Obama Transition Team: Fiscal Responsibility Still Matters
November 12th, 2008 . by economistmomThe Center for American Progress is headed by former Clinton chief of staff, and current Obama transition team leader, John Podesta. Today they issued this economic policy paper, “Restoring Confidence in the American Economy.” It outlines necessary policy priorities in the areas of short-term stimulus, health care reform, climate change policy, and education. But it also contains a section on “addressing the long-run fiscal challenge” where they say (pages 5-7 of the pdf file):
Facing the greatest financial and economic crisis since the Great Depression, we should not let short-term deficits, even large ones, prevent necessary steps to weather the storm. Yet we also have an obligation to restore budget responsibility and confidence that government is careful and uses taxpayer resources wisely and to good effect. After the period of economic weakness when deficit spending is needed to strengthen the economy, we should make the tough choices to limit the deficit so our economy is growing more quickly than the national debt, providing assurance that the federal government will be able to meet its obligations.
The federal budget is in a deep hole due to the Bush tax cuts favoring the wealthy and a costly and ill-conceived war in Iraq that consumes at least $10 billion a month. We have neglected important investments in our future, while Medicare and Social Security spending threatens our fiscal future in the coming decades. We need to reform Medicare and Social Security to make them sustainable. Those reforms should come alongside efforts to promote stronger economic growth, which would help close the programs’ financial gap. Moreover, those reforms should come within the context of broader reform of health care and the retirement security system…
Confronting these long-term budget challenges is critical, but we must be willing to make tough choices in the short term as well. In a crisis as severe as the one we face today, top priority for resources must go to investments that will promote long-term growth and competitiveness, restore America as a land of economic opportunity for all, and ensure that the benefits of our economy are widely shared…
I think this shows that “fiscal responsibility”–in the broader sense that I and Concord have talked about–will still matter to the Obama Administration.
Amen (seperation of church and state notwithstanding).
Hopefully this signals a move beyond the “It’s a health care problem not a budget problem” false dichotomy. That debate had too much at risk with either side having too little to gain.
Hi Diane,
They write:
…we must be willing to make tough choices in the short term as well. In a crisis as severe as the one we face today, top priority for resources must go to investments that will promote long-term growth and competitiveness, restore America as a land of economic opportunity for all, and ensure that the benefits of our economy are widely shared.
There seems to be some conflict between the goal of maximizing bang-for-the-buck in terms of immediate stimulus vs. the goal of using short-term spending in ways that contribute to long-term growth, but which would have less immediate stimulative effect. For example, some types of infrastructure spending (not counting funding to states to avoid suspension/slow-down of current projects) would contribute more to long-term growth than would increased spending on food-stamps, but have less immediate stimulative effect. Similarly, some forms of capital gains tax cut or corporate investment tax credit could contribute to long-term growth more than a tax cut skewed to lower-income earners (temporary reduction of payroll taxes; higher EITC; etc.), but again, with less immediate stimulative effect.
Do you agree that these goals come into conflict, given finite resources (or put differently, a limit to the level of incremental debt we consider worth incurring in the short term)? And if we are adding to deficits and to our projected debt-to-GDP to mitigate/shorten this (likely) recession, which do you consider our goal, or how do you believe we should balance and compromise these goals of maximizing stimulus per dollar vs. investing in long-term growth? (I have some catching up to do on your most recent posts, so forgive me if you’ve already answered that question).
On a related note, while I often here economists and other fiscal policy experts contending that greater short-term deficit-spending (on the spending and/or revenue sides) is desirable at this time to provide stimulus to mitigate/shorten recession, the case is generally not laid out with an explicit rationale and with proper distinctions among rationales vis a vis our economic interests. I see two potential rationales for increased deficit-spending: (1) Such policies are likely to mitigate/shorten the recession to such an extent that our projected debt-to-GDP will actually be lower with such policies than without them (so such policies are a win-win), or (2) such policies will make the long-term worse and require even greater sacrifices, but it is better from an overall utility perspective to smooth out business cycles rather than letting people endure more suffering in the short-term.
I would be very interested in knowing if potential rationale #1 is valid, and if not, to what extent we will be requiring greater sacrifices in the future to reduce pain now. Are there analyses that project the impact on our (publicly-held) debt-to-GDP of the stimulative policies under consideration, taking into account dynamic effects?
thanks
Brooks: There is always an inherent tension/conflict between stimulating economic activity in the immediate term (by boosting consumption and other spending), and encouraging economic growth over the longer run (by increasing saving and investment). I think the point that the CAP paper makes and that I have made before is that temporary deficit spending is less likely to come into conflict with longer-term goals if what we are (deficit) spending on encourages productive investments–so as to “increase our means” in the future. In other words, we are more likely to decide it’s fair to leave future generations with the extra debt burden if that extra debt at least partially goes toward ensuring they really will have a large enough (not just larger, but larger enough) economic pie. My feeling is that short-term deficit spending is necessary to counter the cyclical downturn, but that it may also be justified to up-front fund longer-term public investments that are likely to pay off over the longer run. But if we start going down that path, we still need to be very careful that such longer-term spending really IS the best we can do for longer-term national saving and economic growth. We need to simultaneously live within our means and expand our means.
Brooks: An interesting mathematical modeling datum. An economy that grows at a constant rate will end up larger than an economy that cycles around the same average rate. Thus, a policy which encourages growth in a recession at the expense of growth in a boom actually maximizes long term growth. (The huge caveat is that the policy must not take more from the boom than it delivers to the recession).
An example might be a rainy day fund. The model has the administrative costs as negligible. If you save more than the recession requires, you will reduce long term growth. If you save less than the recession requires, you will also reduce long term growth. Only by perfectly predicting how much to save and how fast to spend it again can you optimize long term growth. Not so easy, but it shows that maximizing growth at all points in the cycle it not the optimal solution.
Thanks Diane.
‘The 15% Solution”
One possible approach to dealing with the auto crisis — The federal government should give any one who buys a fuel efficient car from the Big 3 a 15% instant rebate back on the selling price. This program could have an 18 month time limit.
The total of the rebate dollars might then constitute a loan the auto makers would have to pay back.
If effective, this solution would immediately jump start US auto makers by giving them a huge advantage over the competition while they work on the remaining legacy issues. Auto makers would stay employed and no money would go directly to the car makers.
The feds might also think about underwriting an extended warranty program for this period. Again, the total dollars to do so, could constitute a loan to the auto makers.
If the dollars don’t proof out, the concept still might we worth exploring.
Joseph Hare
Hingham, MA.
More…..
A quick direct “15%” instant government rebate (say averaging around $3,000) from the Dept of Treasury paid to consumer with purchase of a US auto maker lower mileage car I think would make those cars stand out from the crowd.
Problem with tax return deductions is you onlyt get indirect value but once a year(Aprol 15) and higher wage earners get more real dollar benefit….and they do get lost in the shuffle.
If you could buy a Camry priced today at $20,000 for $20,000 versus a Malibu priced today for $20,000 for $17,000 plus get a 10 year warranty which would you buy?
US Car makers would have to use their real current sell the car off the lot price (then on top of that consumer gets 15% back ASAP from the Feds.
Such a program, if it worked, would give auto makers an instant dramatic jump start while they work on getting
more cars that would sell (without rebate program) developed and while they deal with worker legacy issues.
Giving a bailout just keeps them from going bankrupt while they try to get a higher % of americans to buy their cars. They have not suceeded in doing that over the last 20 years.