Obama and the Deficit

When framing the 2010 budget, one would hope that the Obama Administration brings to the task a greater sense of economic realism than that which has characterized its economic policy making decisions to date. In particular, one would hope that it recognizes how ineffectual its fiscal stimulus package has been and how very weak the present US economic recovery is likely to be. This is especially the case when one recalls how, when presenting its fiscal stimulus package earlier this year, the Administration assured us that with the fiscal stimulus unemployment would peak at around 8 1/4 percent, rather than anywhere near its present 10 1/4 percent level.

On scoring the 2009 fiscal stimulus package, the Congressional Budget Office estimated that even were there to be a full economic recovery, the US budget deficit would remain in the region of 4-6 percent of GDP by 2019. The CBO also estimated that over the next decade the US would experience the largest ever peace-time increase in it public debt. Recognizing how optimistic the CBO's underlying economic assumptions were, including its supposing a relatively robust economic recovery and its not making allowance for increased public health care spending, one would think that long-run US fiscal sustainability will require a medium-term reduction in the US primary budget deficit of at least 3 1/2 percentage points of GDP.

In formulating the 2010 budget, the Administration will be confronted with a basic dilemma. Fiscal sustainability will require some combination of deep expenditure cuts and tax revenue enhancements. Yet the present fragile state of the US economy would argue against an early start to budget consolidation. Indeed, it may very well still require a second fiscal stimulus package.

The appropriate way for the Administration to thread the budget needle would be to maintain near term fiscal support to the economy but to couple this near term support with credible policy commitments to medium term spending cuts and revenue enhancements. In the latter respect, the Administration should consider making serious commitments as to how to rein in entitlement spending on the Social Security, Medicare, and Medicaid programs. It should also consider substantive steps at limiting tax deductions on mortgage borrowing and on corporate debt, higher energy taxes, a federal consumption tax, and measures to ensure better tax compliance.

Desmond Lachman is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

What's new on AEI

image The money in banking: Comparing salaries of bank and bank regulatory employees
image What Obama should say about China in Japan
image A key to college success: Involved dads
image China takes the fight to space
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Event Registration is Closed
Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.