With the excitement of the incoming Obama Administration and their bold plans to both change how Washington does its business and “rescue” the economy, it’s been really uncool to raise the question “how are you going to pay for it?” or “where is this money coming from?” But we seem reluctant to ask this question even of the out-going (and not-so-cool) Bush Administration, even as they’ve already committed hundreds of billions of dollars to help the economy, in far less-than-transparent ways.
A few days ago a Washington Post editorial was willing to rain a bit on the Obama economic team “parade” and ask the question, how exactly will President Obama (once he’s president) eventually pay for all the bold things he’ll want to do to address the economic crisis?:
…Mr. Obama is talking about adding hundreds of billions of dollars in federal debt. That is reasonable under the dire economic circumstances, but it is scarcely adequate to couple that with platitudes about eliminating wasteful spending. As Mr. Obama well knows, and as his first-rate new budget director, Peter R. Orszag, understands as keenly as anyone, it will take far more than that to get the nation’s fiscal house in order…
Mr. Obama was on firmer ground when he talked about focusing on “one of the biggest long-run challenges that our budget faces, namely the rising cost of health care in both the public and private sectors.”… Yet here, too, Mr. Obama engaged in a bit of happy talk, skating lightly over the difficult choices that controlling health-care costs will entail… slowing the growth of health-care costs alone won’t be enough to deal with the fiscal ramifications of the baby boomers’ retirement. Yesterday may not have been the moment for Mr. Obama to lay all this out, but at some point he is going to have to stop talking vaguely about the need for “sacrifice” and be more candid about what that will entail.
And I did an interview with Kathleen Pender of the San Francisco Chronicle last week where I did worry out loud quite a bit about the economic rescue tab that seems to be running up rapidly:
The federal government committed an additional $800 billion to two new loan programs on Tuesday, bringing its cumulative commitment to financial rescue initiatives to a staggering $8.5 trillion, according to Bloomberg News.
That sum represents almost 60 percent of the nation’s estimated gross domestic product.
Given the unprecedented size and complexity of these programs and the fact that many have never been tried before, it’s impossible to predict how much they will cost taxpayers. The final cost won’t be known for many years…
It’s hard to say how much the overall rescue attempt will add to the annual deficit or the national debt because the government accounts for each program differently.
If the Treasury borrows money to finance a program, that money adds to the federal debt and must eventually be paid off, with interest, says Diane Lim Rogers, chief economist with the Concord Coalition, a nonpartisan group that aims to eliminate federal deficits.
The federal debt held by the public has risen to $6.4 trillion from $5.5 trillion at the end of August. (Total debt, including that owed to Social Security and other government agencies, stands at more than $10 trillion.)
However, a $1 billion increase in the federal debt does not necessarily increase the annual budget deficit by $1 billion because it is expected to be repaid over time, Rogers said.
A deficit arises when the government’s expenditures exceed its revenues in a particular year. Some estimate that the federal deficit will exceed $1 trillion this fiscal year as a result of the economic slowdown and efforts to revive it.
The Fed’s activities to shore up the financial system do not show up directly on the federal budget, although they can have an impact. The Fed lends money from its own balance sheet or by essentially creating new money. It has been doing both this year.
The problem is, “if you print money all the time, the money becomes worth less,” Rogers says. This usually leads to higher inflation and higher interest rates. The value of the dollar also falls because foreign investors become less willing to invest in the United States.
Today, interest rates are relatively low and the dollar has been mostly strengthening this year because U.S. Treasury securities “are still for the moment a very safe thing to be investing in because the financial market is so unstable,” Rogers said. “Once we stabilize the stock market, people will not be so enamored of clutching onto Treasurys.”
At that point, interest rates and inflation will rise. Increased borrowing by the Treasury will also put upward pressure on interest rates.
Deflation a big concern
Today, however, the Fed is more worried about deflation than inflation and is willing to flood the market with money if necessary to prevent an economic collapse.
Federal Reserve Chairman Ben Bernanke “has ordered the helicopters to get ready,” said Axel Merk, president of Merk Investments. “The helicopters are hovering and the first cash is making it through the seams. Soon, a door may be opened.”
Rogers says her biggest fear is not hyperinflation and the social unrest it could unleash. “I’m more worried about a lot of federal dollars being committed and not having much to show for it. My worst fear is we are leaving our children with a huge debt burden and not much left to pay it back.”…
And today’s New York Times editorial seems to worry a little:
This page has consistently held that the government must intervene in markets when failure to do so would cause even greater economic harm. The impending collapse of Citi or an unrelenting credit freeze demand intervention. But good crisis management also requires that the calamity of the moment not be allowed to overwhelm good governing. Unfortunately, that is not the case now.
Even, as the rescue tab rises, taxpayers are not being adequately informed or protected. There is as yet no effort to deal effectively with the underlying causes of the problem, especially mass mortgage defaults that feed bank losses. And officials seem to think urgency to act absolves them from considering the longer-term implications of the actions they take…
Another danger is that in fighting today’s crises, the government is teeing up the next one. To finance the bailouts, the Treasury is borrowing money and the Fed is printing it. That bodes ill for a heavily indebted nation, presaging higher interest rates and higher prices — perhaps sharply higher. That is not an argument for inaction. But frank acknowledgment of the dangers would put a premium on getting the rescues right today. As it is, the reckoning is postponed…