by Charles Lemos, Fri Nov 13, 2009 at 01:02:18 PM EST
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.