Obama Hashimoto

Politico reports this morning citing unnamed top aides that the Administration plans plans to announce in next year's State of the Union address a greater focus  on cutting the federal deficit extensively in 2010. The Administration will seek to cut new domestic spending other than jobs programs. The decision is being driven by political calculations.

The president's plan, which the officials said was under discussion before this month's Democratic election setbacks, represents both a practical and a political calculation by this White House.

On the practical side, Obama has spent more money on new programs in nine months than Bill Clinton did in eight years, pushing the annual deficit to $1.4 trillion. This leaves little room for big spending initiatives.

On the political side, Obama can help moderate Democrats avoid some tough votes in an election year and, perhaps more importantly, calm the nerves of independent voters who are voicing big concerns with the big spending and deficits.

With the President in Japan today mending a frayed relationship, he might ask Prime Minister Yukio Hatoyama about a former Japanese Prime Minister Ryutaro Hashimoto and how Hashimoto's decision to tackle Japan's budget deficit before fully restoring growth plunged the Japanese further into recession. Tackling the budget deficit may be good politics now but it is bad economics and ultimately then poor politics.

If we are facing a Japan-like asset deflationary spiral and a balance sheet recession as many believe we are, then the sooner and the more sustained a fiscal response is legislated, the smaller the ultimate budget deficit will be. While the Administration's fiscal stimulus was a solid if imperfect start, it is important to remember that no one piece of legislation is likely to be sufficient to kick start the economy. A proactive and sustained fiscal policy is essential to both getting the economy moving and minimizing the final bill. As economist Richard Koo notes "in a balance sheet recession, where the economy could fall into a vicious cycle from any deflationary gap remained unfilled, reactionary fiscal policy is always inefficient and wasteful." Translation, chasing a recovery is more costly in the end than proactively spending our way back to health.

The President and his economic team would do well to learn from the experience of Japan in the late 1990s. Prime Minister Hashimoto in 1996 on the first whiff of recovery from Japan's then half decade long downturn became hell-bent on reducing the budget deficit. The result was an economic catastrophe with GDP falling from a 4.4% growth to a -1.9% decline in the space of a year. The collapsing economy resulted in plummeting tax receipts, nearly doubling the size of the deficit. Japan's fiscal deficit went from ¥18 trillion to ¥38 trillion over two years. Imposing fiscal discipline too soon prolonged Japan's misery and it cost Prime Minister Hashimoto his job in July 1998.

Prime Minister Hashimoto's replacement was Prime Minister Keizo Obuchi who wisely refused as he put it "to run after to two hares" - economic growth and fiscal discipline. Obuchi would move forcefully to spend, spend and spend. Between passage of his fiscal stimulus and Prime Minister Obuchi's untimely death by a stroke on April 2, 2000, the Japanese Nikkei staged a dramatic run with total market capitalization increasing by ¥213 trillion. The economic recovery would cut Japan's fiscal deficit by ¥5 trillion yen. More importantly, the proactive and consistent fiscal policy allowed Japanese banks to recover. Over the period, their capitalization grew 14.5% largely from a drop in non-performing loans and some stability in real estate prices.

By creating jobs, the Administration will enlarge the tax base that in turn will reduce the deficit. Through the end of August, the IRS collected 25 percent less in tax revenue for the year than they did during the same period a year earlier. The two biggest culprits were a 56 percent drop in corporate income tax revenue and a 20 percent drop in individual income tax revenue. On balance, the Congressional Budget Office expects that tax receipts will be 14.9 percent of gross domestic product this year, well below the historical 18.3 percent average. Jumpstarting the economy remains the objective. Priority one is jobs, priority two is more jobs.

Tags: Balance Sheet Recession, Cap and Trade, Japan, Keynesian economics, Obama Administration, US Budget Deficits, US Tax Policies (all tags)

Comments

11 Comments

Re: Obama Hashimoto

Jobs , deficit and spending would be the top electoral issues in the next election , especially in these swing districts . It's smart politically to focus on it , even if it is rhetoric which i think it would end up being . There is really not much evidence the administration doesn't subscribe to much of what you have written in terms of the impact on the recovery of reducing deficits...

A number of representatives in the house would probably be running scared because of the deficits and spending in the next election , the white house recognizes that...

by lori 2009-11-13 06:06AM | 0 recs
Re: Obama Hashimoto

Perhaps, but cutting the deficit in the middle of an economic downturn is nearly suicidal in terms of economic recovery.  I hope they know what they are doing!

by LordMike 2009-11-13 04:38PM | 0 recs
Depends on what they're cutting

by ND22 2009-11-13 01:09PM | 0 recs
Re: Depends on what they're cutting

You're right. The Administration to its credit (and too quietly if you ask me) passed deep cuts in defense programs.

I am more taking the tact that the emphasis really is on job creation and that in turn will increase tax receipts.

FDR also made this mistake in 1936 leading to the 1937 downturn, the depression within the depression.

by Charles Lemos 2009-11-13 01:28PM | 0 recs
I thought they only slowed

the rate of increase in defense programs.

And I read yesterday that defense would be spared in any budget cuts next year. From the WSJ:

The White House is in the early stages of considering what bigger moves it might make for next year's budget. The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.

OMB is also reviewing a host of tax changes. The President's Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.

White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the "tax and spend" label that has bedeviled Democrats, according to administration and congressional officials.

Idiocy and Hoovernomics.

by desmoinesdem 2009-11-13 01:49PM | 0 recs
Re: I thought they only slowed

Yes they slowed the rate of increase, not cut, sorry about the imprecise language, but they did kill weapons programs.

■ F-22 stealth fighter. Terminated.

■ Future Combat Systems. Slashed.

■ Multiple Kill Vehicle. Dead.

■ Kinetic Energy Interceptor. Eliminated.

■ Airborne Laser. Truncated.

■ Combat search and rescue helicopter. Killed.

by Charles Lemos 2009-11-13 02:02PM | 0 recs
It looks to be the 2011 budget they are cutting

This would mean that any more negative affect it would have on the economy wont happen until 2011-2012.  Obama can sleep in the bed that he makes.  

by Kent 2009-11-13 07:12PM | 0 recs
oh good

that should keep you busy trolling through 2011.

by ND22 2009-11-13 10:28PM | 0 recs
Re: Obama Hashimoto

I always wished we could have just annex Okinowa.

Sigh. We'll have to give it back someday.

by MNPundit 2009-11-13 01:19PM | 0 recs
Re: Obama Hashimoto

It's also worth noting it was not Obama who pushed up the deficit to 1.4 trillion, it was Bush. Back in January 2009, before Obamas inauguration the CBO scored the deficit at 1.3 trillion dollars.

Not that Politico would care about that.

by vecky 2009-11-13 05:28PM | 0 recs
Re: Obama Hashimoto

I find it oddly appropriate that news of Obama's plan to follow in the footsteps of Japan's lost decade comes as he is actually in Japan.

I guess it is time to focus on fiscal responsibility, since we've saved all the institutions that are "too big to fail" and the stock market is on the way back up. Wall Street bonuses are higher than ever, so, sorry middle class and other working people, you'll just have to wait until those efforts trickle down to you. Using Japan as our guide, that should happen sometime around 2020, assuming we can replicate their economic recovery based on exports.

by Makarov 2009-11-14 06:47PM | 0 recs

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