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Tuesday, Sept. 28, 2010

Fiscally, Obama has had a rough summer


PALO ALTO, Calif. — Has the Obama administration learned anything from the string of fiscal setbacks it has suffered this summer?

First, at the Group of 20 Summit in Canada, President Barack Obama was soundly rebuffed by Canadian Prime Minister Stephen Harper, British Prime Minister David Cameron and German Chancellor Angela Merkel, among others, on his demand for additional fiscal stimulus (more government spending). They are pursuing fiscal consolidation, following the immense explosion of public debt in the 2008-2009 recession, and have called for cutting deficits in half by 2013 and stabilizing the government debt-to-GDP ratio by 2016.

Obama said at the summit that he will propose tough deficit-reduction measures next year. But talk is always cheaper than action. Thus far the Obama administration has followed the opposite strategy, letting rip with new spending, while hoping that concern over deficits and debt will lead to pressure for higher taxes, possibly even a European-style value-added tax.

But American voters aren't cooperating. To the surprise of many on the political left and most pundits, the clamor for a big expansion of government has not materialized. Instead, there has been a backlash against the barrage of federal government spending, deficits, and debt.

Most political prognosticators expect large losses for Democrats in November's midterm elections over this issue. Voters want less spending, not higher taxes. They sense that the American economy has outperformed the Western European economies largely because of its less expansive government.

Second, the International Monetary Fund, under the G20's "Mutual Assessment Process," suggested that the United States cut its fiscal deficit by 3 percent of GDP more than planned — over $400 billion in additional cuts per year. The IMF believes current fiscal plans will deter U.S. economic growth.

Recently, the European Central Bank reiterated its position that serious fiscal consolidation would generate enough increase in private-sector confidence that gains in spending by households and businesses would more than offset lower spending by governments.

America's major trading partners want the U.S. to grow and buy more of their exports. As their economies recover, massive U.S. government borrowing also will crowd out their government and private borrowers. The U.S. deficit for 2010 is roughly $1.3 trillion. That is larger than the elevated borrowing by all other G7 countries combined — Britain, France, Germany, Italy, Japan and Canada — plus profligate Portugal and Greece. In short, the rest of the world wants the U.S. to get its fiscal house in order as soon as possible.

Third, the administration issued its midyear budget update, which projects huge deficits as far as the eye can see. The proposed solution: a commission to recommend a path to balance the primary deficit (the deficit excluding interest payments) in 2015.

Presidents themselves used to propose paths to a balanced budget.

Moreover, the goal of balancing the primary budget in 2015 is hardly encouraging. By then, Obama would have almost doubled the government debt-to-GDP ratio from an inherited safety zone of 40 percent to a danger zone of almost 80 percent, a level not seen since the immediate aftermath of World War II.

Of course, the longer-term deficits, driven by baby-boomer retirements and rising health and pension costs per beneficiary, grow progressively worse thereafter (the commission will also recommend how to get the longer-term deficit under control).

Fourth, the House of Representatives decided not even to attempt to pass a budget this year. This remarkable evasion is the first time the House has not passed a budget since the procedural reforms 35 years ago created the congressional budget committees and rules that legislators were supposed to use to control deficits.

Fifth, Obama announced a new series of stimulus proposals just weeks before the midterm elections. His political opponents quickly observed that this amounted to an admission that the first stimulus had failed. One proposal — immediate tax deductibility for capital investment — should be part of a permanent (and overdue) corporate-tax reform, but Obama has proposed it as a one-year measure to induce businesses to move capital spending forward to 2011.

Sixth, Budget Director Peter Orszag, the Obama administration's leading deficit hawk — at least prior to joining the administration — has resigned (to be replaced by Jack Lew, a budget director under former President Bill Clinton).

So who will now counsel Obama that piling on additional deficits and debt to fund a vast expansion of spending is bad economics, that the costs are likely to far outweigh the benefits, and that raising taxes will do permanent long-term damage to the economy? Certainly not his effusive cheerleaders for the costly, ineffective February 2009 stimulus bill, a vast array of social engineering and pork that was ill-suited to deal with the sharp contraction in private employment in the recession. Certainly not the businessmen and women in the Cabinet, based on their real world experience.

Let's hope the late conversion to tough deficit rhetoric gets a lot of play. Fortunately, it appears that U.S. voters, who have a way of holding politicians accountable for their pronouncement, are far ahead of the politicians.

Michael Boskin, professor of economics at Stanford University and a senior fellow at the Hoover Institution, was chairman of President George H.W. Bush's Council of Economic Advisors, 1989-1993. © 2010 Project Syndicate


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