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April 06, 2009

Obama's Looming Budget Catastrophe

Can a nation run a 10-12 percent deficit year after year into the far future?

Obama thinks it can.

I was told there would be no math during this presidency.

The administration’s original proposal, you recall, left a persistent budget deficit of roughly 3 per cent of gross domestic product. This has nothing to do with stimulus: the gap is there 10 years out and beyond, long after the economy is assumed to have experienced a prompt, strong, and sustained recovery. Taking account of newer data, and using slightly less optimistic near-term assumptions, the Congressional Budget Office has already upped that projected deficit to 4 per cent of GDP.

Even before the budget, the country’s underlying fiscal gap, reflecting demographic and other distant pressures on public spending, had been estimated at 8 per cent of GDP. On the administration’s plans, the US economy will prepare to greet that eventual shortfall with a big structural deficit already in place.

But that is not all. One of the most expensive commitments in the budget is healthcare reform. Towards the full cost of this initiative – estimated at $1,200bn (€890bn, £810bn) or higher over 10 years – the budget merely calls for a 10-year “downpayment” of $600bn. So even that 3 per cent full employment deficit (4 per cent, according to the CBO) was a deliberate underestimate.

And still it gets worse. Congress’s new versions of the budget tweak here and there, paying lip service to the need for fiscal control, but taken together point in the direction you might expect, towards even bigger long-term deficits. Both chambers have agreed to scale back spending on future financial bail-outs, and to trim relief for the alternative minimum tax (a parallel tax code originally aimed at the very rich, which is starting to affect middle-class households). These are delusional economies. More will have to be spent on bail-outs before this crisis is over, and it is the closest thing to a political certainty that the ever-encroaching AMT will continue to be pushed back, at the cost of forgone revenue, year by year.

Also bear in mind that the budget’s signature spending initiative now looks more likely to pass, whereas its signature revenue-raising initiative looks doomed.

Incidentally, this isn't even Keynesianism. Keynes championed deficit spending during downturns, not permanently.

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posted by Ace at 04:10 PM

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