Two wise columns in this morning’s Washington Post convey the same reminder: the financial crisis seems to be encouraging ideas that clearly increase the debt position of the federal government, when clearly the federal debt has been part of the big problem.
Bruce Bartlett, a Reagan Administration official, urges the candidates to lay out real plans that would seriously reduce the budget deficit (emphasis added):
[I]t is extremely unlikely that either man envisioned the magnitude of the economic problems that are becoming more obvious by the hour.
Now, federal officials are crafting an entity akin to the Resolution Trust Corporation to buy up bad debts and get them off bank balance sheets. That’s how the RTC cleaned up the savings and loan mess in the early 1990s — to the tune of about $125 billion. Today’s problems will cost a lot more.
What this means is that we cannot afford either candidate’s tax and spending plans. The money that Obama would like to spend on the poor will have to be used to clean up the financial mess. Similarly, the tax cuts that McCain would like to hand out are off the table. The federal government is going to need new revenue and fast. We cannot continue to cut taxes as if the budget deficit doesn’t matter. The fundamental problem of the U.S. economy is too much debt. Fixing that will require belt-tightening from everyone — including the federal government, which must get its fiscal house in order to help the financial sector heal.
Voters should insist that McCain and Obama throw out their tax and spending plans and offer something that reflects current economic realities. These new plans must be more than vague generalities and should commit the next president to a course of action that involves real spending cuts and real tax increases.
…It would be useful for both candidates to work from the same benchmark, such as reducing the projected deficit by $1 trillion over 10 years. That would pretty much eliminate the use of “smoke and mirrors” and unserious proposals. If one candidate wants to raise taxes by, say, $1 trillion, then he should say so and spell out how. If he thinks we can get $1 trillion out of the income tax without burdening middle- and lower-income workers, let’s hear how. If he thinks we can cut spending by that much, he should explain how. If he thinks it can be done without significantly cutting popular programs such as Medicare, I for one would like to know how…
…It’s probably realistic to assume that the balance would be roughly 50-50 between taxes and spending, though each candidate could offer a different balance. But if the proposed package is so one-sided as to make enactment by Congress impossible, this is also useful information for voters.
The time for free lunches is past…The people deserve to know what is really going to happen in January…right now we need quick and decisive action if we are to right the economy.
And Sebastian Mallaby points out that the government bailout moves more debt onto the federal balance sheet (and onto the “taxpayers’ portfolio”)–not exactly just what the federal books needed. He asks this really good question: why couldn’t we consider the government taking on some equity instead? (emphasis added):
Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans. Given a fatter capital cushion, banks would have time to dispose of the bad loans in an orderly fashion. Taxpayers would be spared the experience of wandering into a bad-loan bazaar and being ripped off by every merchant.
Raghuram Rajan and Luigi Zingales of the University of Chicago suggest ways to force the banks to raise capital without tapping the taxpayers. First, the government should tell banks to cancel all dividend payments…Second, the government should tell all healthy banks to issue new equity…
Meanwhile, Charles Calomiris of Columbia University and Douglas Elmendorf of the Brookings Institution have offered versions of another idea. The government should help not by buying banks’ bad loans but by buying equity stakes in the banks themselves. Whereas it’s horribly complicated to value bad loans, banks have share prices you can look up in seconds, so government could inject capital into banks quickly and at a fair level. The share prices of banks that recovered would rise, compensating taxpayers for losses on their stakes in the banks that eventually went under.
Congress and the administration may not like the sound of these ideas. Taking bad loans off the shoulders of the banks seems like a merciful rescue; ordering banks to raise capital or buying equity stakes in them sounds like big-government meddling. But we are in the midst of a crisis, and it shouldn’t matter how things sound. The Treasury plan outlined on Friday involves vast risks to taxpayers, huge complexity and no guarantee of success. There are better ways forward.
Here we are, staring at a budget deficit that looks likely to top a trillion dollars next year. Not exactly just what we needed… But is it too late to “wake up” and change course, along the lines that Bruce and Sebastian suggest? I hate to sound so pessimistic, but the political momentum of the wrong course seems far too great.