Ten Trillion and Counting

Obama's Options?

Paul Krugman Princeton University; The New York Times

Deficits are, all things being equal, a bad thing. And a persistent deficit, one that you have no realistic prospect of eliminating, is a very bad thing. Now, these are very exceptional times. This is a case where I've been saying virtue is vice. Trying to be prudent and responsible about the budget right now can be disastrous. We have history for that. FDR tried to balance the budget in '37 and almost destroyed his legacy because it sent the economy into a tailspin.

You don't want to do that, but we're starting to get to where we're going to add probably well over a trillion dollars to U.S. debt next year, and it probably won't end there. There will be more: a trillion here, a trillion there. We are seriously talking about bringing the U.S. debt to levels that are higher than we've seen, certainly back up to where they were in the Reagan administration, maybe beyond that. And you start to get a little nervous. There really ought to be a plan -- not now, but later on, we need a plan to get this back. …

Keynesian economics says that you should be running deficits, possibly large ones, in times of severe economic distress, but you should offset that with surpluses in the good years. Right now we're going to have to run those deficits even though we didn't run the surpluses in the good years past. We're going to have to figure out a way to do them in the future, but not now. You know, St. Augustine, grant me chastity and continence, but not yet.

Paul O'Neill Secretary of the Treasury, 2001-02

Right now we've got this financial crisis, and one day we're spending $700 billion, and the next day that gets trumped by "That's not enough; we need another $300 billion." And then we have people saying, "That's not enough; we need $500 to $700 billion more." And so if that's all right and there are no limitations, why don't we make it $4 trillion, or $10 [trillion]?

... Why don't we just give every American a million dollars a year if it's really in our power to endlessly borrow money? And this is what I mean by education. People need to understand why if $1 trillion is good, $10 trillion isn't better.

... I don't believe that those people who are arguing for economic stimulus and for preventing banks from going under are saying money grows to the sky forever on trees. I think they are saying that the house is on fire, and we have to spend some money to put it out; if we don't, the economy might go over a cliff.

So let me say we have two problems. One, we have a meltdown in our financial structure that encompasses the whole world. And let me agree with you that -- I didn't think we did it quite the right way, but what we did initially to recapitalize the banks was something [that] needed doing.

This issue of stimulus is a different issue. This is about borrowing money and spending it for things; it's not about recapitalizing the financial system. So let's use some numbers. Right now we have, arguably, 10 million unemployed people. So if we said we were going to give every one of those 10 million people $40,000 a year for the next couple of years while we're in this ditch, how much would that cost us? Well, let's see: 10 million times 40,000 -- that's $400 billion. So if we're going to do $700 billion, what are we going to do with the other $300 billion?

I believe what the Obama administration is recommending is a public works program where jobs would be generated, certainly, where the economy would be stimulated, certainly. But the basic infrastructure of the United States, which has been lying fallow for a very long time, would be able to be rebuilt.

Oh, I see. So what about the 10 million?

Those are jobs that go in there.

Uh huh. We're going to get the 10 million people employed for $700 billion? I just fixed the 10 million unemployed by showering them with cash.

I'm glad you did, but you didn't fix the roads --

I want to fix the roads too. I want to fix the roads, so why are we only asking for $700 billion? Why don't we ask for $2 trillion? ...

The truth is, you can't endlessly borrow money and have a sound economy, whether you like it or not. In times like we're in now, it's true that you can borrow some money and it won't produce immediate inflation and immediately higher interest rates. But the American people need to understand, why are we only asking for $700 [billion]? ...

Allan Hubbard Assistant to the President for Economic Policy, 2005-07

The problem, if you're looking at a stimulus, you want it to be broad-based and basically hit the whole economy, and you want it to occur as quickly as possible. Infrastructure -- [it] takes a long time to build a new road; even to repair a road, that's a long time. ... Most people think that if a big infrastructure bill is passed this year, no more than 25 percent of it will be spent this year.

I think a much better approach is to reduce taxes; i.e., put more money in the American people's hands, and reduce the withholding tables, and reduce across-the-board taxes where people have more money. Now, the argument against that is, well, they're just going to save it, and they're not going to spend it. This is a very important point. ... If it's a temporary tax reduction, they're going to save it because they're not going to have it next year. But if it's permanent [and] they know they're going to have for the foreseeable future, then they will spend a much bigger percentage of it. … They, better than the government, know where spending should occur, and they are the best at deciding what makes the most sense for economic growth. ...

Michael Duffy Time magazine

The stimulus package that passed in the first two weeks of the administration is one of the easiest measures to get by a Congress because there are no hard choices. Congress either reduced the taxes of various people and companies and industries in the country, or it wrote checks to others. There were no hard choices; there was no effort to restrict or reduce anyone's federal take. The only people who had to give anything in the stimulus package were your children and my children; anyone who is alive today doesn't actually have to lose anything. Everyone got; no one had to give. ...

Barack Obama came to town thinking he could generate bipartisan support for some of his measures. But on a series of votes that were among the easiest for Congress to make -- giving away billions of dollars worth of government money -- he couldn't get Republican support even for that. When he turns around in the coming months and asks Congress to do more difficult things -- to restrict access to health care, to change eligibility requirements on Social Security and Medicare -- he's going to discover that, while he may get Republican votes for some of those measures, he's going to have trouble generating Democratic votes for them. So the easy votes have been taken, and now the hard ones are those that are ahead.

Clive Crook Financial Times

Prior to the release of this budget proposal from the White House, Clive Crook, well-known centrist, thought that Obama was a compatriot in centrism. Do you still?

I'm not sure. I think I'm almost ready to say I don't think he is. First of all, let me say I'm not accusing Obama of cheating here. What he's doing in the budget is, for the most part, what he promised to do in the election. So in a way, you could criticize my naiveté for thinking that he wouldn't do what he promised to do; politicians usually don't. One of the interesting things about Obama's budget is he's serving notice that he intends to do what he said. And the elements in this budget are really strikingly liberal. They aren't centrist. I think they're well to the left of center.

What takes you aback?

Well, it was one thing -- and some people argued that it was not such a big deal, but I'd like to argue that it is -- and that was the decision to cap tax deductions for households on more than $250,000 a year in order to pay for his health care reserve. Now, that is not a huge thing -- I mean, it's not small; it's a $30-billion-a-year tax increase on the higher-paid. But I thought it was significant politically because it signaled a more aggressive approach to redistribution than I thought Obama would propose.

Also [during] the election campaign, he promised to reverse the Bush tax cuts for the higher-paid. I think that's something that a lot of the country wanted to see happen. In the budget, not only did he say that he intended to keep that promise -- as though the recession hadn't happened, as though the savings of those people hadn't been hammered, as though that housing equity hadn't been cut in half -- ... but then some more. He's going to increase taxes even by more than he said he would do during the election. Although it's not a huge additional tax increase, it's revealing because I think it tells you that he's serious about wanting the top few percent of the country to carry the entire burden of the cost of his public investment program.

And so you have the combination of a striking increase in the size of government -- because of health reform and the other public investments he wants to undertake -- together with this insistence that almost all Americans will pay not a dime, as he puts it, towards meeting these costs. That's a very liberal vision, and there isn't much there for a centrist to say, you know, "Well, I can do business with that." …

Shared sacrifice is what's missing?

When FDR introduced Social Security, the notion was not that … 95 percent of the country can have pensions and the rich will pay. No, the deal was we all have to pay something for this, to get our pensions. … That's my problem with the Obama budget. It doesn't make any concession at all, as far as I can see, to the idea that these investments are going to cost us all something. If you offer people something for nothing they're going to want it. I don't think that's good leadership. ...

There is much talk of trying to deal with the national debt, cutting the deficit in half by the end of his term. Do you see that in the budget?

No, not yet. Listen, I think that they're serious about this. I have an awful lot of respect for the people in the administration who are on the budget side. They know what they are doing, and I think they're genuinely aiming to control debt, get the deficit down.

But … the budget doesn't do it. It leaves this big deficit in place. And it is based on some pretty optimistic economic assumptions -- not wildly optimistic, but fairly optimistic, more optimistic than what economists out there in the markets are assuming.

If you plugged their numbers into this budget, then a bigger deficit would remain at the end. And the truth is, we can't afford for there to be any deficit at the end. Because not much after the end of his budget planning process we begin to see the demographic pressures on Medicare, especially, and on Social Security start to kick in. We need to be approaching that long-term fiscal problem from a position of fiscal strength. And a full-employment budget deficit of 3 percent of GDP is not a position of fiscal strength.

Peter Orszag Director, Office of Management and Budget

And here's the obligation that you have. You have to do two contradictory things: On the one hand, you've got to jump-start the economy. That means you've got to spend a lot of money. And on the other hand, you've got to figure out how not to spend a lot of money. And you've got to do it at the same time.

You should put the policies in place at the same time, but the timing of when those policies actually take effect needs to differ. And it is quite difficult, because what's good for the economy right now, when it's falling a trillion dollars short of capacity, is exactly the opposite of what's good for it in five or 10 years after we've started to grow again.

In particular, right now, the key thing is we could be producing a lot more, so we need to jump-start the economy, add to aggregate demand, and the key constraint is how much we're spending. Over time, however, the key constraints on economic growth is how rapidly we're expanding the capacity to produce goods and services, and so it flips on its head.

In the very short run, it's good to have the government stepping in, allowing some increase in the deficit, because that helps fill in the hole in terms of how much we're actually producing this year. Over the medium to long term, though, those same deficits become quite harmful to economic growth.

Are you satisfied that you're putting a budget into place today that lays the groundwork for dealing with the unfunded liabilities of entitlements?

I think what's very clear, the single most important thing we can do on our long-term entitlement problem is to reduce the rate of growth of health care costs. Everything else is almost a footnote.

So, in particular, let's just look at the numbers. If health care costs grow at the same rate over the next four decades as they did over the past four decades, Medicare and Medicaid -- those are the two federal health insurance programs -- go from 5 percent of the economy today to 20 percent of the economy by 2050. That's basically the entire size of the federal government under normal conditions. That 15-percent-of-GDP increase can be compared to roughly a 1.5-percent-of-GDP increase in Social Security and roughly no increase in the rest of the budget.

So if you're looking at where the money is, it's in health care. We need to bend the curve on long-term health care costs. And this budget is the most aggressive budget that I have ever seen in terms of moving toward a more efficient health care system.

posted march 24, 2009

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