. Why is deficet spending by the government even remotely defensible? What good is another 1.2 trillioin in “new money” when there already exists 4 trillion in “Total Savings” and 2.5 trillion in “Institutional Money Funds”?
    It seems the stimulus plan is simply an overconsumption plan with no net benefit and long term harm.
    Aren’t all the people holding these record amounts of cash simply looking for a good deal the government seem determined to not materialize?
    And whatever happened to the transparency for the TARP, have they been able to find the bottom of those “toxic assets” why has that been swept under the rug?

  2. If he actually makes an attempt to address the real, politically tough, long term issues in conjunction with a short term fiscal package … I will drop dead of pragmatist glee immediately.

  3. Mr. Kwak – The CBPP report (on the 2008 report of the Social Security and Medicare Trustees) you link to makes the point you should have made in your article — that adequate funding for Social Security after 2041 is not a significant problem and can be fixed relatively easily.

    The entitlement problem is with increases in Medicare spending *if the increased cost of health care generally* is not addressed. So, the solution to controlling entitlement spending is controlling the cost of health care for all of us.

    Perhaps you can address this again directly in a future post.