Record Deficit May Dash Obama's Big Plans

Friday’s headline in the Washington Post: “Record-High Deficit May Dash Big Plans”–refers primarily to President Obama’s “big plans” for further deficit-financed stimulus spending. But realistically, the large (though still smaller-than-expected) $1.4 trillion deficit is a threat to all of the Administration’s fiscal policy agenda, including their health care reform initiative which they believe will eventually reduce and not just not increase the deficit. Revenues (whether newly proposed or already in place) that the government chooses to use to fund new programs are revenues that are unavailable for deficit reduction. And revenues given away through deficit-financed tax cuts are revenues that are no longer available for, well, either new initiatives or deficit reduction.

I’ve harped about the deficit-financed extension of the Bush tax cuts over and over here–far more than I’ve “harped” or “carped” about deficits in general (what a nag I’ve been!)–but for today let’s just consider this simple math: the large portion of the Bush tax cuts that President Obama has proposed to extend cost about $2 trillion over ten years (fiscal years 2010-19, see Table 1-4 in this CBO analysis)–without counting the additional costs of extended alternative minimum tax (AMT) relief and without counting interest costs. The cost of expanding health care coverage to achieve nearly universal care is now commonly known to be about $1 trillion over ten years. Thus, if we chose to let the Bush tax cuts expire as scheduled at the end of 2010–a policy choice that would require no legislative action on the part of Congress or President Obama and which Obama Administration budget director Peter Orszag has previously urged as the “right” choice–we would be able to pay for expanded health coverage without any “new” tax increases and still have (over) $1 trillion left over for deficit reduction.

I’m not saying that letting the Bush tax cuts expire is the best way to pay for health care reform (I actually prefer raising taxes tied directly to health care spending so that revenue would keep pace with health costs), but I’m saying that that’s a lot of revenue to give away and not have available for all these other things (health care, deficit reduction) we say are really important to us. And I continue to be puzzled as to why the deficit-financed extension of the Bush tax cuts is the single largest (most expensive) item in President Obama’s proposed budget, especially in light of these record deficits and how the Obama Administration reminds us, constantly, that these deficits are not their fault. From the Administration’s press release on the final FY2009 budget deficit (released Friday afternoon–the best time for bad news), emphasis added:

The FY2009 deficit was largely the product of the spending and tax policies inherited from the previous Administration, exacerbated by a severe recession and financial crisis that were underway as the current Administration took office.

Well, these record deficits might not be the Obama Administration’s “fault,” but they are now their “problem.” Choosing to extend the Bush tax cuts basically amounts to the Obama Administration saying they prefer Bush Administration tax policy over Clinton Administration tax policy. (If the Bush tax cuts expire at the end of 2010, we will go back to pre-2001 tax policy and the marginal tax rates we had at the end of the Clinton Administration.) I don’t believe that they actually feel that way. I think Bill Gale (Peter Orszag’s coauthor on those many “Bush tax cuts are bad” papers that were written during the Bush Administration) says it well at the end of Friday’s Washington Post story:

Economists universally agree that the nation cannot run such massive deficits indefinitely. The question now facing Obama, budget experts said, is how to bring spending and revenue more closely into balance in the years ahead, after the economy fully recovers.

“[T]he significance of the number is not what happened to cause it to be so large. The question is what happens next,” said William Gale, a senior fellow at the Brookings Institution.

If, as the Post story quotes Peter Orszag saying, the President is truly “considering proposals to put our country back on firm fiscal footing,” then a reconsideration of the extension vs. expiration of the Bush tax cuts ought to be at the top of the list–even before other good ideas such as an add-on value-added tax and reducing costly and inefficient tax expenditures such as the exclusion for employer-provided health care. For as good as those other ideas for “revenue enhancement” are, getting those ideas passed will be a lot more work and would take us to a tax system we’ve never experienced before. In contrast, Congress and the Obama Administration don’t have to lift a finger to get the $2 trillion to $3 trillion in revenue they’d get (just over the first ten years) by just not extending the Bush tax cuts and going back to Clinton-era tax policy. President Obama could always choose to reform the tax system from that starting point, to craft “Obama Administration tax policy” as something truly of his own.

Comments

[Dave Wrixon:]

Yes, and all this assume interest rates don't go through the roof with rocketing unemployment and massively reduce government revenues. Has anyone run a Worst Case Scenario? Or even a Something Remotely Probable Scenario?

Oct 18 10:58 AM

[CautiousInv...:]

We should all be thankful that the US is on the verge of bankruptcy; the only constraints limiting Obama's left leaning tendencies are fiscal constraints being imposed by international capital markets. Were these not in place, Obama would widen the sweep of progressive Jacobin change and accelerate its implementation. Our disastrous fiscal health may be the very thing that saves us from Obama colluding with congress and imposing his malignant dream (nightmare for those who are not union members and work) on our vulnerable economy.

Oct 18 11:36 AM

[yellowhoard:]

Cloward and Piven planned this crises 40 years ago.

Obama wants the system to melt down.

Then, his marxists buddies, can "fundementally change America."

Oct 18 12:04 PM

[Moon Kil Woong:]

If overspending could constrain politicians it would have already by now. Bush Jr. was bad enough. The US couldn't suffer another 4 years of a fake conservative spending us into the hole. It can hardly suffer Obama who's fiscal wits are even worse. If the US is always in crisis and needs stimulus isn't crisis just another term for normal terrible economics brought on by a constant stream of poor monetary policies? It will not get better until the poor policies end. We all have learned by now stimulus is nothing but a guise for Washington porkus and nothing else.

Oct 18 12:13 PM

[Faisal Humayun:]

The defecits are at a record high...But there is no stopping the Government...The U.S. budget projections for 2009-2019 show deficits of $7.3 trillion...

If interest rates rise very sharply due to inflation 3-4 years down the line then the Goernment will be using a major portion of taxpayers money in order to just service its debt...

Remains to be seen who will fund this huge expected deficit...

Oct 18 02:13 PM

[The Geoffster:]

Obama's margin of victory can be attributed to centrist voters who believed he would govern from the center. These same voters are concerned about massive government debt and deficits. They will turn against Obama unless the economy significantly improves. In the meantime, Obama will try to ram his socialist programs through Congress. If he succeeds with health care and cap and trade, he will have accomplished much of his agenda and it wont matter whether he is reelected. His legacy will be assured.

Oct 18 02:52 PM

[Swashbuckler:]

Obama's margin of victory can also be attributed to a liberal Republican sellout opponent masquerading as a conservative. Who became the Republican nominee due to a flawed electoral process and massive support of the liberal mainstream media.


On Oct 18 02:52 PM The Geoffster wrote:

> Obama's margin of victory can be attributed to centrist voters who
> believed he would govern from the center. These same voters are concerned
> about massive government debt and deficits. They will turn against
> Obama unless the economy significantly improves. In the meantime,
> Obama will try to ram his socialist programs through Congress. If
> he succeeds with health care and cap and trade, he will have accomplished
> much of his agenda and it wont matter whether he is reelected. His
> legacy will be assured.

Oct 18 05:29 PM

[Mr. Ed, Jr.:]

"Thus, if we chose to let the Bush tax cuts expire as scheduled at the end of 2010–a policy choice that would require no legislative action on the part of Congress or President Obama and which Obama Administration budget director Peter Orszag has previously urged as the “right” choice–we would be able to pay for expanded health coverage without any “new” tax increases and still have (over) $1 trillion left over for deficit reduction."

There is absolutely no difference-- zero, nada, zilch-- between letting the Bush tax cuts expire and voting to abolish the Bush tax cuts. The results are identical. It is still increasing taxes during an economic recession/almost depression.

No matter how it is packaged, "...let the Bush cuts expire...." is a word game.

However, our Orator-In-Chief and his buddies do like to play word games, such as....

"There is nothing in this bill that would require you to give up your current health insurance"......even though there are plenty of clauses in the bill that will very strongly encourage your employer to give it up for you. You are still going to lose it.

I have grown weary of word games. Go play scrabble.

Oct 18 07:53 PM

[The Geoffster:]

"A dog is not considered a good dog because he is a good barker. A man is not considered a good man because he is a good talker."
Buddha

Oct 18 08:13 PM

[Mad Hedge F...:]

cho The black GM Suburban barreled into the parking structure at San Francisco’s posh St. Francis Hotel, its emergency lights flashing, and quickly disgorged a team of secret service agents. Behind them the armored Cadillac limo screeched to a halt, and out lept Barrack Obama, the President of the United States. He came to speak to a select group of wealthy, A-list, party faithful who had paid $15,200 each for the privilege of having their picture taken with our famous president. Although the tension was so thick you could cut it with a knife, Obama firmly shook my hand with the controlled cool he is famous for, and produced the obligatory grin for the camera, as if on autopilot. The scene outside in Union Square was a mad house, with every fringe group but the Lemurians well represented, and the police struggling to prevent a shouting match between antiwar demonstrators and the anti-abortion activists exploding into violence. An Obama win in the California was never in doubt, with 85% of some districts going for the Democratic candidate. Yet, the Golden State was a mandatory stop for Obama as it generated the cash flow needed to fund wins in a half dozen battleground states. The support paid off, as dozens of desperately needed infrastructure projects started raining down upon us the second after the budget was passed, and no less than a half dozen UC Berkeley notables filed into the administration, with more waiting in the wings. I always thought that Obama was a man from the future, but he is 150 years from the future, and would bring upon us more rapid change than many even in his own party are able to digest. He is not an African American, but an African and an American, and bears no taint of slavery in his DNA. He is taking huge risks with the future of the country now, and may drive us all to ruin if his lofty plans don’t work out. But what choice does he have? The backdrop for the 2012 was either going to be the Great Depression II or a fragile recovery fueled by massive borrowing. Seems like a no brainer to me. I’ll just go out and short more dollars, laughing all the way to the bank. Call me a cynic, but as they used to say at Morgan Stanley, who is guilty of losing the $100 bill, the guy who dropped it, or the one who picked it up? You can find the photo on my Facebook page.

Oct 19 11:34 AM

[market mojo:]

Whenever someone use the word "socialist" with reference to Obama one can safely conclude that that person is a Fox "News" brainwashed individual.

On Oct 18 02:52 PM The Geoffster wrote:

> Obama's margin of victory can be attributed to centrist voters who
> believed he would govern from the center. These same voters are concerned
> about massive government debt and deficits. They will turn against
> Obama unless the economy significantly improves. In the meantime,
> Obama will try to ram his socialist programs through Congress. If
> he succeeds with health care and cap and trade, he will have accomplished
> much of his agenda and it wont matter whether he is reelected. His
> legacy will be assured.

Oct 19 05:35 PM

[fxdudeinmia:]

I am utterly dismayed by the deficits projected and wish Obama would change course dramatically. But, he was dealt a terrible hand by Bush/Cheney and 30 years of overspending. Saying Obama hopes for a total fiscal meltdown is pure, unadulterated GARBAGE and makes you sound like a small-minded Rethuglican. Is that what you are?

Oct 19 09:35 PM

[Graham and ...:]

"They [centrist volters] will turn against
> Obama unless the economy significantly improves."

As they did against Jimmy Carter.

But both of them were in office long enough to win Nobel Peace Prizes.

On Oct 18 02:52 PM The Geoffster wrote:

> Obama's margin of victory can be attributed to centrist voters who
> believed he would govern from the center. These same voters are concerned
> about massive government debt and deficits. They will turn against
> Obama unless the economy significantly improves. In the meantime,
> Obama will try to ram his socialist programs through Congress. If
> he succeeds with health care and cap and trade, he will have accomplished
> much of his agenda and it wont matter whether he is reelected. His
> legacy will be assured.

Oct 21 12:44 PM

[optionsgirl:]

I am actually quite pleased to see the mainstream press finally print the truth.
There is nothing that this administration can do that can't be undone!!! We are going to have financial pain to get out from under, just like Peter Schiff warns.
An article in the Boston Globe this morning leaked the results of a congressional testimony by the Secret Service. It stated that President Obama has 400% more death threats that GWB did. That saddens me. The prospect of "President" Biden makes me wish President Obama long life and a legacy as a one term president, a la Jimmy Carter.

Oct 21 01:58 PM