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The Structural Deficit

It is, I think, much too early to be worrying about closing America's structural deficit through any policies other than trying to set health care cost-containment in motion. Recession-fighting should be the agenda for 2009-2010. Structural balance should be the agenda for 2011-2012.

Ed Luce disagrees:

Deficit disorder: Back in February, Barack Obama’s presidency suffered an early setback when Judd Gregg, the Republican senator from New Hampshire, withdrew as his nominee for commerce secretary... decided he could not belong to an administration that would preside over such high budget deficits.... The Congressional Budget Office, a nonpartisan watchdog, forecasts that the US will post deficits in excess of a trillion dollars in each of the next 10 years... national debt will double to 82 per cent of GDP in the next decade – a level not seen since the second world war.... America’s fiscal outlook has rapidly become the object of widespread alarm....

The administration cannot be blamed for what is this year an almost entirely inherited deficit. Mr Obama’s new spending accounts for only about one-tenth of it. The effects of the recession, the costs of the bank bail-out and the structural legacy of the three large tax cuts and two wars bequeathed by George W. Bush account for the remainder. Nor do critics, including Mr Gregg, blame the new president for pushing through a $787bn two-year fiscal stimulus within a month of moving into the White House. “We needed to dig the economy out of a hole,” says Mr Gregg. “I understand that.”...

Barack Obama made it clear this week that the door to further fiscal stimulus is wide open – even as he stressed that his administration has not yet decided to seek one from Congress, writes Krishna Guha. “I think it’s important to see how the economy evolves and how effective the first stimulus is,” he told a news conference. But the US president added that “nobody understood what the depths of this recession were going to look like” when the current stimulus package was passed weeks after he took office in January. Many analysts think it is all but inevitable that the administration will end up seeking an additional stimulus if only to smooth the cliff-edge effect when the effects of the previous boost fade and tax cuts introduced under George W. Bush expire from late 2010. Otherwise, many see a serious risk of a double-dip recession in 2011....

But politics is quick to change. The otherwise deeply unpopular Republican party is starting to sense an opportunity. A rapidly growing proportion of the US public is registering anxiety at the sea of red ink.... Ben Bernanke, governor of the Federal Reserve, told Congress this month: “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” All this leaves Mr Obama in a deepening quandary. In Augustinian style, he needs to keep pumping the economy in the short term, since consumers, who are the mainstay of the US economy, are unlikely to resume spending soon. But he needs simultaneously to reassure investors that he has put in place plans for a return to fiscal responsibility the moment recovery sets in.

The White House promises to halve the deficit it inherited by the end of Mr Obama’s first term in 2012. But few believe the economic growth numbers on which its projections are based. “I probably shouldn’t say this but President Obama’s plans remind me of George W. Bush,” says Douglas Holtz-Eakin, a former head of the CBO who was John McCain’s chief economic adviser during the the presidential election. “Both presidents experienced a crisis – 9/11 and the financial meltdown. Both promised to halve their resulting budget deficits. Neither were credible.”...

[T]he vast looming deficits in Medicare and Medicaid.... Conventional wisdom says Mr Obama should set up a bipartisan commission to tackle the problem. This would be the only way of shielding both parties from the political fall-out that would undoubtedly result from a cut in benefits.... Most Republicans, meanwhile, would agree to join the commission only if it excluded the possibility of tax increases – a precondition that would in effect kill the exercise before it began....

A plausible alternative scenario is that Mr Obama will head into next year’s midterm congressional elections, which will help determine his re-election chances in 2012, facing a sullen electorate that fears the Democrats are taking their country towards bankruptcy. It might not be fair – Mr Bush, rather than Mr Obama, deserves most of the blame for America’s deepening structural deficits. But it is the kind of message that could help bring a moribund Republican party back to life...

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