Obama Doubles Down

By James Kwak

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 10/31/09).

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.

Comments

[fatcat:]

Bush wanted to allow market investment for social security fund...self directed.Wonder how that would have worked out....401k gone and no social security pension for the next 10yrs and private pensions facing funding problems.

Wonder what Obama thinks he can pull out of the magical hat??

Jan 07 04:17 PM

[Kevin Walmsley:]

"the highly competent Congressional Budget Office ."

Six words that have never appeared in print, in the same order.

Jan 07 04:41 PM

[happysoul77777:]

Investing 401k money in the stock market is a fine idea, as long as the SEC is not going to come up rules to help the market makers to destroy the market.

The repeal of the uptick rule and the approval of naked short selling (for two days) has helped to decimate many institutions.

Jan 07 04:42 PM

[bricki:]

If he can do it he deserves a place on Mt. Rushmore.

Jan 07 04:44 PM

[Kevin Walmsley:]

There is absolutely no way--zero--that Obama and a Dem Congress will reform Social Security or Medicare in any meaningful way.

The deficits that are projected over the next few years to keep the recession at bay will, in inflation-adjusted dollars, sufficed to finance the Second World War. Wouldn't it be cheaper--not to mention smarter--to just let the economy unwind? The government could run their antipoverty programs, and ensure that Americans remain fed and clothed and housed, without scampering around, frantically trying to re-inflate a bubble with money borrowed from our grandkids. It's insane. Hopefully children in kindergarten won't mind having their taxes go up for the rest of their lives so that Citigroup and Merrill and Chrysler can hang around another quarter or two.

Jan 07 04:46 PM

[Jolly_Rancher:]

Obama is trying to con the markets into accepting 1.2 trillion dollar deficits by talking sternly about deficit reduction later. It's a total con. After the recession is fixed (if), here comes gov. health care.

Jan 07 05:07 PM

[Chris B:]

B.O.'s administration will be in two parts, perhaps comprised of a first term and a second term. At least that's his plan. In the first part, the severe deflationary recession we have now will be put to rest by a "new deal" type expansionary policy. In the second part, the 5-10% inflation that results from such an expansionary policy will have to be controlled by cutting spending, raising interest rates, and selling all the assets the government bought during the initial crisis. As I said, at least that's the plan.

Yet I doubt Obama wil be able to (or even try to) overcome political reality and force fiscal discipline on an America that - amazingly - still doesn't believe in it. Do you think the retiring baby boomers will vote against their own self interest to roll back Social Security or Medicare? Have they EVER voted against their own self interest for the greater good? No.

Jan 07 05:35 PM

[MarvinMBA:]

Living in a retirement community will show you how many seniors depend on SS and Medicare for their survival. Cutting any of these funds to the exisitng retired would create panic and increase the poverty level dramatically. Most ordinary workers that are now retired absolutely depend on that monthly check to pay their food, utilities, medicines etc etc etc. Cutting off existing recipricants would be cruel...MarvinMBA

Jan 07 05:51 PM

[Kevin Walmsley:]

Cutting off existing recipricants would be cruel...MarvinMBA
* * * *

Either we fix the boomers' Social Security and Medicare entitlement imbalances, or the country goes bankrupt. Unless we're willing to allow open and unlimited immigration, and those immigrants miraculously make many times the income current immigrants do, AND they're willing to continue to support a system that disproportionately rewards old retired married whites, it's over. It's a simple function of mathematics: one burger-flipper can't be expected to finance the retirements of an entire gated community.
It staggers the imagination that we're now into our third generation of retirees who managed to grow up and build careers in the greatest economic country in the history of the world, yet they rely on the government to pay for their groceries and water. And we can't afford a fourth. Cutting them down (not off) might be cruel, but a good bit less so than asking our kids to pay for it all.

Jan 07 06:59 PM

[Kevin Walmsley:]

Bingo. It's always been debatable whether or not the WW2 age was "The Greatest Generation". What isn't debatable is that they gave birth to one of our worst. The "Me" generation is now hitting retirement age, and there's little reason to expect them to vote for anything besides more and more largesse for themselves.


On Jan 07 05:35 PM Chris B wrote:
>
> Yet I doubt Obama wil be able to (or even try to) overcome political
> reality and force fiscal discipline on an America that - amazingly
> - still doesn't believe in it. Do you think the retiring baby boomers
> will vote against their own self interest to roll back Social Security
> or Medicare? Have they EVER voted against their own self interest
> for the greater good? No.

Jan 07 07:01 PM

[otbricki:]

The "me" generation has been paying 15% or so of its earnings into Social Security and Medicare for more or less 30 years. Why shouldn't it expect something in return?

It sounds to me like it is the X and Y generations that are welshing on their obligations here.

Jan 07 09:21 PM

[bcncv:]

I wouldn't take this analysis to far. What makes Obama a brilliant politician is his ability to imply multiple things while actually promising something much smaller.

Jan 07 10:23 PM

[User 265729:]

Obama's a one-term president who came to office as a reaction to Bush. Much like Carter because of Nixon/Ford...

While our country drifts into massive poverty, he'd better pull a lot of rabbits out of his hat, 'cause that's what we'll all be eating for the next 10 years.

Social Security will be the last thing on the list as we'll all be struggling for any kind of security, be it social, financial, job, whatever... I really don't think people understand the gravity of what will be going down in the next few years...

Jan 07 10:57 PM

[Chuch:]

Obama has some serious time ahead of him, banks are going to struggle. Especially competing with these new P2P lending sites like the one this guy talks about at www.crashmarketstocks.... .

They sound like they get pretty big returns

Jan 07 11:26 PM

[SteadfastMason:]

I would like to see a real debate start on regaining a diverse, growing, and and profitable American manufacturing base.

Jan 07 11:38 PM

[SteadfastMason:]

I would like to see an active debate start on restoring a diverse, growing, and profitable American manufacturing base.

Jan 07 11:43 PM

[John Lounsbury:]

BodySurf - - -

The problem is not with the Congressional Budget Office. They have given very accurate economic projections on everything from Social Security and Medicare deficits to annual budget deficits. The problem is with their employer (Congress), who doesn't listen and take the indicated action.

To all commenters - - -

Obama has been giving some pretty straight talk. It may be harder after the first year in office. If he is still telling it like it is in 2010, some of the nay sayers may start to waiver. If he is not doing that, the Black Widow (Washington) will have another one in it's web.

This man has the intelligence to do the job that needs to be done and the communication skills to educate a public that has too long been lied to. Whether this potential will crash on the rocks of a Washington/Wall Street barricade remains to be seen.

Jan 07 11:44 PM

[SteadfastMason:]

Why is it a cheaper proposition for a consumer to walk into their neighborhood discount store and purchase a $.99 plain plastic bowl that was originally punched out of an assembly line in China for under a nickel, packed, shipped half-way around the world, trucked from one of 6 major freight ports to a short list of cheap import distributor warehouses, and then to a retail shelf in any small town in the USA - ...than it is for that same consumer to pay the same $.99 for an identical bowl punched out on a machine at a US factory...perhaps located in their state or region...at a per unit cost of a dime or two....is just plain embarrasing.

If we can't even compete with a factory on the other side of the world at making a plain plastic bowl that sells for under a buck that was nearly 100% made by a machine (aka: no issue with labor differentials between China and USA), then how can we begin to secure financing necessary to make larger capital expenditures to build more complex and comparable quality products and that the consumer will want to buy...that are made with more efficient machines, in more efficient factories, and with more effective techniques...to keep more of America's dollars circulating within the our economy...contributing to our country's tax revenue, cash in circulation, and trickle-down employment growth?

Jan 08 12:08 AM

[Anthony Alfidi:]

Defusing the entitlement boondoggle has always been a political minefield. Tough talk is welcome, but the likelihood that it will be followed by hard choices diminishes with each uptick in the fiscal stimulus price tag. Massive government spending may become the transmission mechanism for wage-price inflation that will make overt attempts at entitlement reform unnecessary.

Unfunded liabilities can be paid off, cut back, or inflated away. Right now the last option seems most likely.

Jan 08 12:19 AM

[Steven Hansen:]

Social security and medicare are still making a profit, and the profit is being used to finance the country. Social security is not a current threat in 2009 - there are bigger fish to fry.

most of the commenters are assuming these huge stimulus's can trigger this economy. what happens if they do not? these are not really stimulus - but gdp filliing. i don't see anything yet which will retrigger the economy.

i hope i am wrong.

Jan 08 12:31 AM

[RatWatcher:]

"At the same time, the highly competent Congressional Budget Office projected a $1.2 trillion deficit for fiscal 2009 (year ending 10/31/09)."

I'd guess most readers know the fiscal year will end on 9/30/09.

Jan 08 12:44 AM

[alaskaeagle:]

The bailout is aimed at the wrong target. They should aim the bailout at the people if they want the economy to start up again. I would propose that they give the money directly to the legal citizen in the form of $200,000,.00 per year for 2 or 3 years. It would cost the government $6oo billion but they could tax it at 25% which would mean that they only have to give out $450 billion. The states could tax it at 10% which pump them $60 billion. That would mean that $390 billion would be left to be pumped into the economy. The people would be left with $130,000.00 to spend or invest. That would jump start the economy fast. The taxes generated from the economy could help reduce the bailout even further. It sounds crazy but it could work.

Jan 08 01:22 AM

[Al-USA:]

May I remind people that the reason Social Security and Medicare were created was to persuade the "peasants" of the 1930s Great Depression era that their capitalist elite masters were worthy of continuing to rule over them?

Now, take that away, or even reduce it, with the present deteriorating economic conditions that might yet rival or surpass those of the 1930's well... The "peasants" of the 1930s wouldn't have stood for that, and neither will todays "peasants". The capitalist elites will find a way to "pacify" the "peasants", there is still too much wealth concentrated at the top, after all, or they and their capitalist system will cease to exist in its present form... Such are the lessons of history.

Jan 08 04:21 AM

[Chris B:]

Social Security and Medicare taxes pay for the current generation of retirees not the next one. Think of it as the price we pay not to have to watch homeless elderly people dying of starvation and frostbite in the streets. It's not a 401(k). There is virtually no money set aside for later generations. When you hear the phrase "trust fund" applied to SS or Medicare, you should think "baloney."

The obligation of generations X and Y to the previous generation is debatable, since the previous generation is leaving them with a national debt of tens of thousands of dollars per working person - a massive economic screwover that no generation has ever inflicted on the next. Boomers voted to cut their own taxes while they were earning money, and now want gens X & Y to pay more - typical boomer selfishness.

In terms of right & wrong, should productive young workers trying to make rent with 2 roommates in their house and ramen noodles for dinner have to pay higher taxes to support retired baby boomers living alone in their golf course McMansions? Or should the retired boomers be the ones consolidating households, shopping at thrift stores, and turning down the thermostat?


On Jan 07 09:21 PM otbricki wrote:

> The "me" generation has been paying 15% or so of its earnings into
> Social Security and Medicare for more or less 30 years. Why shouldn't
> it expect something in return?
>
> It sounds to me like it is the X and Y generations that are welshing
> on their obligations here.
>

Jan 08 09:23 AM

[bricki:]

The obligation of post boomers to fund social security is a social contract formed generations ago. It will be enforced by the fact that boomers vote in far greater numbers than the X and Y's. Yes, there may be modifications to the benefits that make it possible for the X's and Y's to fund the plan at the same level of taxation as the current levels. But it isn't going away.

Yes, there is debt. But the post WWII debt was much greater as a multiple of GDP than the current national debt. Plus post WWII infrastructure was in much worse shape than it is today, and there was the MASSIVE military commitment to the cold war. So don't give me that crap about the level of debt being too high - your history is wrong. Previous generations didn't cry about that. And the Social Security entitlement is FAR greater than the current national debt - by a factor of 5.

People whining about paying social security taxes to support their parents truly show who the selfish generations are. And it isn't the so-called "me" generation - they have pulled their weight. It is the "slacker" generation who aren't willing to pull their weight.

On Jan 08 09:23 AM Chris B wrote:

> Social Security and Medicare taxes pay for the current generation
> of retirees not the next one. Think of it as the price we pay not
> to have to watch homeless elderly people dying of starvation and
> frostbite in the streets. It's not a 401(k). There is virtually
> no money set aside for later generations. When you hear the phrase
> "trust fund" applied to SS or Medicare, you should think "baloney."

>
>
> The obligation of generations X and Y to the previous generation
> is debatable, since the previous generation is leaving them with
> a national debt of tens of thousands of dollars per working person
> - a massive economic screwover that no generation has ever inflicted
> on the next. Boomers voted to cut their own taxes while they were
> earning money, and now want gens X & Y to pay more - typical
> boomer selfishness.
>
> In terms of right & wrong, should productive young workers trying
> to make rent with 2 roommates in their house and ramen noodles for
> dinner have to pay higher taxes to support retired baby boomers living
> alone in their golf course McMansions? Or should the retired boomers
> be the ones consolidating households, shopping at thrift stores,
> and turning down the thermostat?
>
>
> On Jan 07 09:21 PM otbricki wrote:

Jan 08 10:18 AM

[sleepless_o...:]

alaskaeagle - - -

You have lost some zeros in your calculation. 300,000,000 citizens times $2000 each is $600 billion (a year). Using your $200,000 amount, the annual figure is $600 trillion.

I don't want you to take my comment personally, because I make back-of-the-envelope errors like that. I will say, though, that making this error would qualify you to be in Congress.

Jan 08 10:29 AM

[Kevin Walmsley:]

Check your math again.


On Jan 08 01:22 AM alaskaeagle wrote:

> The bailout is aimed at the wrong target. They should aim the bailout
> at the people if they want the economy to start up again. I would
> propose that they give the money directly to the legal citizen in
> the form of $200,000,.00 per year for 2 or 3 years. It would cost
> the government $6oo billion but they could tax it at 25% which would
> mean that they only have to give out $450 billion. The states could
> tax it at 10% which pump them $60 billion. That would mean that $390
> billion would be left to be pumped into the economy. The people would
> be left with $130,000.00 to spend or invest. That would jump start
> the economy fast. The taxes generated from the economy could help
> reduce the bailout even further. It sounds crazy but it could work.

Jan 08 04:46 PM

[Kevin Walmsley:]

Oops--somebody beat me to it.

Jan 08 04:46 PM

[Kevin Walmsley:]

The so-called Social Contract that was signed a few generations ago at which I, by definition, was not at the table, was different from the one of today. It was taken as given that few reached the age of 65, and those who did were unable to work. Since then, longevity has skyrocketed, along with medical costs for geriatric and elder care. How about adjusting Social Security and Medicare for the additional 17 years of life expectancy that has been tacked on since 1932, and allow for full retirement age at 75 or so?

I don't mind the prospect of supporting my parents when they're unable to work. I'm less inclined to support yours, given my 50% combined federal and state income tax rates. And given that many of today's very healthy retirees will live past a hundred, the system won't last long enough for me to enjoy any of it.

Hope you enjoyed your golf today. My check is in the mail.

Jan 08 04:56 PM

[axelrod608:]

Intergenerational sniping is no more helpful at solving problems than the partisan sniping in politics. Give it a rest. There are responsible people in every age group. But we all are influenced by advertising and other antisocial influences.

One reason we need to reexamine the entire Soc Sec and Medicare mess is that when it started, 65 year olds died within 5-10 years. Now they live another 20-30 years. The payout is vastly greater. And medicine is far more advanced and expensive.

We remain the only first world country that authorizes extremely expensive treatments to terminal patients with no hope of returning to a quality life. It is absolutely essential to rein in medical care for those with zero probability of a return to health. - Boy, will that get me a bunch of negative ratings. -

My father's doctors, clinic and hospital subjected him to a battery of procedures costing Medicare six figures after he was terminal. They did it for PROFIT. There was ZERO chance of him recovering. It was medical torture. It MUST STOP. They even renoved the DNR (do not resuscitate) orders from his files. I had to replace them TWICE. Medicare is terminally screwed up. The medical community has ethical principles common to Bernie Madoff. It's long past time to fix it.

Jan 08 05:22 PM

[henarl:]

axelrod, you will get no negative feedback from me and I'm 78 years old (so far in good health thankfully). I agree with everything you stated, including not wasting extremely expensive medical treatment on terminal patients just so the doctors, hospitals, big pharma, etc. can extract more money from the medicare or medicaid systems. When my inevitable time comes, I hope it will be humane but quick.
As to Social Security, I did pay into it for several years but I have now been receiving it for several and have gotten out a lot more than I paid in. That is fairly common now I believe and certainly is not equitable to those who are still forcibly paying in and are not likely to repeat my experience. If I was in my twenties again I would not be happy about this and would much prefer to attend to my own retirement needs thru budgeting, investing, and personal financial discipline.

Jan 08 07:52 PM