IS OBAMA'S BUDGET MAGICAL THINKING?

Jackie Calmes writes a piece comparing Obama's fiscal politics to supply-side economics, suggesting that Obama belives deficits will cure themselves thanks to government investment. (The whole thing falls a little flat when she writes, "They say Mr. Obama would never go so far as Republicans who claim that tax cuts pay for themselves.") It's not a very convincing argument, especially because Calmes conflates Obama's assertion that his investments will spur growth (reasonable but debatable) with a position he hasn't taken, that his investments will end the deficit.

Rather astoundingly, the article doesn't mention any of the administration's plans to increase tax revenue by letting the Bush tax cuts expire and changing student-loan programs to eliminate subsidies to private-sector middlemen. Those are the two things that are almost sure to pass; the article also neglects to mention other revenue-increasing measures (ending agricultural subsidies, decreasing tax deduction rates for the wealthy) that were cut out of the budget, though it does dwell on the tax cut proposal that was also cut out of the budget. Either evaluate him by his entire proposal or evaluate him by what's likely to pass, but it's not very rigorous to evaluate the plan by combining the worst of both categories.

We've heard this accusation before from conservatives, and I think the key thing here is that Obama has never claimed that this current fiscal situation is normal. A good deal of the nervous-making expenditure going on right now results from the fiscal stimulus package, the bank rescues, and the Bush administration hangover; in comparison, the president's long-standing policy reform ideas (roughly, health care, education and energy) aren't as costly. For conservatives, there is never a bad time to cut taxes, whether you're in a surplus or a deficit, a boom or a bust; for Obama and other liberals, economics needs to be context-driven, and in this context (a severe recession) deficit spending is what gets us out. Obama hasn't made the argument that we should have a deficit all the time.

The real crux of this argument is that Obama has, by necessity, put off a lot of deficit-reduction measures until we see some kind of economic recovery. True, he's tackling health-care reform and focusing on cost cutting (note the article mentions the need to restrain medicare and medicaid spending without mentioning Obama's extensive plans to do something about that.) But tax reform and Social Security discussions have been pushed off a year or two. Calmes is right to say that other presidents also pushed off those discussions and promised actions that never came. Then again, those other presidents' budgets were never as gimmick-free as Obama's initial effort was. It is too soon to tell if the president will deal seriously with the deficit, but the evidence available thus far doesn't suggest that he's likely to follow an irresponsible path.

I wonder if it's a coincidence that the two economists Calmes quotes are, respectively, a Reagan official and the editor of a collection of essays on Reagan?

-- Tim Fernholz

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