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Obama’s Vow to Halve Deficit Puts Focus on Budget Plan

February 23, 2009 at 6:20 PM EST
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President Barack Obama cast a new focus on the budget deficit Monday, announcing a goal of halving the $1.3 trillion gap by the end of his first term. Analysts weigh the goal.
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RAY SUAREZ: How realistic is the president’s pledge to halve the deficit by 2012? We ask that of three experts who attended today’s summit.

Douglas Holtz-Eakin is former director of the Congressional Budget Office. He also served as an economic adviser for John McCain’s presidential campaign.

Maya MacGuineas is a president of — is president of the Committee for a Responsible Budget at the New America Foundation.

And Robert Greenstein heads the Center on Budget and Policy priorities.

And since all three of you were involved in the breakout groups after the president gave both his fairly grim diagnosis and his fearsome set of assignments, let me get a quick impression from all of you whether your groups in this afternoon’s meeting thought what you were asked to do was doable.

Bob Greenstein?

ROBERT GREENSTEIN, Center on Budget and Policy Priorities: Well, today’s session wasn’t designed itself to produce some set of agreements in three hours. It was just the beginning of a process.

There was a very good bipartisan feel in the room at the end. It was a very good first step. And as your clip showed, the president was completely in command of the room at the end of the day and expressing a real determination to make progress on these problems.

RAY SUAREZ: Maya MacGuineas?

MAYA MACGUINEAS, New America Foundation: Well, I was in the tax session. And it was really an opportunity not to come forward and figure out a tax plan, but for Secretary Geithner and Christina Romer, who runs the CEA, to sort of hear from the participants, politicians and outsiders, what they think can be done on tax reform.

There was a lot of talk about the importance of permanency or sort of understanding where the tax code goes from here. We have a lot of things that change year to year.

The alternative minimum tax, for instance, gets patched each year or you have these tax cuts that are set to expire at the end of the decade. People said that needs to be made permanent. Whatever the policy is, we need to know what it will be.

The tax code needs to be simplified. And there was also focus on other things, like broadening the tax base, looking at corporate income tax reform. A lot of ideas were laid out there.

RAY SUAREZ: Douglas Holtz-Eakin?

DOUG HOLTZ-EAKIN, Former Director, Congressional Budget Office: Well, I was in the health care reform session, and I think it revealed all the tensions that are present in this entire process.

People spoke optimistically about the chances to do major health care reform and the idea that we could get higher quality care in the United States at a lower cost. And I think there’s a great opportunity there.

There’s a lot of agreement between Republicans and Democrats on needed changes in the practice of medicine in America that would deliver higher-quality care and would actually get us a price tag we could afford in this nation.

But there’s also some pitfalls. Those changes will take a long time, and the cost savings will probably evolve very, very slowly. And if we rush into health care reform and cover a lot of people with big government programs, I think there are going to be political tensions and there’s going to be a big impact on a budget situation that’s already very bad.

Is halving the deficit enough?

Maya MacGuineas
New America Foundation
If we get to a $500 billion deficit at the end of four years, we're not going to be saying, "Great, our work here is done." Instead, we're going to be saying, "We still have a lot of work to do."

RAY SUAREZ: Maya MacGuineas, the president stated the intention of cutting the deficit in half by the end of this presidential term. Are details starting to emerge on how you can do it?

MAYA MACGUINEAS: Well, we're just starting to get a sense. We don't have the specifics yet. Let me just say that cutting the deficit in half over the presidential term will still leave us with very large deficits, about $500 billion.

So what I would say about the fiscal goal is, one, it's very important to have a fiscal goal, to say what you're going to try to do and put that out there.

Two, if we get to a $500 billion deficit at the end of four years, we're not going to be saying, "Great, our work here is done." Instead, we're going to be saying, "We still have a lot of work to do." It's not close to sort of the whole thing being accomplished, but it is realistic. And I think that's a good thing.

But I think we can do this. Depending on where the economy goes, it will take some tough policy choices, but, frankly, not enough. And the president was upfront about that today. He said there will be more to do, and I expect that over the next years the budget deficit -- the budgets the administration puts forward will have to deal with this on an ongoing basis.

RAY SUAREZ: Douglas Holtz-Eakin, you heard Maya MacGuineas call it "realistic." Is it realistic when, at the same time, you're propping up major financial institutions, loaning automobile companies money, and trying to push money out the door to get the economy going again?

DOUG HOLTZ-EAKIN: It's not only realistic; I don't think it's nearly aggressive enough. I would expect that when this budget comes out on Thursday, what the administration will show is that, in 2013, the economy will have recovered, that tax revenues will have returned to historic norms, that they will show on the books hundreds of billions of dollars of additional revenues that come from higher tax rates on individuals and cap-and-trade proceeds from auctioning the permits.

And despite that, we'll have a budget deficit of over $500 billion. And that suggests they're planning to spend an awful lot of money, and those are steps in the wrong direction, given our budget picture.

Obama plan uses 'real' numbers

Robert Greenstein
Center on Budget and Policy Priorities
What's particularly important is [Obama's] budget, A, uses realistic numbers for the first time since I can remember.

RAY SUAREZ: Robert Greenstein, what are the assumptions or some of the assumptions that the president is using in making these calculations? Just over $1 trillion in deficit now. If there's a target of $500 billion when it's all over, where is the money coming from?

ROBERT GREENSTEIN: Well, we need to be very clear that, by four years from now, we're going to have an economy that is approaching a $20 trillion economy. We have to keep this in perspective. The deficit that he's talking about, President Obama, in 2013 equals only 3 percent of the size of the economy.

Most budget experts think that, if you're over 3 percent, you're on a path towards exploding debt, that we have to get back down on a permanent basis to the 2 percent to 3 percent range.

And what's particularly important is his budget, A, uses realistic numbers for the first time since I can remember. For years, presidents have proposed budgets that leave out of them costs for doctors and Medicare, for patching, for giving people relief, middle-income people relief from the alternative minimum tax, for natural disasters that occur every year.

Presidents have left those out, and their numbers down the road haven't meant anything. He's putting every one of those numbers in.

He has a series of tough -- I would say even courageous proposals that take on special interests in areas ranging from tax loopholes used by Wall Street traders to excess payments to private insurance companies and Medicare who were overpaid. His job is going to be to try to get Congress, members of both parties, to go along with or come up with their own courageous choices, as he has done.

And the second big question is the international economy. If we're still in a global recession four years from now, we won't be near a $500 billion -- excuse me, $500 billion deficit. It will be much bigger.

But if the economy recovers, he's using honest numbers. If he can get his proposals enacted, then I think we're going to see a deficit that's in the $1 trillion to $2 trillion range now come well down and we will be starting to get to that safer area of having deficits that do not exceed 3 percent of the size of the U.S. economy.

Specific policy details needed

Douglas Holtz-Eakin
Former Director, CBO
We're entering a period when there's tremendous pressures on the national debt anyway. It should be an aggressive budget that actually brings that down and doesn't accept an ever-rising national debt.

RAY SUAREZ: But along with building in, as Bob Greenstein mentioned, the amount for the war and things like that, are there also assumptions that the president is using that perhaps make the assignment less difficult?

MAYA MACGUINEAS: Well, in fact, what they're doing is they're building -- they get credit for being very honest about the policies that they're going to put in the baseline. They're going to talk about assuming the AMT is fixed every year. They're going to make the tax cuts that are expiring permanent. They're going to budget for the full cost of the war and even for emergencies that are likely to happen. This is all great on the point of transparency.

However, what I don't think they're going to do -- and we don't have all the details yet -- is actually say how they're going to pay for these things. So if the favored policy is to make these tax cuts permanent, that's great. We do want to put that in the budget. But you also have some kind of an obligation to say, how are you going to offset the costs of those things?

And that would be a bigger lift and that would be something I'm not anticipating that they'll put in the budget, which means the deficits will be that much larger.

I think a $500 billion deficit is troublesome. I do think we want to remain flexible and so, if the economy is doing well, we should shoot for higher. If it's not doing well, we want to focus on fixing the economy first.

But sooner or later, we're going to have to get to the bottom line of, how do you pay for these things? If you want to make the tax cuts permanent, how do you pay for it? If you want to expand health care, we need to offset all the costs. And it's not clear this budget is really going to deal with all those tough choices yet.

RAY SUAREZ: Douglas Holtz-Eakin, you just heard two perspectives on the numbers as they're understood by your colleagues. You're a former CBO head. Do they add up?

DOUG HOLTZ-EAKIN: Well, I think there are two real important points here. Number one, I think the Bush administration's legacy of budgeting in ways that weren't exactly what we've seen in terms of what they actually wanted to do didn't fool anybody, so the notion that the transparency itself will solve all the problems I think is misplaced.

What really matter is the policies. And I think Maya is right in that we won't know the full list of policies that will actually make this budget add up when it comes out on Thursday.

And to Bob Greenstein's point, if we get to 3 percent of GDP in 2013, we will still be increasing the national debt relative to the size of the economy when it has skyrocketed in recent years.

And we're entering into the period when the baby boom is going to retire. We're entering a period when there's tremendous pressures on the national debt anyway. It should be an aggressive budget that actually brings that down and doesn't accept an ever-rising national debt.

Budget is only 'first step'

Maya MacGuineas
New America Foundation
Right now, we borrow a lot from overseas. If we borrow too much with no plan for how to bring the debt down, people are going to charge us more for that lending, and our interest rates are going to go up.

RAY SUAREZ: Why is it important to bring the budget deficit down by the end of this presidential term, Maya MacGuineas?

MAYA MACGUINEAS: Well, it's important that you have a plan to bring it down, because you cannot borrow indefinitely. When you do, it places major macroeconomic pressures in your whole economy.

So if you're borrowing, that means someone has to lend you the money. Right now, we borrow a lot from overseas. If we borrow too much with no plan for how to bring the debt down, people are going to charge us more for that lending, and our interest rates are going to go up.

What does that do? That could destabilize the economic recovery just when we're starting to get strong again. So you want to have a plan where you run deficits and you build up your debt when the economy is weak and you need that borrowing, but equally as important or more important is having a legitimate plan to pay back that once the economy has strengthened again.

That's why you basically want to balance your budget over a business cycle, so when the economy is strong again, we actually should be shooting for budget surpluses. That's going to be a big challenge with the aging and health care challenges we have. We're going to have to deal with those.

RAY SUAREZ: And very briefly, Bob Greenstein, is it important symbolically, important as a message to markets, to regular American taxpayers?

ROBERT GREENSTEIN: It's important. It's not -- I don't think it's critical to balance the budget. I disagree with Maya here.

As Doug indicated, the key is that we can't have a debt explosion. Like somebody whose credit card gets bigger and bigger and the interest payments they pay eat up more and more of their income, we can't let the debt grow faster than the economy.

Now, what Obama is proposing is to get us by 2013 to the point where the debt isn't growing faster than the economy at that time. Doug is right that we'll then need to do a lot more, and Obama said today this budget is only the first step. He then in coming years wants to go a lot farther so we avoid a debt explosion and we protect long-term economic growth.

RAY SUAREZ: And, Doug Holtz-Eakin, important and important to be done quickly? Very quickly.

DOUG HOLTZ-EAKIN: It's important to do everything you can in the near term to put us in a position to deal with our long-term problems, as Bob said.

Most importantly today, there was an agreement that the fundamental part of a long-term outlook is rising health care costs. We need to take that on because it will take a long time to get that right. And we can't keep our eye on just health care. We have to take care of everything else in between while we fix the health care system.

RAY SUAREZ: Guests, thanks a lot. To be continued.

MAYA MACGUINEAS: Thank you.

ROBERT GREENSTEIN: Thank you.