Macroeconomic Scholasticism
Duty, Honor, Country

Economist Mom Hopes That the Obama Administration Is Thinking Sensibly About the Medium Run Deficit

Even though they are not yet talking sensibly--like about the need for sticking to PAYGO over the medium run.

Economist Mom:

Peter Orszag on the Tough Specifics of Deficit Reduction: The President’s budget director, Peter Orszag, was on NPR’s Morning Edition on Wednesday morning.  He talked about the really difficult fiscal policy dilemma the federal government faces right now–dealing with both an unusually severe recession and a worsening longer-term budget outlook (emphasis added):

“On the one hand, [you have] the GDP gap, the gap between how much the economy is producing and how much it could produce, and, on the other hand, these deficits,” he says. “If we only faced one or the other, the way forward would be clearer. But balancing between the two keeps me up at night.”

Sometime around 2011 to 2013, “that’s where we’re going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jump-start the economy,” he says. “We’re working through [this], and we haven’t made final decisions on the best path to walk down from where we are now to where we need to get.”

Personally, I’d like to believe they’re mulling over the Bush tax cuts and President Obama’s campaign promises, weighing economic and political costs versus benefits.  Here’s a little hint (emphasis added):

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”

The Medicare Prescription Drug Benefit and the 2001 and 2003 tax cuts weren’t paid for, he points out. That was compounded by the reduction in tax revenue from the economic downturn, the cost of the economic stimulus and the need for increased spending on unemployment benefits and food stamps.

“So, the point being, we inherited a big hole,” Orszag says.

Sounds like not paying for the 2001 and 2003 tax cuts was a bad idea, and that the current revenue system is not keeping up with our spending needs (even ongoing, not just the temporarily high spending needs associated with stimulus).  It sounds like by 2011-13 we ought to be considering a fundamental reform of the tax system.  I’d like to suggest that “fundamental tax reform” ought to mean more than deciding which parts of the Bush tax cuts should get extended.

And as Peter points out:

“The thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it,” Orszag says. “There are some that will decry the deficit but are unwilling to embrace anything that will actually bring it down.”

Well, I think the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).  It’s the reason, by the way, why Concord’s online budget challenge (based on CBO’s “Budget Options”) seems lopsided in favor of tax increases over entitlement cuts:  because the fiscally-irresponsible policies of the Bush Administration that the Obama Administration now blames for the awful budget outlook were lopsided on the tax-cut side.  It’s not that CBO or Concord prefers raising taxes to cutting spending.  It’s that that’s where the biggest levers are to significantly change the budget outlook anytime soon–meaning right after the economy is strong again, maybe in 2011-13, like Peter says.