TW: I rag on Pethokoukis frequently but I agree with the substance of this piece. It is in fact the holy grail as far as I am concerned for a wise and successful Obama fiscal policy. Stimulate the economy in the short-run to mitigate the impact of the Great Contraction, but define a plan by which the long-term fiscal challenges facing America can be addressed.
The concept is simple, its execution, not so much. The fiscal "tweaks" Pethoukoukis mentions are politically challenging to say the least. Reducing the growth rates on Social Security and Medicare spending must occur if the U.S. is to achieve fiscal soundness yet as evidenced by the tumult with health care reform, implementing the changes are treacherous. Furthermore, conservatives like Pethokoukis may mention these type initiatives but neither he nor more importantly practically any actual elected Republican officials publicly are willing to put the meat on the concepts (a propos ironically Micheal Steele RNC chairman has a piece in today's WaPo pledging to protect Medicare from the Dems). What would you rather do pander to the seniors (with their 50MM and growing voting bloc) or bite the bullet on fiscal responsibility?
As I have said before, addressing our fiscal posture is by no means impossible, the options are fairly clear. Accumulating the political will in face of entrenched interests and voting blocs is the challenge.
From James Pethokoukis at Reuters:
"If so, unemployment would remain really high. And, given that prospect, you just know incumbent Democrats facing re-election in 2010 would love to vote for Son of Stimulus. The big drawback: Doing so would risk the wrath of budget-conscious independents, as well as bond investors who share Warren Buffett’s stated concerns that all this red ink could sink the dollar. Plus, a backup in interest rates would negate any positive effects from more stimulus.
But Olivier Blanchard, chief economist at the International Monetary Fund, may have cracked the code on to boost the economy and not spook bond investors and budget hawks. Blanchard’s grand bargain, one I have been suggesting for months, is for government to spend more money in the short term to boost growth while simultaneously taking strong action to reduce the long-term budget deficit. “The trade-off is fairly attractive,” Blanchard said in a report this week. “IMF estimates suggest that the fiscal cost of future increases in entitlements is 10 times the fiscal cost of the crisis. Thus, even a modest cut in the growth rate of entitlement programs can buy substantial fiscal space for continuing stimulus.”
Fiscal space is good! When you’re dealing with gobsmacking budget numbers, small cuts (or even just nicks in the rate of growth) can make a huge, real-world difference. As the Peterson Foundation figures it, Uncle Sam has run up some $55 trillion in long-term liabilities. Minor tweaks that make that number a bit more manageable in the future would create huge fiscal opportunities for more pro-growth measures today.
One example: the Dartmouth Institute for Health Policy and Clinical Practice calculates that if Medicare spending across America “grew at the San Francisco rate of 2.4 percent per year instead of the current national average (3.5 percent), Medicare would achieve a cumulative savings of $1.42 trillion between now and 2023.” That’s a nice chunk of change. Or, as an analysis I commissioned from the American Enterprise Institute revealed, extending the Social Security retirement age while at the same time indexing benefits to inflation rather than wages would turn a $5 trillion present value deficit into a $5 trillion surplus.
Can America afford to upgrade its rotting transportation infrastructure and electrical grid while also, say, lowering corporate and investment tax rates to a more internationally competitive level? Yes and yes. If entitlement liabilities are downscaled, the U.S economy can generate more than enough future economic growth and excess tax revenue tomorrow to “pay for” smart investments today. That would create jobs and strengthen America’s economic foundation -– and keep the bond vigilantes at bay."
http://blogs.reuters.com/james-pethokoukis/2009/08/24/how-obama-could-prevent-a-second-recession/
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