The Deficit

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Mike Allen and Jim VandeHei have a sexed-up big-picture story in today’s Politico on the Obama administration’s plans for cutting the federal deficit. The gist is that the Obama team is going to spend 2010 focusing on slashing the deficit—so much so that the President will focus his State of the Union address in January on the subject. The problem is that most economists agree that when the economy is in recession it needs more spending, not less. So cutting the deficit could be counterproductive, especially if it further depresses the economy and further reduces tax revenues. At the same time, the deficit is an illustration of a very serious problem, as Doug Elmendorf, the director of the Congressional Budget Office, explained this week:

The country faces a fundamental disconnect between the services the people expect the government to provide, particularly in the form of benefits for older Americans, and the tax revenues that people are willing to send to the government to finance those services.

The difficulty for the Obama administration lies in the contradiction between the need for deficit spending to stimulate the economy and the unsustainability of deficit spending. The national debt is already at a historically high level as a percentage of GDP, leaving Obama with less room for countercyclical deficit spending than he would otherwise have. It’s a bad time to borrow, but it’s also a bad time not to borrow. The profligacy of 2001-2008 has put the Obama team in a really tough place.


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