Government Finds Itself in Hole, Keeps Digging: Caroline Baum

Commentary by Caroline Baum

-- If it seems incongruous for elected officials to talk about budget discipline in the same breath as trillion-dollar deficits, it is.

President-elect Barack Obama is being encouraged by economists of all stripes to err on the side of doing too much to get the economy moving again. The bidding starts at $775 billion; only the naive believe it will stop there.

While Obama was in Washington pushing his agenda last week, the Congressional Budget Office was pouring cold water on the rollout. CBO projects a federal deficit of $1.2 trillion in fiscal 2009, 8.3 percent of gross domestic product, the biggest share of GDP ever with the exception of the periods during the two world wars.

The CBO estimates do not take into account the fiscal stimulus package, a.k.a. the American Recovery and Reinvestment Plan. That package will find a new urgency after Friday’s employment report for December closed the book on 2008 and its 2.6 million job losses, the biggest decline since the end of World War II.

Even scarier for those who measure the size of government by how much it spends is the projected jump in outlays to 25 percent of GDP, according to CBO, the highest since 1945.

If economics is, as it’s sometimes defined, the study of scarcity, then resources available to the private sector just got a whole lot scarcer.

Obama held up government as the only solution to the current problems.

“Only government can provide the short-term boost necessary to lift us from a recession this deep and severe,” he said in a Jan. 8 speech at George Mason University in Fairfax, Virginia. “Only government can break the vicious cycles that are crippling our economy.”

Kindness of Strangers

He neglected to say that only government can borrow trillions of dollars at miniscule interest rates. With yields on Treasury bills close to zero, I’m surprised the government hasn’t come up with a plan to borrow forward. Why not capitalize on the demand for super-safe T-bills and sell three-month bills one year from today?

How long the U.S. can count on the kindness of foreigners is an open question, not to mention a potential Armageddon scenario for the Federal Reserve if the dollar collapses.

Confronted with a fiscal situation that is bad and getting worse, what’s the government to do?

Even some groups dedicated to fiscal discipline concede the government has a responsibility to offset the decline in private demand. That the discretionary spending binge comes at a time when the retiring baby boomers are adding to existing strains on the government’s retirement and health-care systems (Social Security and Medicare) is an unlucky twist of fate -- or perhaps a needed wake-up call.

Like It Is

The challenge is “doing what’s necessary in the short-term without aggravating what’s already a monumental long-term problem,” says Susan Tanaka, director of citizens’ education at the Peter G. Peterson Foundation, a group dedicated to increasing public awareness about America’s fiscal future. The spending and tax cuts “should be temporary, targeted and efficient,” she says. “There is never an excuse for wasting money.”

Some of Obama’s supposed $300 billion in tax cuts -- credits for workers who pay no income tax, for instance -- is government spending by another name. (The first step in greater transparency is telling it like it is.)

Even in the face of $56.4 trillion of unfunded promises for future Social Security and Medicare beneficiaries -- $483,000 per household -- some economists are arguing that bigger (fiscal stimulus) is better. They cite statistics showing that every $1 of public spending translates into $1.50 of GDP.

Performance Czarina

If that’s the case, “why not do it every year?” says Andy Laperriere, managing director at the ISI Group in Washington.

The way he sees it, if consumers use the $150 billion of “tax cuts” to pay down credit-card debt, “we have $150 billion in government debt,” the burden of which ultimately falls on the taxpayer. The transaction boosts “short-term GDP at the expense of long-term GDP,” he says.

“The only way the stimulus package makes sense is to halt a downward spiral, to stop a freefall,” he says.

Obama promises the stimulus package will be kosher (pork- free, in other words). Management consultant McKinsey & Co. will be looking over his shoulder to ferret out any government waste and inefficiencies. (Former McKinsey consultant Nancy Killefer was named to the new post of chief performance officer.) And all those bridges that will be part of infrastructure spending? I have one or two to sell you.

Dire Straits

The dire state of federal finances presents an opportunity to educate the public, make the costs of government programs more transparent and “change the political environment so lawmakers can make the decisions they need to make,” Tanaka says.

“We talk about finding ‘efficiencies’ in health care, but these are euphemisms for not being able to get the volume of services we’re used to,” she says. “Everybody wants coverage. What are they willing to pay for it?”

Medical care may appear to be “free” to employees whose insurance premiums are paid by the company, but “it’s not free,” Tanaka says. “It’s coming out of wages.”

Until voters accept that there’s no free lunch, it’s hopeless to expect politicians to get the message.