Politico's Jim Vandehei and Mike Allen wonder today whether Obama will have to scale back his health plan or McCain will have to give up on cutting taxes for the wealthy because of the budgetary impact of the bailout. This has become a dominant new meme in this election; the idea is that the candidates aren't being honest if they don't admit that their platforms need a radical overhaul in light of the crisis on Wall Street. Prepare to hear more and more calls for cutbacks on social spending, especially health care and education.
But although $700 billion is a ginormous number, it isn't necessarily a budget-breaking one -- even if the bailout ends up costing that much, which, as Tim writes, it probably won't. Here's what former Treasury Secretary Larry Summers wrote in the Post today, and it's worth keeping in mind:
The idea seems to have taken hold that the nation will have to scale back its aspirations in areas such as health care, energy, education and tax relief. This is more wrong than right. We have here the unusual case where economic analysis suggests that dismal conclusions are unwarranted and recent events suggest that in the near term, government should do more, not less. ...
Since Keynes we have recognized that it is appropriate to allow government deficits to rise as the economy turns down if there is also a commitment to reduce deficits in good times. After using the economic expansion of the 1990s to bring down government indebtedness, the United States made a serious error in allowing deficits to rise over the past eight years. But it would compound this error to override what economists call "automatic stabilizers" by seeking to reduce deficits in the near term.
--Dana Goldstein
